While the second impeachment of Donald Trump held all the attention in markets on Wednesday, the real threat to the US economy was exposed in the latest Beige Book of economic anecdotes collected by the US Federal Reserve ahead of its first meeting of the year on January 26 and 27.
While the survey showed US economic activity increasing modestly in recent weeks, a growing number of the Fed’s 12 districts saw a drop in employment as the surge in coronavirus infections led to more lockdowns and restrictions.
The December jobs report last week revealed the loss of 140,000 positions last month with losses occurring in service sector industries more exposed to the virus and the impact of the lockdowns such as cafes, food service, tourism, accommodation and travel.
The Beige Book picked up on the employment weakness which it said had appeared in a growing number of Fed districts due to a surge in coronavirus infections.
That threat to employment – and signs of weakening consumer spending – is the big threat to the health of the US economy as it confronts the contentious end of Trump’s regime and the transition to Joe Biden, as well as the deepening COVID-19 threat which is not being helped by the incompetent rollout of the new vaccines by Trump and other administrations in the 50 states.
The Beige Book survey revealed how the pandemic’s impact varied by region and industry as rising infections dampened the optimism promised by the arrival of effective coronavirus vaccines.
“Although the prospect of COVID-19 vaccines has bolstered business optimism for 2021 growth, this has been tempered by concern over the recent virus resurgence and the implications for near-term business conditions,” the Fed noted in the Beige Book.
While manufacturing activity continued to recover in almost all Fed districts, reports on consumer spending (the main driver of US economic activity at the moment) were mixed.
“Some Districts noted declines in retail sales and demand for leisure and hospitality services, largely owing to the recent surge in COVID-19 cases and stricter containment measures.”
” Most Districts reported an intensification of the ongoing shift from in-person shopping to online sales during the holiday season. Auto sales weakened somewhat since the previous report,” the Beige book stated.
New York was especially bad, the Fed noting:
“The regional economy weakened moderately in late 2020, and the labor market has deteriorated somewhat. This weakness was concentrated in the service sector, where activity has been further constrained by a rise in COVID-19 cases, increased restrictions, and cold weather. Consumer spending declined, with holiday sales down from last year and auto sales weakening. Businesses reported some acceleration in wages and selling prices.”
This report was ignored by the markets which remain focused on Washington and the second impeachment vote against Donald Trump.
The Dow spent most of the session in the green, but dipped into the red in the final minutes to close down 8.22 points or 0.03% at 30,060.47.
The S&P 500 ended up 8.65 points, or 0.23%, to 3,809.84 with the index also losing ground in the closing minutes of the session. The Nasdaq repeated that late weakness as well, closing up 56.52 points (after being up more than 90 points earlier in the day) or 0.43%, to 13,128.95.
Intel Corp was the S&P’s biggest percentage gainer, up more than 7%, after the chipmaker announced the replacement of its Chief Executive Officer Bob Swan with VMware Inc CEO Pat Gelsinger next month. The change has come in response to activist shareholder pressure.
Unlike equities, oil markets took the Fed’s report seriously, along with the mounting COVID toll and tightening lockdowns (Switzerland has gone to almost total lockdown).
China recorded the biggest daily jump in coronavirus cases in more than five months, despite lockdowns, increased testing and other measures aimed at preventing another wave of infections.
Brent crude prices settled at $US56.06 a barrel, down 0.9% or 52 cents, while in the US West Texas Intermediate (WTI) settled at $US52.91 a barrel, a drop of 30 cents, or 0.6%. The falls came despite a larger than forecast drop in US oil stocks of 3.2 million barrels.
Gold edged higher, settling up 0.6% at $US1,854.90 an ounce and then fading a little in early Asian trading. Comex Copper though remained up, with a tint gain to remain well over $US3.61 a pound.
No lead for the local market from iron ore. The price of 62% Fe fines delivered to northern China dipped 1.4% or $US2.56 to $US170.11 a tonne and the price of 65% Fe fines fell $US2.10 a tonne to $US191.50 a tonne.
The US dollar was a touch firmer meaning the Aussie dollar softened a little to 77.40 US cents in early Asian trading Thursday, down from 77.70 a day earlier. US interest rates eased a touch.