We have been noting that the investment markets across multiple asset classes have been suggesting a recovery in earnings and economic activity is expected to take hold in 2021. One of the economic data series that usually lags is the labor market. This has been even more prevalent during this current period due to the limitations put in place to combat the spread of COVID. Limitations around mobility have had an outsized impact on the services sector and have prevented business activity and employment from returning to pre-COVID levels. This has kept consumer and small business confidence at lower-than-normal levels.
The preliminary University of Michigan Consumer Sentiment Index came out last week and declined by three points to a six-month low of 76. The recent decline was driven by a four-point decline in the expectations component.
The NFIB Small Business Optimism Index for January was also released last week and showed a one-point decline to the lowest level since May 2020. The outlook was also the weakest part of the data series having declined to the lowest level since November 2013.
Small businesses tend to be more services versus goods-oriented, and employment and earnings have been weaker in these areas as they are more difficult to operate under the current COVID restrictions. This is likely a major contributor to the lack of recovery in small business confidence and likely will remain in place until the services economy is more broadly open.
The lack of labor market recovery, related to the limitations on the services sector, is likely holding back consumer confidence compared to asset prices. While several equity and commodity markets are above their pre-COVID levels and corporate credit spreads are below prior levels, the University of Michigan Sentiment index remains 24% below pre-COVID levels. This is likely tied to the labor market and mobility being more important factors to most consumers than financial markets, and the lack of broad ownership of financial assets.
Small business and consumer sentiment will likely remain below prior levels until the services sector is more broadly open, leading to an improvement in employment and business performance. This is likely tied to progress combating COVID, where the recent data has been improving and vaccines are becoming more widely available.
Source: The COVID Tracking Project.
Source: Centers for Disease Control and Prevention.
As long as the labor market data does not start to decline compared to 2020, the financial markets will likely continue to focus on the year-over-year (YOY) improvement more than the recent weakness.
Rank Dawson, CFA
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.