The first jobs report of 2021 came in at the lower end of expectations and followed a downgraded December jobs number. The economy added 49,000 jobs, with a mere 6,000 of those coming from the private sector, leaving nearly 10M unemployed workers. December’s number was also revised down from -140,000 to -270,000 lost jobs. The unemployment rate for the month fell from 6.7% to 6.3%. The improvement was misleading as the labor participation rate deteriorated from 61.7% to 61.4%. We like to look at the rate normalized for participation, which is closer to 13% unemployment. We are hopeful that vaccinations and reduced business restrictions will improve the employment situation as we move through this year.
The economy grew at 4% in the fourth quarter with a 3.5% loss in GDP for the full year. We would argue this is great progress given the largest recorded drop in GDP in the second quarter of the past year. The fourth quarter was boosted by capital investment that will pay dividends in the coming years with increased production capacity and productivity. Spending slowed in the fourth quarter as lockdowns increased to tamp down on an uptick in virus cases. Incomes were down slightly but picked up in December as government stimulus checks made it to households.
Our call for the coming year is for growth to accelerate as vaccinations become more widely available and the economy begins to open more fully. We do not wade into the politics of government stimulus, but it looks like increased unemployment benefits, as well as additional stimulus payments, will make their way to consumers in the coming months. This will only enhance the recovery as we move through this year. We expect the services sector, which has mostly missed much of the recovery to date, to improve exponentially as lockdowns are lifted. Current consensus forecasts for 2021 growth are 4.1%, with a few prominent firms calling for +6%. Higher growth is certainly welcome but may lead to higher inflation, as pointed out in our fourth-quarter commentary.
Bottom Line: The jobs market recovery stumbled over the past two months, stymied by increased virus restrictions. Growth slowed in the final quarter as consumer spending slowed. We expect the economy to grow well above trend in 2021 as consumers return to spending on leisure and hospitality. Our chief economic concern is that pent-up demand will drive prices higher in the discretionary sectors leading to higher interest rates. Our asset allocation call is well-positioned for this possibility.
