ECONOMIC COMMENTARY  | PUBLISHED BYRAYMOND JAMES & ASSOCIATES

Scott J. Brown, Ph.D. | (727) 567-2603 | scott.j.brown@raymondjames.com OCTOBER 2, 2020 | 3:25 PM EDT

Weekly Economic Monitor -- The September Employment ReportThe September Employment Report – Nonfarm payrolls continued to recover in September, although the pace of improvement has slowedand we are unlikely to return to February levels until the pandemic is well behind us. The impact of COVID-19 has been uneven, with job lossesremaining more severe in lower-paying service industries. Consumer spending has improved, though mixed across sectors. Further fiscal supportwill be critical for the unemployed.

Nonfarm payrolls rose by 661,000 in the initial estimate for September, slower than in July (1.761 million) and August (1.489 million). There aretwo seasonal forces at play in September. We normally add jobs in education and lose those related to the summer travel season. This September,prior to seasonal adjustment, education jobs rose less than usual (1.160 million, vs. 1.445 million a year ago), while fewer non-education jobs wereshed (-23,000, vs. -1.030 million a year ago). Less seasonal hiring implies fewer seasonal layoffs later on.

While much of the focus is on the pace of job growth, it’s important to take a step back and look at the longer-term picture. Payrolls fell by 22.1million (14.5%) from February to April and have rebounded by 11.4 million (8.8%) from April to September. That still leaves us down by 10.7 million(7.0%). Weakness has been more severe in leisure and hospitality, but even “strong” sectors like manufacturing and construction are 5% or morebelow pre-pandemic levels.

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The unemployment rate edged down to 7.9% (from 8.4%), but mostly because people exited the labor force (to be counted as “unemployed,” youhave to be actively looking for a job and many have given up.

Weekly claims for unemployment benefits, while less horrific than in March and April, are still trending at an elevated level. People and businessesare getting used to living in a pandemic, and we can expect further job gains in the months ahead as the economy continues to recover. At thesame time, as the pandemic continues, temporary layoffs are becoming permanent and firms can be expected to focus on cost-containment.Labor is typically the largest expense for most firms.

Job losses have weighed more heavily at the lower end of the income spectrum, but these aren’t big spenders. The top 20% of income earnersaccount for more than half of personal income and more than half of consumer spending. White collar workers have been more able to work fromhome and to adapt to the pandemic. In turn, while nonfarm payrolls are still down 7.0% from February, overall consumer spending is down 3.4%.Spending on consumer durables, including motor vehicles, is higher than in February. Spending on clothing, gasoline, and consumer serviceswon’t fully recover until the pandemic is in the past. Unfortunately, a vaccine is unlikely to be 100% effective, a third of the population may nottake it, and even with a vaccine, many will be reluctant to venture out in crowds for some time.

The pandemic has had a positive impact on housing. Working from home is now expected to be long-lasting (if not permanent). If that’s the case,workers will seek larger homes with office space, in better locations. Mortgage rates are low, but prices are rising, reducing affordability, addingto issues of income and wealth inequality. Still, residential construction accounts for only about 3.5% of GDP.

Further fiscal support is needed, primarily for those still unemployed. Strains in state and local government budgets are also being felt, likelyadding to job losses in the months ahead.

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Recent Economic Data

Nonfarm payrolls by 661,000 in the initial estimate for September, still down 10.7 million (7.0%) from February. There were 41,000 fewer temporary census workers. Private-sector payrolls rose by 877,000, down 9.8 million (7.5%) from February. Manufacturing payrolls rose just 29,000 (down 647,000, or 5.0%, from February). Construction added just 16,000 (down 394,000, or 5.2%, from February.

The unemployment rate fell to 7.9%, vs. 8.4%. However, the unemployment rate typically understates the weakness in a downturn, as laid-off workers get tired of looking and drop out of the labor force. The employment/population ratio provides a better way to gauge the amount of slack in the job market. This ratio edged up to 56.6% in September, up from 51.3% in April, but down from February’s 61.1%. Expect for recent months, this ratio is the lowest in decades.

Unit motor vehicle sales rose to a 16.3 million annual rate in September (vs. 15.2 million in August).

The ISM Manufacturing Index edged down to 55.4 in September, from 56.0 in August, reflecting further growth in new orders and production. Manufacturers are getting used to operating in the pandemic. Increased demand and supply chain issues have led to some increases in prices, but this is likely to be transitional.

The Conference Board’s Consumer Confidence Index rose to 101.8 in the advance estimate for September, vs. 86.3 in August (it was 132.6 in February).

The Pending Home Sales Index rose 8.8% in August, up 24.2% from a year earlier.

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Real GDP fell at a 31.4% annual rate in the 3rd estimate for 2Q20 (vs. -31.7% in the 2nd estimate).

Personal income fell 2.7% in the initial estimate for August, reflecting a 53.0% decrease in unemployment benefits. Private-sector wage and salary income rose 1.3%, although still down 4.2% from February.

Personal spending rose 1.0% in August, up 0.7% adjusting for inflation. Real consumer spending (70% of Gross Domestic Product) appears on track for about a 38% annual rate in 3Q20 (vs. -33.2% in 2Q20 and -6.9% in 1Q20)

Personal spending rose 18.6% from April to August, but that’s not enough to offset the 18.6% decline in March and April (August spending was 3.4% lower than in February). Spending on consumer durables has surpassed pre-pandemic levels. While spending on clothing, gasoline, and consumer services have risen off their pandemic lows, the August level remained well below February’s level.

$billion (annual rate) Feb-Apr % Apr-Aug % Feb-Aug %

Personal consumption expenditures -2765.3 -18.6 2257.6 18.6 -507.8 -3.4 Goods -677.4 -14.8 934.8 24.0 257.4 5.6 Durable goods -352.9 -22.7 539.6 45.0 186.7 12.0 Motor vehicles and parts -146.3 -28.4 218.1 59.3 71.9 14.0 Furnishings and durable household equipment -73.2 -19.9 106.5 36.1 33.3 9.0 Recreational goods and vehicles -42.9 -9.6 116.4 28.7 73.5 16.4 Other durable goods -90.5 -40.7 98.6 74.6 8.1 3.6 Nondurable goods -324.5 -10.8 395.3 14.7 70.7 2.3 Food/beverages for off-premises consumption 81.9 7.9 24.5 2.2 106.4 10.3 Clothing and footwear -195.7 -48.3 157.7 75.4 -37.9 -9.4 Gasoline and other energy goods -174.9 -52.6 95.1 60.4 -79.8 -24.0 Other nondurable goods -35.8 -2.9 117.9 9.8 82.2 6.6 Services -2087.9 -20.3 1322.8 16.1 -765.2 -7.4 Household cons. exp. (for services) -2340.1 -23.8 1587.2 21.2 -752.9 -7.6 Housing and utilities 31.5 1.1 31.9 1.1 63.4 2.3 Health care -883.0 -34.7 721.2 43.5 -161.7 -6.4 Transportation services -261.2 -52.1 126.8 52.9 -134.4 -26.8 Recreation services -360.5 -61.0 177.7 77.1 -182.9 -30.9 Food services and accommodations -540.2 -53.0 362.9 75.8 -177.3 -17.4 Financial services and insurance -28.4 -2.4 40.1 3.4 11.8 1.0 Other services -298.4 -23.9 126.6 13.3 -171.8 -13.8

The PCE Price Index, the Fed’s chief inflation gauge, rose 0.3 (+1.4% y/y), also up 0.3% (+1.6% y/y) excluding food and energy.

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Gauging the Recovery

Jobless claims, a leading economic indicator, fell to 837,000 in the week ending September 26. However, California, which had accounted for around 30% of U.S. claims in recent weeks, announced a two-week Pause in processing claims. The four-week average was 867,250 – still an extremely high trend (although less horrific than in March and April). Continuing claims (for regular state unemployment insurance programs), a coincident economic indicator, fell by 980,000 (week ending September 19) to 11.767 million.

The New York Fed’s Weekly Economic Index rose to -4.62% for the week of September 26, up from -4.95% a week earlier (revised from -4.50%) and a low of -11.45% at the end of April, consistent with a moderation in the pace of the recovery. The WEI is scaled to four-quarter GDP growth (for example, if the WEI reads -2% and the current level of the WEI persists for an entire quarter, we would expect, on average, GDP that quarter to be 2% lower than a year previously). Note that the weekly figures are subject to revision

The University of Michigan’s Consumer Sentiment Index rose to 80.4 in the full-month assessment for September (the survey covered August 26 to September 28), vs. 78.9 at mid-month and 74.1 in August. The report noted that “the September survey recorded a significant increase in the proportion that expected a reestablishment of good times financially in the overall economy.” However, “the recent gains, while encouraging, were largely due to upper income households.” There are two key non-economic issues that will have an impact on consumer sentiment in the near term. One is the availability and efficacy of a vaccine. The other is the election (the survey was conducted before the presidential debate).

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General Outlook:

20.1 20.2 20.3 20.4 21.1 21.2 21.3 21.4

GDP q/q % -1.3 -9.1 6.8 1.1 0.8 0.6 0.6 0.6

GDP q/q, annual rate -5.0 -31.7 30.1 4.7 3.2 2.6 2.5 2.4

GDP y/y 0.3 -9.1 -3.6 -3.0 -1.0 9.6 3.2 2.7

Unemployment Rate, % 3.8 13.0 8.8 7.6 7.1 6.7 6.3 6.0

federal funds rate 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25

2-yr Treasury note 1.08 0.19 0.14 0.16 0.18 0.21 0.25 0.29

10-yr Treasury note 1.37 0.69 0.72 0.78 0.84 0.90 0.95 1.00

Source: Raymond James

Unemployment rate and interest rate forecasts are quarterly averages

GDP growth is expected to have risen sharply in 3Q20, largely reflecting the initial rebound in economic activity in May and June (following the sharp drop in March and April). Foreign trade is expected to subtract. Exports fell more than imports in March and April and have rebounded more slowly than imports in recent months. Inventories fell sharply in 2Q20 and will add in 3Q20 if they simply stop falling (the change in inventories contributes to the level of GDP, hence the change in the change in inventories contributes to GDP growth). Of course, the outlook beyond 3Q20 depends on the virus, the efforts to contain it, and the amount of fiscal support going forward. Risks remain weighted to the downside, with some fear of further layoffs in the months ahead. The Fed is expected to keep the federal funds rate near 0% through 2023.

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This Week – The economic calendar is lighter. The ISM Non-Manufacturing Index should be consistent with moderate growth in the overall economy. The trade balance should have widened in August (the advance figures showed another record merchandise trade deficit, as imports have rebounded faster than exports). Jobless claims are expected to be little changed, as California remains in a two-week pause in claims processing. The Vice-Presidential debate is likely to get more attention that it normally would, and should be a little more “presidential.” FOMC minutes are unlikely to shed new light on the Fed’s thinking. Chair Powell will speak on the economic outlook on Tuesday morning. (M20-3267852)

This Week: forecast last last –1 comments

Monday 10/05 10:00 ISM Non-Manf Index Sep 55.6 56.9 58.1 moderate

Tuesday 10/06 8:30 Trade Balance, bln Aug -66.2 -63.6 -53.5 wider goods only -83.7

-80.9 -71.7 imports rebounding faster than exports

10:00 JOLTS data Aug hiring and quit rates rebounding 10:40 Fed Chair Powell speaks “econ outlook” at NABE video conference

Wednesday 10/070

2:00 FOMC Minutes 9/16 some insight into range of econ views 9:00 Vice-Presidential Debate Salt Lake City (Susan Page moderates)

Thursday 10/08 8:30 Jobless Claims, th. 10/03 840 837 873 California data on pause

Friday 10/09 no significant data into a three-day weekend for bonds

Next Week:

Monday 10/12 Indigenous People’s Day bond market closed

Tuesday 10/13 8:30 Consumer Price Index Sep +0.3% +0.4% +0.6% gasoline not much of a factor year-over-year +1.5% +1.3% +1.0% seen higher ex-food & energy +0.3% +0.4% +0.6% some further rebound from pandemic year-over-year +1.8% +1.7% +1.6% picking up 8:30 Real Hourly Earnings Sep -0.2% 0.0% -0.4% nominal earnings rose 0.1% year-over-year +3.3% +3.3% +3.7% distorted by composition changes

Wednesday 10/140

8:30 Producer Price Index Sep +0.3% +0.3% +0.6% moderate ex-food & energy +0.3% +0.4% +0.5% moderate ex-f, e, trade services +0.3% +0.3% +0.3% moderate

Thursday 10/15 8:30 Jobless Claims, th. 10/10 830 840 837 trend is still relatively high 8:30 Import Prices Sep NF +0.9% +1.2% rebounding from pandemic impact ex-food & fuels NF +0.7% +0.3% little inflation in finished goods 9:00 2

nd “Presidential” Debate Miami (Steve Scully moderates)

Friday 10/16 8:30 Retail Sales Sep +0.6% +0.6% +0.9% unit autos sales rose further ex-autos +0.3% +0.7% +1.3% seasonal adjustment adds uncertainty ex-autos, bld mat, gasoline +0.4% +0.5% +1.5% weak back-to-school spending 9:15 Industrial Production Sep +1.0% +0.4% +3.5% a further rebound Manufacturing Output +0.7% +1.0% +4.0% aggregate hours rose 0.4% Capacity Utilization 72.2% 71.4% 71.1% still relatively low 10:00 Business Inventories Aug +0.5% +0.2% -1.1% higher in 3Q20 (adding to GDP growth) 10:00 Consumer Sentiment m-Oct 76.5 80.4 74.1 likely lower

Coming Events and Data Releases

October 20 Building Permits, Housing Starts (Sept.)

October 22 3rd

Presidential Debate (Nashville)

October 23 IMF World Economic Outlook

October 27 Durable Goods Orders (September)

October 29 Real GDP (3Q20, advance estimate)

November 3 Election Day

November 5 FOMC Policy Decision

November 6 Employment Report (October)

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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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The MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largestindustries are materials, energy, and banks.

The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000Index, which is made up of 3,000 of the largest U.S. stocks.

The NYSE Alerian MLP is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted,capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities,is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).

The Barclays Intermediate Government/Credit Bond index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Euro Stoxx 50 Index is a market capitalization weighted stock index of 50 large, blue-chip European companies operating within Eurozonenations. Components are selected from the Euro STOXX Index which includes large-, mid- and small-cap stocks in the Eurozone.

The China CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of top 300 stocks traded in the Shanghaiand Shenzhen stock exchanges. It had a sub-indexes CSI 100 Index and CSI 200 Index.

The S&P 500 Futures is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domesticeconomy through changes in the aggregate market value of 500 stocks representing all major industries.

The DJIA Futures is a stock market index futures contract traded on the Chicago Mercantile Exchange`s Globex electronic trading platform. Dow

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Futures is based off the Dow 30 stock index.

The Nasdaq 100 Futures is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and internationalcompanies listed on the NASDAQ.

Europe: DAX (Deutscher Aktienindex (German stock index)) is a blue chip stock market index consisting of the 30 major German companies tradingon the Frankfurt Stock Exchange.

Asia: Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted indexcomposed of Japan's top 225 blue-chip companies traded on the Tokyo Stock Exchange.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, whichwill affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Futureinvestment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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