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Look behind at November 4, 2019 week: The data suggest FOMC pause was the right move

A look behind at the November 4 week shows Fed policymakers are in fact nearer a consensus than they have been for some months. Broadly, it appears that:

  • Most think the three rate cuts in July, September, and October were appropriate. We can exclude the consistent dissents from Kansas City Fed’s Esther George and Boston’s Eric Rosengren on this point.
  • Monetary policy is currently accommodative and the rate is not far off neutral – which is difficult to know for certain, but seems lower than in the past. The three rate cuts were undertaken as insurance or a “risk management” effort, not to address a shock or actual recession. More would be needed if the latter were to occur.
  • A little time is needed to allow the lagged effects of monetary policy to become visible, whether that is that cuts were insufficient, just right, or more than enough.

With policymakers more in alignment in their views, Chair Jerome Powell will have less difficulty in reconciling the divergent voices into a coherent policy message in his role as spokesman for the FOMC. He is scheduled to speak in the coming week.

The economic data calendar was thin and there were no real standouts or surprises among the scheduled reports.

Initial jobless claims for the week ended November 2 declined more than expected, but the four-week moving average put the underlying trend firmly in a range of 210,000-220,000. The level is consistent with low numbers of layoffs. The insured rate of unemployment for the week ended October 26 remained here is has been at 1.2% almost without exceptions since May 2018. There is little slack in the labor market.

The ISM Non-Manufacturing Index for October managed to rise just over 2 points to 54.7. It is another middling number but it did reflect increased activity and new orders for services. Much of this is attributable to the end of the government’s fiscal year and new contracts going into effect and may not be sustained into November.

The preliminary University of Michigan Consumer Sentiment Index for November was essentially unchanged at 95.7 after 95.5 in October. Consumers’ perceptions of current conditions were a bit softer and those for six months from now a bit firmer. It all came down to the strength in the labor market and that the news cycle continues to be noisy but without resolution of long standing risks to the outlook.

September data on trade and inventories closed out the third quarter.

International trade in goods and services was down to a deficit of $52.5 billion after $55.0 billion in August. The decrease was due to a 0.9% decline in exports that was more than offset by a 1.7% drop in imports. While closing the trade gap helps reduce drag from net exports in GDP, the numbers also represent a decline in overall trade which suggests slower conditions in global economies as well as the disruptions in trade policy.

Data on inventories in September was updated for manufacturing and wholesale. Inventories in the factory sector were up 0.3%, a hint that there may be some increased stocks on hand while the manufacturing is experiencing a string of months where activity contracted. Wholesale inventories fell 0.4% in September which was attributable to a 1.2% decline in auto inventories while GM production was idled and also a 1.7% decrease for furniture which might be due to the present wave of homebuying.

New orders for factory goods in September were down 0.6% overall, with durables off 1.2% and nondurables edging up 0.1%. Transportation orders remained weak and were down 2.8% in September, mostly due to a 11.8% drop in nondefense aircraft. Excluding transportation, durables were down 2.8%.

Among the unscheduled reports, the Fed’s October Senior Loan Officer Opinion Survey was published on Monday and suggested a mild worsening of standards for C&I loans – mainly in commercial real estate – and that businesses of all sizes were less interested in borrowing at a time when they were deferring investment in plants and equipment. Household credit saw a little greater risk aversion on the part of lenders. Consumers with more marginal credit scores were seeing less available credit. There was a definite uptick in demand for home mortgages while other types of credit were not much changed.

The NFIB’s Small Business Jobs Report for October was released on Thursday afternoon and pointed to fairly steady increases in payrolls in recent months. Small businesses may have cut back slightly on the number of job openings and new hires, but they are still snapping up skilled workers where they can find them and paying more than they intended to do so.

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