A look behind at the December 9 week leaves the economic data hard-pressed to stand out against the FOMC meeting announcement and Chair Jerome Powell’s press briefing. There weren’t a lot of reports, but there were enough surprises to wake up markets.
The FOMC meeting of December 10-11 concluded with no change in short-term rates, just as expected. There was no dissent in the vote this time around which suggests that once again a clear majority of policymakers agree on the path of monetary policy. The post-meeting statement was explicit that while previously mentioned risks remain – and will be monitored – the outlook is for no change in rates for some time to come.
The Summary of Economic Projections (SEP) was little changed except in one respect. Forecasts for the unemployment rate were lowered for the next three years and the longer-run expectation was down a tenth to 4.1%. Moreover, the rate for 2020 was 3.5%, 2021 was 3.6%, and 2022 was 3.7%. This constitutes an extended undershoot of the longer-run expectation. In his press briefing, Powell offered that there may be more slack in the labor market than previously thought and that he would characterize the labor market as “strong” rather than “tight”. He also said he would not label the job market as “hot” unless there were signs of heftier and more consistent wage increases. If this is the case, it leaves the Fed with a sound justification to leave rates where they are for some time yet. Powell acknowledged that inflation has continued to run below the 2% symmetric target and said that it will take time for it to return closer to that goal. Without gains from wages, it looks like inflation is going to rely on increases in services prices as the main source of upward pressure.
The inflation reports were in alignment with no particular sign that the lagged effects of the three rate increases in July, September, and October were seeping into overall prices. The Consumer Price Index for November was up 2.1% year-over-year, and the core CPI was up 2.3%. At the consumer level prices are being driven by services which were up 2.9% compared to last year while commodities were up a meager 0.6%. Final Demand PPI for November was up only 1.1% from the year-ago month, and core PPI – excluding food, energy, and trade services – was up 1.3%. Input costs for producers have generally reflected the mild changes in energy prices which were actually down 4.0% from the same time last year, while food prices were up 3.2% and trade services up 1.4%. Additionally, the cost of imported goods as measured by the Import Price Index has fallen 1.3% year-over-year in November on moribund prices for finished goods.
The Atlanta Fed’s Business Inflation Expectations survey put business’ outlook for inflation at 1.9%, essentially no different from the Fed’s 2% target.
Initial jobless claims for the week ended December 7 delivered a surprise 49,000 increase from the prior week to 252,000 which was the highest level since 257,000 in the September 30, 2017 week. This should be read with extreme caution. The late timing of the Thanksgiving holiday and series of winter storms that affected a broad swath of the US should be taken into account. The seasonal adjustment factor was swamped by the number of claims that came in (100,697 versus the expected 39,217). But unless there is a repeat in the December 14 week, this is likely a one-off. I suspect that some manufacturers decided to get their year-end layoffs out of the way a week or two earlier due to soft conditions and that we may well have seen the bulk of non-retail layoffs for the December-January period. There will be more detail about this week’s state layoffs reasons in the report set for December 19 at 8:30 ET. Given that the advance unadjusted numbers showed about 25% of the layoffs occurred in just four states – California, Texas, New York, and Pennsylvania – the comments should clarify the situation. I would also point out that the insured rate of unemployment for November 30 was unchanged at 1.2% and that the unrounded version was lower than the prior week at 1.156% from 1.1730%.
The NFIB Small Business Optimism Index for November lived up to its name with a 2.9 point rise to 104.7, the highest 104.7 in July. Small businesses are adapting to a modest pace of expansion and shrugging off uncertainty. Nine of the index’s 10 components were up. In particular, the now-is-a-good-time-to-expand index jumped 7 points to 29%, its highest in a year and since the economy did a reset late in 2018.
Retail and food sales for November had an anemic 0.2% increase overall and was up only 0.1% excluding motor vehicles. This was disappointing relative to expectations, especially at a time when growth has relied heavily on consumer spending rather than business investment. Nonetheless, I think it is too soon to write down the contribution from consumer spending for the fourth quarter. October wasn’t a bad month and November had some timing and weather issues that could have made the number soft. I would look for some upward revision when the December data is released and a healthy pace of sales for the holiday period, although on line retailers may have the most to celebrate when the New Year comes around.
The increase in business inventories for October was modest, but it was an increase. The fourth quarter change in private inventories may not be a large contribution to growth, but it may not be a negative.
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