U.S. Data Looks a Little Better, but Beware the Jabberwock

  • U.S. data at the start of the fourth quarter looks a little  bit better, but the European crisis reminds us of Lewis Carroll’s Jabberwocky, incomprehensible, but with jaws that bite! (See page 2 for more discussion on Europe). October U.S. payroll employment data showed a modest gain of 80,000 jobs. The U.S. unemployment rate ticked down to 9.0 percent.  The October employment report showed a significant upward revision to the September payroll survey, now revised up to a gain of 158,000 jobs. The separate household survey of employment is running well ahead of the payroll survey. The household survey added a substantial 277,000 jobs in October, and has had an average gain of 335K jobs per month over the last three months. The household survey may be picking up growth in self-employment and job growth in small companies that the payroll survey is missing.
  • Third quarter real GDP growth came in about as expected at 2.5 percent, boosted by an unsustainable surge in consumer spending. Real (inflation adjusted) consumer spending increased at a 2.4 percent annual rate, even as real disposable income fell and the saving rate slipped to 4.1 percent. This gain in consumer spending, despite weak job growth and declining income, is simply unsustainable and suggests that consumer sales could turn into the frumious Bandersnatch (again from Carroll), and drag on GDP in 2011Q4 or 2012Q1.
  • At the Nov. 2-3 FOMC meeting, the Federal Reserve made no changes to monetary policy. The Fed funds rate will remain near-zero at least through mid-2013. The Fed will continue its “Operation Twist,” selling short term Treasury bonds and buying longer term Treasury bonds, while holding total assets constant. The FOMC’s policy statement had a slightly more optimistic tone than in September, noting stronger growth in the third quarter, however, FOMC members lowered their GDP forecasts for 2012 and 2013. Fed Chairman Bernanke left the door open for additional quantitative easing, saying that purchases of mortgage-backed securities remain “a viable option.”
  • The U.S economy remains vulnerable to recession through the end of 2012. Labor market conditions, though modestly improving, are still weak. The housing sector is still in a recession. Real disposable income has not grown over the past year. Government spending will continue to be a drag. Europe still looks like a black hole, threatening to drag down global growth. However, some things have improved recently. We are starting to see modest improvement to labor markets. 2011Q3 real GDP growth registered an acceptable 2.5 percent. Inventory accumulation will likely add to Q4 growth. The U.S. stock market had a significant rally through October. Auto sales have climbed to a 13.2 million unit annual rate.  The likelihood that the U.S. economy will fall into recession before the end of 2012 is now lower, down to 40 percent. This is still elevated. We are not out of the “tulgey” woods yet.

Economic Update, November

Click below for the complete November Comerica Economic Update, with an expanded forecast table, special analysis on the Eurozone crisis and updated monthly charts: USEconomicUpdate1111.

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