Comerica Economic Weekly

The official Bureau of Labor Statistics employment data for September was not released as scheduled due to the federal government shut-down of nonessential services. The last official word we have on the U.S. unemployment rate is the 7.3 percent reading for August. Other employment data for September was mixed. Both the ISM-Manufacturing Index and the ISM Non-Manufacturing Index for September showed increased hiring. The  ADP Employment Report for September showed an unimpressive gain of 166,000 private-sector jobs. There is a strong, but not perfect, correlation between the ADP numbers and the official BLS numbers for the month. Initial claims for unemployment insurance were released, as usual, Thursday. UI claims for the week ending September 28 increased slightly to 308,000. UI claims near 300,000 are consistent with improving labor market conditions. Even though we are flying blind in terms of much of the official data, other sources indicate that at least through September, labor market conditions likely improved moderately.

A federal shut-down of two-weeks or less will not exert a significant downward drag on the economy. Part of a compromise agreement on the budget may include an agreement to raise the debt limit. If Congress does not agree to lift the debt limit by around October 17, then there is a significant risk of technical default on some interest payments on Treasury bonds. A default of any kind would likely result in a downgrade of U.S. Treasury bonds by ratings agencies, pushing bond prices down and interest rates up.

The budget impasse in Congress is affecting monetary policy. The more economic damage the congressional impasse causes, the less likely it is that the Fed will begin to “taper” its purchases of Treasury bonds and MBS soon. The next FOMC meeting is October 29/30. That may be too soon to start the taper if Congress fails to act quickly. The following FOMC meeting is December 17/18. That was originally thought to be an inopportune time to begin the taper due to concerns about holiday shopping and other year-end issues. The January 28/29 meeting will be Chairman Bernanke’s last meeting, not at optimal time to shift monetary policy. The March 18/19 meeting is expected to be  Janet Yellen’s first meeting heading the FOMC. There is now no obvious, logical or “good” time to begin the tapering process. An orderly start to the taper process will require clear communication from the Fed.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly100413.

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