Comerica Economic Weekly

It appears that forward guidance on the Federal Reserve’s highly accommodative monetary policy is in flux with the expected confirmation of Janet Yellen as the next chair of the Federal Open Market Committee. Through mid-summer, forward guidance by Fed officials suggested that QE3 would begin tapering this year. The last monetary policy announcement by the FOMC on October 30, showed that the FOMC was backing away from previous guidance on QE3, saying that asset purchases were not on a preset course. The uncertainty surrounding QE3 has put more focus on current economic conditions, consistent with the view that recently positive data increases the odds that the FOMC will announce the tapering of QE3 at their December 17/18 meeting.

We do not share that view. Third quarter real GDP growth came in stronger than expected at 2.8 percent, but that was boosted by an unsustainable surge in inventories. Also, October payroll job growth was better than expected at +204,000, but the household survey was abysmal, showing a loss of 735,000 jobs for the month.  We believe that recent data has not been strong enough for the FOMC to agree to begin tapering QE3 this December. However, that could change with a strong jobs report for November, due out on December 6.

The U.S. international trade gap for September widened to $41.8 billion. This implies a small negative revision to Q3 GDP, perhaps down to 2.6 percent, when the second estimate comes out on December 5.

Industrial production for the U.S. decreased slightly by 0.1 percent in October. The main culprit was a 1.1 percent drop in utility output on the heels of a surge in September. Manufacturing output increased by 0.3 percent for the month.

Initial claims for unemployment insurance decreased by 2,000 for the week ending November 9, to hit 339,000. Claims remain elevated relative to their September lows, but those lows were heavily influenced by technical problems in California. A level of 339,000 is consistent with ongoing moderate economic expansion.

The National Federation of Independent Business’ small business optimism survey tumbled in October to 91.6. The October drop was attributed to the dysfunctional politics surrounding the federal budget and debt ceiling debates. Included in the negative momentum for index components was a decline in the “plans to increase employment” category.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:CMAEconWeekly111513.

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