Better Economic Data for Fed to Contemplate
- The ADP Employment Report for November showed an increase of 215,000 private sector jobs.
- The November ISM Manufacturing Survey PMI improved to a solid 57.3 percent.
- The November ISM Non-Manufacturing Survey’s Purchasing Managers’ Index decreased to 53.9 percent.
- Auto sales for November rebounded to a strong 16.4 million unit annual rate.
- November New Home Sales jumped to a 444,000 unit annual rate.
- The U.S. International Trade Gap for October narrowed to -$40.6 billion.
It is turning out to be a November to remember with generally better-than-expected U.S. economic data. The fear was that there would be a lasting hangover from the government shutdown through the first half of October. That has not happened. Solid recent data also suggests that the odds of the Federal Reserve beginning their tapering process for quantitative easing, sooner rather than later, are increasing. This Friday’s official Bureau of labor Statistics payroll jobs report looms large. November payroll job gains in excess of 200,000, consistent with today’s ADP Employment Report, would signal to the Fed that they have an opportunity to begin tapering their $85 billion per month asset purchase program, if they want to take it. That remains a big “if”. There is also reasonable speculation that the Fed may modify its forward guidance for the fed funds rate. Currently, the near-zero fed funds rate is linked to an unemployment rate threshold of 6.5 percent. This implies that the FOMC would delay the first increase of the fed funds rate until around mid-2015. A lowering of the unemployment rate threshold to, say, 5.5 percent would effectively push back the first increase in the fed funds rate for about a year, to mid-2016 or later. A decision by the FOMC to begin tapering on December 18 could be accompanied by a modification to fed funds rate forward guidance. In this way the Fed could tighten monetary policy by tapering with one hand, while it eases policy through forward guidance with the other hand. Discussion of this maneuver is highly speculative. What we can say for sure right now is that recent economic data is solid, and the Fed has a lot to talk about.
The unofficial ADP jobs report for November showed a solid 215,000 private sector jobs gained for the month. If we take the ADP report as gospel and assume zero net government job creation for the month, then it looks like we are in store for a strong BLS jobs report on Friday morning. The ISM Manufacturing PMI increased from 56.4 to 57.3 in November, a good-looking number. The employment sub-index was well into positive territory, indicating payroll expansion for the month. The ISM Non-Manufacturing PMI decreased to a still-positive 53.9 in November, down from October’s 55.4. The employment sub-index also declined, but to a still-expansive 52.5. Auto sales rebounded from soft September and October results, to a 16.4 million unit pace in November as truck sales re-engaged (which in itself is a positive sign for small business job growth). October new home sales were a pleasant surprise, increasing by a strong 25.4 percent to hit a 444,000 unit annual pace. If this pace is maintained over the next couple of months that would show a complete recovery from the summer slump. The U.S. international trade gap narrowed in October to -$40.6 billion. Exports were strong for the month, increasing by $3.4 billion, while imports gained $1.0 billion. The October real balance of trade in goods was -$48.3 billion ($2009). This was slightly better than the Q3 average, suggesting that trade may be a positive for Q4 GDP.
Market Reaction: U.S. stock markets opened with losses but have since headed north. Treasury yields are up. NYMEX crude oil is up to $96.79/barrel. The dollar is down against the euro and up against the yen.
For a PDF version of this Comerica Economic Alert click here: ADP 120413.