Recent U.S. economic data has generally been stronger than expected. Payroll jobs increased by 203,000 in November, following a 200,000 job gain in October. The separate household employment survey, which took a 735,000 job dive in October because of the government shutdown, recovered in November, adding 818,000 jobs. It is the household employment survey that feeds into the unemployment rate; so we saw a big improvement there as the unemployment rate dropped in November to 7.0 percent, after ticking up in October to 7.3 percent.
The second estimate of 2013Q3 real GDP growth was increased from the initial estimate of 2.8 percent annualized to a strong 3.6 percent. About half the growth in real GDP for Q3 came from inventory accumulation. Inventories increased by $116.5 billion ($2009) in the third quarter, about double the normal rate. If inventory accumulation had been close to normal, real GDP growth for Q3 would have been in the vicinity of a moderate 2.0 percent. The 2013Q3 surge in inventories will likely be followed by weak inventory accumulation one to two quarters out. We had a similar inventory surge in 2010Q3 when inventories increased by $116.2 billion ($2009). For the next quarter inventory accumulation was near normal. The following quarter, 2011Q1, inventory growth was notably weak and real GDP declined at a 1.3 percent annual rate.
The moderately strong November job report, that confirms a labor market rebound from the October government shutdown, will bring the Federal Reserve one step closer to tapering quantitative easing. A remaining obstacle to a December 18 taper announcement by the FOMC is the still undone business of budgeting and funding the federal government (see page 2 for a discussion of recent developments in the federal budget and debt ceiling process). Recall that the Fed’s decision not to taper in September was linked by FOMC Chairman Bernanke to the dysfunctional budget debate on Capitol Hill. Better economic data, a budget deal and the right political atmosphere, both within the FOMC and in Washington more generally, may allow the stars to align for “taper-lite” on December 18. An FOMC decision to begin tapering their asset purchase program may be combined with a revision of forward guidance for the fed funds rate. The near-zero fed funds rate is currently tied to an unemployment “threshold” of 6.5 percent. This would likely keep the funds rate near zero into 2015. A lowering of the unemployment rate threshold to, say, 5.5 percent could keep the fed funds rate near zero into 2016 or beyond.
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