Labor Data is Positive, FOMC Contemplates Taper Trajectory
- The ADP Employment Report for December showed an increase of 238,000 private-sector jobs.
- Consumer Credit for November expanded by $12.3 billion, almost all the increase was in nonrevolving.
- The FOMC Minutes from December 17/18 set expectations for QE tapering in 2014.
Data from year-end 2013 looks reasonably solid and consistent with the view that economic momentum will improve moderately in 2014. However, it does look like we will have more weather effects in the data to sift through this winter than we have had recently, thanks to the errant polar vortex. With a little less drag from fiscal tightening, a little help from our overseas trading partners, and an ongoing domestic growth story, upside risks for 2014 appear to be increasing. Today’s ADP Employment Report for December is supportive of the sanguine view. The report shows an increase of 238,000 private-sector jobs for the month. The government sector has been a drag on total employment, averaging a loss of about two thousand jobs per month through the first 11 months of 2013. But that will likely change in 2014. If we take the ADP report at face value, then we can expect a gain of about 236,000 payroll jobs in the official BLS count. The ADP report does a good job of tracking the official Bureau of Labor Statistics numbers, but monthly variations are to be expected, especially when there are weather effects to account for. So even with today’s better-than-expected numbers, we do not alter our expectation for an official BLS payroll job gain of between 190,000 and 200,000 for the month and an unemployment rate of 6.9 percent. However, it does feel like there is some upside risk to that expectation. The official data will be released Friday morning at 8:30 Eastern/7:30 Central time.
Total consumer credit expanded by $12.3 billion in November. Revolving consumer credit grew by $0.5 billion. Nonrevolving consumer credit increased by $11.9 billion, driven by strong auto sales. Revolving credit growth increased 1.1 percent over the previous 12 months. Nonrevolving credit came in stronger at 8.2 percent over the previous 12 months, showing an ongoing appetite for automobiles and other big-ticket items.
The minutes from the FOMC meeting of December 17/18 show a consensus view within the FOMC that asset purchase tapering should continue “in measured steps” as long as economic data and financial market conditions remain positive. The committee notes emphasize that there is not a preset course for tapering. However, in his post-meeting press conference, Chairman Bernanke did suggest that it was the consensus view of the committee to conclude its asset purchase program by the end of this year as long as economic and financial market conditions permit. We conclude that it is reasonable to expect the FOMC to reduce its asset purchase program by approximately $10 billion at each of its eight meetings this year, winding down purchases completely by the end of the year. The FOMC was also reluctant to tie interest rate policy to a more explicit unemployment rate target. Most committee members preferred to emphasize a more qualitative approach to forward guidance for the fed funds rate. In the Summary of Economic Projections that accompanied today’s release of the FOMC minutes, the distribution of FOMC participant’s projections for the target fed funds rate show that most participants expect to begin to increase the fed funds rate sometime in 2015. We conclude that it is reasonable to expect the FOMC to slowly increase the fed funds rate through the second half 2015.
Market Reaction: U.S. stock markets continue to drift sideways in the new year. A solid jobs report for December on Friday would help to re-establish market confidence. Long-term Treasury yields are up. The 10-Year T-bond rate climbed today to 3.00 percent. NYMEX crude oil is down to $92.58/barrel.
For a PDF version of this Comerica Economic Alert click here: ADP 010814.