The economic data were mostly stronger than anticipated last week. GDP growth exceeded expectations, although the details were a bit troublesome. With everyone anticipating some impact from the partial government shutdown, nonfarm payrolls accelerated in October. Moreover, revisions to August and September, painted a much stronger picture of job growth. What does this mean for the Fed and its decision to taper?
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Golly! Real GDP rose at a 2.8% annual rate in the advance estimate for 3Q13, the strongest performance since 1Q12. However, consumer spending growth rose at a 1.5% pace and business fixed investment rose 1.6% – nothing to write home about. Residential home building continued to pick up; residential fixed investment added 0.4 percentage point to the headline GDP growth figure. Foreign trade added 0.3 percentage point (exports +0.6, imports -0.3). Government was about a wash, as a positive contribution from state and local government offset a negative contribution from the federal government (a theme that has also been reflected in the payroll figures). Inventories, which had risen at a relatively brisk pace in 2Q13, rose even faster. Recall that the change in inventories contributes to the level of GDP. So, the change in the change in inventories contributes to GDP growth. Faster inventory growth appears to have been unintentional, as domestic demand fell short of expectations. We’re almost certain to see slower inventory growth in 4Q13, which will subtract from GDP growth. There’s a major caveat to all this. The GDP figures will be revised on December 5 (and again on December 20).
The partial government shutdown had a mixed impact on the October employment figures. Bureau of Labor Statistics Commissioner Groshen indicated that “there were no discernible impacts” on the estimates of payrolls, hours, and earnings. However, there appear to be non-sampling errors in the household survey. Furloughed federal workers should have been classified as “unemployed on temporary layoff,” but many were apparently recorded as “employed, but absent from work.” The unemployment rate edged up only slightly (from 7.24% to 7.28%), but labor force participation fell by 0.4 percentage point, to 62.8%, while the employment/population ratio dipped by 0.3 percentage point, to 58.3%. The BLS reported that the labor force fell by 720,000, while employment dropped by 735,000, with 932,000 disappearing from the labor force. These are large numbers, reflective of the government shutdown, but don’t take them at face value. The household survey, which is based on a sample of about 60,000 households, generates unreliable estimates of levels (employment, unemployment). The estimate of the number of unemployed individuals, reported to have risen by 17,000 in October, is accurate to ±300,000. The household survey sample is, however, large enough to generate reasonable estimates of ratios, such as the unemployment rate (although that’s only accurate to ±0.2 percentage point).
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Shazam! Nonfarm payrolls rose by 204,000 in October, with a net revision to August and September of +60,000. Private-sector payrolls have averaged a 190,000 monthly gain over the last three months – a higher trend than expected.
For Fed policymakers, the recent data paint a mixed picture of the economy. The labor market has improved significantly since the Fed began its asset purchase program, but is that enough? The better picture of payrolls implies that a December tapering in the pace of asset purchases is not out of the question, but the decision to taper, as Fed officials have explained repeatedly, will be data-dependent. There will be one more employment report before the December 17-18 Fed policy meeting, but the Fed will have a lot to consider besides jobs. Higher long-term interest rates and a low inflation trend will be important factors.
© Raymond James
