Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Payrolls rise more than forecast
-- The jobless rate dropped to a five-year low of 7 percent in November as American employers added more workers than forecast, boosting speculation the Federal Reserve may start scaling back stimulus as soon as this month. The 203,000 increase in payrolls followed a revised 200,000 advance in October, Labor Department figures showed today in Washington. Joblessness fell from 7.3 percent. “Unemployment is falling quite dramatically,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York and the top forecaster of the jobless rate for the past two years, according to data compiled by Bloomberg. “It will continue to move lower, aided by what I’m guessing is going to be stronger GDP growth next year.”
The pickup in hiring signals that companies are more confident demand will improve, while gains in wages and hours reported today give American workers even more reason to spend as holiday shopping gets under way. Stocks rallied on bets the economy is strong enough to withstand a reduction in the Fed’s $85 billion in monthly bond purchases. November’s employment gain was the biggest in three months. The median forecast of 89 economists surveyed by Bloomberg called for a 185,000 advance, with estimates ranging from increases of 115,000 to 230,000. See full story.
GDP revised higher as inventories bulge
-- The U.S. economy grew faster than initially estimated in the third quarter but weak demand and a pile-up in business inventories buoyed the case for the Federal Reserve to keep up its bond-buying stimulus for now. Gross domestic product grew at a 3.6 percent annual rate instead of the 2.8 percent pace reported a month ago, the Commerce Department said on Thursday. It was the biggest gain since the first quarter of 2012, but inventories accounted for almost half of the increase in growth. "The strong third-quarter growth pace masks the more subdued tone in domestic activity, and as the bloated level of inventory is worked off, we are likely to see a much softer performance in growth in the fourth quarter," said Millan Mulraine, senior economist at TD Securities in New York.
Businesses accumulated $116.5 billion worth of inventories during the quarter, the most since the first quarter of 1998. The big build-up suggested firms were surprised by a lack of demand. Domestic demand rose at just a 1.8 percent rate, instead of the 2.1 percent the government reported last month. Against this backdrop, economists said the Fed would likely remain cautious about trimming its asset purchases, even though recent signs on the labor market, including data on Thursday that showed a big drop in new claims for jobless benefits, suggest the economy is strengthening. "I am not prepared to interpret the revised third quarter number as an indication that the economy is on a much stronger track," Atlanta Federal Reserve Bank President Dennis Lockhart, a policy centrist at the central bank, told reporters. See full story.
Private payrolls jumped in November
-- Companies boosted payrolls in November by the most in a year, a sign that U.S. employers were optimistic about demand after the end of a government shutdown a month earlier, a private report based on payrolls showed today. The 215,000 increase in employment exceeded the most optimistic forecast in a Bloomberg survey and followed a revised 184,000 gain in October that was larger than initially estimated, according to the ADP Research Institute in Roseland, New Jersey. The median forecast of economists called for a 170,000 advance.
Stronger job growth helps provide working Americans with the income gains needed to boost consumer spending at the same time retailers seek to spur holiday sales with discounted merchandise. Federal Reserve policy makers are watching labor-market progress as they debate when to scale back record monetary stimulus. “Not only is the job market healthy, but it’s improving going into year-end,” said Brian Jones, senior U.S. economist at Societe Generale in New York, whose forecast for a 210,000 gain was the highest in the Bloomberg survey. “We’re optimistic on growth next year, continued improvement, further reductions in the jobless rate.” See full story
Jobs report may mean December taper
-- U.S. job growth likely remained solid in November, with the unemployment rate falling, which could bring the Federal Reserve a step closer to curtailing its massive monetary stimulus. Nonfarm payrolls are expected to have increased by 180,000 last month, according to a Reuters survey of economists. That would be down from October's 204,000 jobs gain and just off the 186,000 monthly average for the first 10 months of the year. First-time applications for unemployment benefits have been declining, small business hiring is improving and a national manufacturing survey on Monday showed a measure of factory jobs at its highest level in 1-1/2 years in November.
Minutes from the U.S. central bank's last meeting in October showed officials were preparing to reduce the pace of bond-buying in coming months as long as the economy continues to improve. A strong November employment report could put a December 'taper' of the Fed's monthly $85 billion bond-buying program on the table. "Another month of solid job gains increases the probability that policymakers will taper when they meet," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. Some economists, however, believe the Fed will probably not want to pull the trigger before lawmakers on Capitol Hill strike a deal on the government budget and would want more data in hand to be sure that the job gains are sustainable. Many expect the Fed will wait until March to act. See full story.
U.S. factory activity hits 30-month high
-- A gauge of U.S. factory activity hit a 2-1/2-year high in November and construction spending increased solidly in October, brightening the economic outlook as the year winds down. Monday's reports were the latest indication the economy was gaining strength despite the fiscal headwinds and could bring the Federal Reserve a step closer to scaling back its massive monetary stimulus. "The economy is moving forward at a moderate to strong pace," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "This is additional evidence that the economic outlook is positive enough and expected to continue long enough and that the Fed might actually taper in December."
The Institute for Supply Management (ISM) said its index of national factory activity rose to 57.3 last month, the highest reading since April 2011, from 56.4 in October. A reading above 50 indicates expansion in the factory sector. Last month's reading outstripped forecasts for 55.0 and was the sixth consecutive month of growth in the goods-producing sector since a contraction in May. The ISM report mirrored a separate index released by financial data firm Markit, which showed manufacturing rebounding to a 10-month high in November. See full story.
Dollar pushes up after Chicago PMI
-- The U.S. dollar on Wednesday jumped against the Japanese yen after a generous helping of economic data before the Thanksgiving holiday. A gauge of Chicago-area business activity edged down in November but still beat expectations. The Chicago purchasing managers index declined to 63 this month from 65.9 in October. “The regional report is very healthy indeed, with the employment component reaching its strongest since October 2011, and is a significant reason we are unnerved by the earlier depressing reading of durable goods during October,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. Data showed durable-goods orders declined 2% in October, compared to expectations of a 2.2% decline. The drop was largely due to fewer contracts for jumbo jets, the Commerce Department said.
Investors have watched economic data as the Federal Reserve monitors the pace of the recovery to gauge when it will begin to reduce monetary stimulus, which has been aimed at encouraging growth. Minutes from the Fed’s monetary-policy meeting in October, released last week, suggested the central bank may pull back on asset purchases at one of its upcoming meetings. The Fed has said improvement in the labor market is a key factor in its policy assessment. Some analysts have said the central bank’s program of purchasing of $85 billion a month in debt hurts the greenback’s value. The ICE dollar index, a measure of the greenback against six rivals, edged up to 80.694 from late Tuesday’s level at around 80.618. See full story.
Consumer confidence hits 7-month low
-- Confidence among U.S. consumers unexpectedly declined in November to a seven-month low as Americans grew more pessimistic about the labor-market outlook. The Conference Board’s index fell to 70.4 from a revised 72.4 a month earlier that was stronger than initially estimated, the New York-based private research group said today. The median forecast in a Bloomberg survey of 78 economists called for a November reading of 72.6. The drop in sentiment helps explain why some retailers such as Best Buy Co. see a need to match competitors’ discounts this holiday-shopping season. More employment opportunities and wage gains would help lay the groundwork for a pickup in household purchases that make up about 70 percent of the U.S. economy.
“The economy just has not performed very well this year and has been disappointing relative to what most people were hoping for and expecting through the course of the year,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s one thing when you have one or two years into the recovery and things aren’t progressing in the job market, but here we are four-plus years in.” Estimates (CONCCONF) of consumer sentiment ranged from 65 to 81 in the Bloomberg survey after a previously reported October reading of 71.2. The Conference Board’s measure averaged 53.7 in the recession that ended in June 2009. See full story.
Economists trim U.S. growth forecasts
-- Economists trimmed their forecasts for U.S. economic growth in the final quarter of the year and the first three months of 2014 but predicted A slightly higher rate of job growth over the next four quarters. Analysts see the economy growing at an annual rate of 1.8 percent in the current quarter, down from a previous estimate of 2.3 percent, according to the Philadelphia Federal Reserve's quarterly survey of 42 forecasters. Growth in the first quarter of 2014 was seen picking up to 2.5 percent, though that, too, was down from a prior estimate of 2.7 percent.
The economy is expected to grow at a rate of 1.7 percent for all of 2013 and 2.6 percent in 2014. The pace of hiring was expected to increase slightly over the next year, with an average rate of monthly job growth seen around 187,000 for each of the next two quarters before rising to 202,100 by the final quarter of 2014. The jobless rate was expected to be 7.2 percent at the end of the current quarter and 7 percent by the second quarter of 2014. The most recent official unemployment rate released by the government edged up to 7.3 percent in October from 7.2 percent. See full story.
Dow, S&P 500 at record highs
-- U.S. stocks rose on Friday, with the S&P 500 index closing above 1,800 for the first time and extending gains into a seventh consecutive week. The Dow Jones Industrial Average also notched a record close above 16,000. The S&P 500 climbed 8.91 points, or 0.5%, to close at 1,804.76, notching a gain of 0.4% for the week. Health care and industrials led gainers among the S&P’s 10 major sectors. The Nasdaq Composite rose 22.49 points, or 0.6%, to 3,991.65, posting a gain of 0.1% for the week.
The Dow gained 54.78 points, or 0.3%, to end at 16,064.77, leaving it up 0.7% for the week. On Thursday, the blue-chip index closed above 16,000 for the first time. U.S. stocks have had a record-breaking rally this year, buoyed by the improving economy, low inflation and the Federal Reserve’s accommodative monetary policy. The Fed has vowed to keep interest rates low for an extended period and has also been pumping $85 billion a month into the economy via its bond-buying program. Janet Yellen, nominated to succeed Ben Bernanke as head of the Fed early next year, is expected to continue the central bank’s efforts to boost the economy and lower unemployment. See full story.
Fed's Bullard: keep buying bonds
-- Accommodative bond-buying must continue for now despite possible inflation risks in part because there are no signs of price rises so far, St. Louis Federal Reserve President James Bullard said on Thursday. Bullard, a voter on monetary policy this year, added he expects the U.S. central bank's balance sheet to "eventually" return to a pre-financial-crisis level of around $800 billion, though "it may take quite a while." Bond-buying in the wake of the 2007-2009 recession has swelled the Fed's balance sheet to about $3.9 trillion.
While it is meant to spur investment, hiring and economic growth, there are concerns that all the money-printing is laying grounds for a run-up in inflation. Still, inflation remains just over 1 percent, lower than the Fed's 2-percent goal, and unemployment remains worryingly high at 7.3 percent last month. "What we need to do is continue with the program for now as we have, but if an inflation problem starts to develop we have to be willing to move to arrest that problem," he told a University of Arkansas event. "At that point I'd put on my inflation hawk hat and spring into action." See full story.
Fed taper likely in ‘coming months’
-- Federal Reserve officials said they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves, minutes of their last meeting show. Policy makers “generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released today in Washington.
The FOMC is considering how and when to reduce asset purchases without triggering a rise in interest rates that could slow economic growth and erode gains in the labor market. Their meeting minutes show extensive discussion on how to increase the clarity of their plans to hold interest rates near zero. They made no decisions on those plans. “It sounds like they’re moving closer to tapering” bond buying, said Sam Coffin, an economist at UBS Securities LLC in New York. “There’s a lot more focus on their forward guidance and a lot of that is because if they’re moving closer to tapering they want to signal they’ll stay easy after the tapering has begun.” See full story.
Yellen defends QE as economic benefit
-- Janet Yellen, the nominee for Federal Reserve chairman, defended the central bank’s bond purchases in a letter to a U.S. senator, saying they boosted economic growth and provide benefits that exceed the risks. “By putting downward pressure on longer-term interest rates and helping to make financial conditions more accommodative, the Federal Reserve’s asset purchases have supported a stronger economic recovery, improved labor-market conditions and helped keep inflation closer to its 2 percent objective,” Yellen said in a Nov. 18 response to questions from Senator David Vitter, a Republican from Louisiana.
In a separate letter to Senator Elizabeth Warren, Yellen said “monetary policy is likely to remain highly accommodative for a long time,” even after the Fed reaches thresholds for considering an increase in the main interest rate. Yellen, at a Nov. 14 confirmation hearing, told the Senate Banking Committee she’s committed to promoting a strong recovery, reducing 7.3 percent unemployment and ensuring stimulus isn’t removed too soon. See full story.
Homebuilder sentiment at 4-month low
-- Confidence among U.S. homebuilders held in November at a four-month low as buyer traffic and sales outlooks retreated. The National Association of Home Builders/Wells Fargo builder sentiment gauge was unchanged at 54 from a revised October reading that was weaker than initially estimated, the Washington-based group reported today. The median forecast in a Bloomberg survey projected it would come in at 55. Readings above 50 mean more respondents reported good market conditions. The 16-day partial government shutdown and political wrangling over the nation’s budget have taken a toll on consumer sentiment, causing some would-be buyers to delay spending decisions. Higher mortgage rates also are holding back gains in real estate, which has been a source of strength for the economic expansion.
“Policy and economic uncertainty is undermining consumer confidence,” David Crowe, chief economist at the builders association, said in a statement. “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.” Two of three components of the builder survey deteriorated this month. The group’s measure of the sales outlook for the next six months declined to 60 from 61 in October, and prospective buyer traffic fell to 42 from 43. That put both measures at five-month lows. The gauge of current single-family home sales was unchanged at 58. See full story.
NY factories slow in November
-- Factory activity declined in New York state earlier this month and employment in the sector failed to grow for the first time since June, signs that U.S. manufacturing may have lost a step. A separate report on Friday showed prices for U.S. exports unexpectedly fell in October, the latest indication of global economic weakness. The New York Fed's "Empire State" index of business conditions at factories fell to minus 2.21 from 1.52 in October, the first negative reading since May. Economists in a Reuters poll had forecast an index of 5.00. A reading above zero indicates expansion. The report underscores the headwinds facing the world's largest economy, where the recovery remains fragile.
The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. If the weakness in New York also appears in other major manufacturing regions, it would mark a setback after data in October showed relatively robust hiring across the economy and strong expansion at factories. A federal government shutdown in October had been expected to drag on growth, but data in the wake of that congressional impasse has been mixed. Labor market conditions in New York's factories weakened, with the index for the number of employees slipping to 0.0 from 3.61 in October. The average employee workweek index also sank to minus 5.26 from 3.61. U.S. Treasuries prices pared earlier losses following the release of the factory data, which backed the view the U.S. central bank will keep buying bonds to help support the economy. See full story.
Data underscore sluggish economy
-- The U.S. trade deficit widened in September as imports rose to their highest level in almost a year and exports fell for a third consecutive month, suggesting the third-quarter growth estimate will probably be lowered. Other data on Thursday painted a less upbeat picture of the labor market than had been suggested by last week's sturdy October payrolls report. First-time applications for jobless benefits fell last week, but the decline in claims for the week ended November 2 was smaller than previously reported. "The reports reveal a slightly weaker path than we expected for exports and claims levels, which has modestly downgraded the outlook for the economy," said Mike Englund, chief economist at Action Economics in Boulder, Colorado.
This measure goes into the calculation of gross domestic product and its rise in September suggested the government will probably trim its initial third-quarter GDP estimate by between 0.1 and 0.2 percentage point, according to economists. Trade was reported to have contributed 0.31 percentage point to the economy's 2.8 percent annualized growth pace in the July-September quarter. In a separate report, the Labor Department said initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 339,000. However, claims for the prior week were revised to show 5,000 more applications received than previously reported. The four-week moving average for new claims, which irons out week-to-week volatility, dropped 5,750 to 344,000. See full story.
Central banks risking asset bubbles
-- Central banks are finding it’s easier to push up stock and home prices than it is to prevent inflation from falling short of their targets. While declining costs for everything from gasoline to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up. “There is definitely a whiff of disinflation again taking hold globally,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said Nov. 5 on Bloomberg Radio’s “Bloomberg Surveillance.”
Federal Reserve Chairman Ben S. Bernanke and his central-bank counterparts are trying to avert the deflationary danger by pumping up their economies with lower interest rates and monetary stimulus. They have bet the run-up in stock and home prices they’ve engineered would boost consumer and corporate confidence and spur faster growth and higher inflation. Now they’re having to maintain or intensify their aid -- running the risk those efforts do more harm than good by boosting equity and property prices to unsustainable levels. “You have a wall of liquidity” that’s “leading to asset inflation and eventually to bubbles,” Nouriel Roubini, chairman of Roubini Global Economics LLC, said Nov. 7 on Bloomberg Television’s “Street Smart.” See full story.
Fed officials advocate for easy money
-- The Federal Reserve should keep monetary policy ultra-easy given the economy's tepid growth and an uncertain outlook for jobs growth, two senior officials said on Tuesday, reinforcing views that the U.S. central bank will not taper bond buying before next year. At the same time, last month's government shutdown may undermine the reliability of economic data through December, said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta. That could provide another reason not to expect policy action when the Fed holds its next policy meeting, on December 17-18, though Lockhart would not rule it out. "Monetary policy overall should remain very accommodative for quite some time," he told an economic forum in Montgomery, Alabama. "Even though the economy is growing, and we're making progress on unemployment, there are real concerns about whether the recent modest pace of GDP is enough to maintain employment momentum."
The economy picked up speed in the third quarter, but largely because businesses restocked their shelves. With growth in consumer spending the slowest in two years, the gain in business inventories may prove to have not been necessary, and the outlook for activity in the final three months of the year is dim. Consumer and business confidence was also dented by a bitter budget battle in Washington that partially closed the government for 16 days last month. Narayana Kocherlakota, president of the Minneapolis Fed, spoke even more strongly about the need for aggressive action to foster growth. "Reducing the flow of (bond) purchases in the near term would be a drag on the already slow rate of progress of the economy toward the committee's goals," Kocherlakota told the Chamber of Commerce in St. Paul, Minnesota. See full story.
Global currency wars heating up
-- The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth. The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.” “It’s a very real concern of these countries to keep their currencies weak,” Axel Merk, who oversees about $450 million of foreign exchange as the head of Palo Alto, California-based Merk Investments LLC, said in a Nov. 8 telephone interview. ECB President Mario Draghi, “persistently since earlier this year, has been trying to talk down the euro,” Merk said.
With the outlook for the global economy being downgraded by the International Monetary Fund and inflation slowing to levels that may hinder investment, countries and central banks are revisiting policies that tend to boost competitiveness through weaker currencies. The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.” “We’re seeing a new era of currency wars,” Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London, said in a Nov. 8 telephone interview. See full story.
U.S. payrolls add 204,000 jobs in October
-- The U.S. economy added 204,000 jobs in October, double Wall Street’s forecast, despite a government shutdown that was expected to put a damper on hiring. Hiring for September and August was revised up by a combined 60,000 jobs, the Labor Department said Friday. The revised gains along with the big increase in hiring in October suggested the economy might have more strength than previously thought. Economists surveyed by MarketWatch had expected an increase of 100,000 jobs in October.
The unemployment rate ticked up to 7.3% from 7.2% in what was likely a residue of the government shutdown. Federal workers were classified as unemployed under the government’s method for calculating the unemployment rate. Indeed, the number of people who said they were temporarily laid off soared by 448,000 in October, an unusually large increase that probably will revert back to normal in November. The shutdown also contributed to a 720,000 decline in the size of the labor force, which tugged the participation rate down to 62.8% from 63.2%. That’s the fewest percentage of able-bodied workers 16 or older looking for work since March 1978. The largest slice of hiring in October took place at retailers, bars, restaurants and hotels — lower-paying establishments that tend to boost hiring temporarily for the holiday season. Those industries added a combined 97,000 jobs. See full story.
Economy in U.S. expands at a 2.8% rate
-- Household purchases and business spending on equipment slowed in the third quarter, even as a buildup in inventories unexpectedly boosted the pace of economic growth in the U.S. The 2.8 percent annualized gain in gross domestic product followed a 2.5 percent increase in the prior three months, Commerce Department figures showed today in Washington. Final sales, which exclude unsold goods, rose 2 percent in the third quarter as consumer spending climbed at the slowest pace since 2011 and corporate investment fell. The biggest gain in inventories since the beginning of 2012 risks holding back the economy this quarter as companies limit production. A 16-day partial shutdown of the federal government added to the headwinds that the Federal Reserve is trying to offset by maintaining $85 billion in monthly bond purchases intended to keep borrowing costs low.
“You’ve got this big jump in inventories, and that’s clearly in excess of what the flow of spending is,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected a 1.9 percent gain in final sales. “If you stockpile all this inventory but your sales don’t really change all that much, then what you’re going to do in the next quarter is cut back.” Economists at Morgan Stanley, Credit Suisse, TD Securities USA LLC and HSBC Securities America were among those who said they might reduce their forecasts for GDP. “Fourth-quarter growth appears to be on a trajectory for growth a bit below 1.5 percent at this point,” Morgan Stanley economists said in an e-mail to clients. See full story.
Fed research says slack justifies stimulus
-- The Federal Reserve’s policy of seeking to drive down the U.S. unemployment rate is effective, and the level of slack in the economy justifies an accommodative stance, according to two separate papers by top Fed officials. William English, head of the Division of Monetary Affairs, wrote that the strategy of not raising interest rates if unemployment is above 6.5 percent has provided effective stimulus, and that an even lower threshold could be helpful. A paper by David Wilcox, the research and statistics chief, says that slack in the economy argues for loose policy at a time of contained expectations for inflation. With the central bank debating the timing of winding down its $85 billion a month in bond purchases, the research provides a window into the views of the senior Fed staff members who write the briefing materials for Federal Open Market Committee meetings and draft the Fed’s policy options.
The papers were posted on the International Monetary Fund’s website ahead of a two-day conference starting tomorrow in Washington. English and his co-authors present a simulation showing that lowering the unemployment threshold to 5.5 percent “improves measured economic performance” in their model. The jobless rate has remained above 7 percent for almost five years. At the same time, lowering the level even further, to 5 percent “reduces welfare, as the control of inflation becomes notably less precise,” according to the paper. Wilcox’s paper, to be presented tomorrow followed by English’s on Nov. 8, says that the “level of economic slack has been and remains quite high.” See full story.