Strong Jobs Data Fits Nicely With FOMC Meeting Message

The central message of the October 2019 FOMC meeting was that the economy continues to be in a good place and that now, after a third rate cut, the policy is as well. Both the statement and press conference essentially removed the signal of a bias toward easing. The Committee convened a transition from (i)  consecutive cuts because of risk management to (ii) an it-depends mode where the presumption is no cut in  December and it will take “material” surprises in the data to move the Committee to cut again. The outcome of the FOMC meeting reinforced our call for no further cuts in our baseline outlook (see our recap of the  FOMC meeting here). With the blockbuster employment report for October released on Friday, a cut in  December now looks nearly out of reach. The jobs data indicated that the economy has more momentum than we had thought, giving us more confidence in our baseline outlook that growth will not slow over the next few quarters to such an extent that another cut would be justified (see our commentary here). 

Policymaker Remarks 

Following last week’s FOMC meeting, several policymakers voiced support for Powell’s core message that developments would have to lead to a “material” reassessment of the outlook for the FOMC to consider any additional easing. It’s been announced that Powell will appear before the Joint Economic Committee on  Wednesday, November 13. 

Williams and Clarida both spoke on Friday (11/1) after the release of the October employment report. Williams  noted that “the economy is in a very good place,” and he called both job growth and the economy “strong.”  Clarida (11/1) said, “the economy is in a good place, and monetary policy is in a good place.” He also  cautioned, “Although the baseline expectation for the U.S. economy is favorable, there are some evident  downside risks to this outlook.” He thought “measures of inflation expectations reside at the low end of a  range” consistent with price stability. To him, the economy was “operating in the range of trend growth” and  “not late cycle.” However, “The policy adjustments we have made to date will continue to provide significant  support for the economy.” Quarles (11/1) agreed and used similar language. 

Other policymakers essentially echoed those views. Daly (11/1) said, “I was in favor of the three rate cuts  we took and I thought those were a good idea…but now the level of policy is accommodative.” Such a stance,  in her view, “is sufficient to push against these headwinds.” Kaplan (11/1) reminded that “monetary policy  acts with a lag’’ and “Monetary policy is basically at an appropriate level and I would strongly advocate that  we are patient here.” Rosengren (11/1) cited the employment report in defending his view that the October  rate cut was unnecessary. At the other end of the spectrum, Kashkari (a dove) said the FOMC is “effectively  on pause for a while” (11/4) but reiterated his concern that inflation expectations “seem to be drifting lower  and lower.” 

Recent Data 

BEA reported that real GDP grew at an annualized pace of 1.9% in Q3, several tenths higher than had generally been anticipated. Government spending, consumer spending, and residential investment were robust in Q3,  while business fixed investment subtracted from real GDP growth, as did net exports and inventories to a  lesser extent. Growth in consumer spending moderated relative to Q2 but a still-strong 2.9% rate and residential investment grew at a 5.1% pace. That was the first quarter of positive growth in residential investment since 2017:Q4. The monthly pattern of real consumer spending revealed in the personal income and outlays report for October seems to show a slowing in consumer spending relative to earlier in the year but without any sudden change at the end of Q3. That report also revealed that the 12-month core PCE  inflation rate edged back down a tenth to 1.7% in October, as was expected based on previously released monthly price data. 

Of course, the most significant release last week was the October jobs report. Nonfarm payrolls increased a much higher than expected 128K in October, and upward revisions to the September and August gains totaled 95K. Moreover, payrolls were held down in October by a couple of temporary factors: A strike in the auto sector was reflected in a 42K decline in manufacturing employment in motor vehicles and parts, and temporary jobs related to the 2020 Census declined 20K. The result is that the momentum in the labor market,  and the overall economy, looks meaningfully stronger now. Despite the continued strong pace of job growth,  however, wage gains aren’t showing signs of overheating: Average hourly earnings increased a modest  0.21% in October, and the 12-month change edged up a tenth to 3.0%. The ECI data for Q3, also released last week, tell a similar story. Growth in that measure has been well above the low levels seen earlier in the expansion but remains moderate, and it doesn’t seem to be picking up further. As for the household survey data, the unemployment edged up a tenth, to 3.6%, paring the previous month’s two-tenths decline. The participation rate also increased a tenth.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Advance Goods Trade Balance Sep -$70.4b -$73.5b -$73.1b -$72.8b
Wholesale Inventories MoM Sep P -0.3% 0.2% 0.0% 0.2%
Conf. Board Consumer Confidence Oct 125.9 128.0 126.3 125.1
Pending Home Sales MoM Sep 1.5% 0.9% 1.4% 1.6%
Real GDP QoQ 3Q A 1.9% 1.6% — 2.0%
Real PCE QoQ 3Q A 2.9% 2.6% — 4.6%
Core PCE Prices QoQ 3Q A 2.2% 2.2% — 1.9%
Employment Cost Index QoQ 3Q 0.7% 0.7% — 0.6%
Personal Income MoM Sep 0.3% 0.3% 0.5% 0.4%
Real PCE MoM Sep 0.2% 0.2% 0.2% 0.1%
PCE Prices MoM Sep 0.0% 0.0% — 0.0%
PCE Prices YoY Sep 1.3% 1.4% — 1.4%
Core PCE Prices MoM Sep 0.0% 0.1% — 0.1%
Core PCE Prices YoY Sep 1.7% 1.7% — 1.8%
Change in Nonfarm Payrolls Oct 128k 85k 180k 136k
Unemployment Rate Oct 3.6% 3.6% — 3.5%
Average Hourly Earnings MoM Oct 0.2% 0.3% — 0.0%
Average Hourly Earnings YoY Oct 3.0% 3.0% 3.0% 2.9%
Labor Force Participation Rate Oct 63.3% 63.1% — 63.2%
ISM Manufacturing Oct 48.3 48.9 — 47.8
Construction Spending MoM Sep 0.5% 0.2% -0.3% 0.1%
Wards Total Vehicle Sales Oct 16.55m 17.00m — 17.19m
Core Capital Goods Orders MoM Sep F -0.6% — — -0.5%
Core Capital Goods Shipments MoM Sep F -0.7% — — -0.7%

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