Taper Talk: How With the Fed Act Now that Jobs Are Rebounding?

Now that most of the S&P 500 has reported quarterly results on Wall Street the focus is shifting back to the latest economic headlines.

The big news of the week came out just this morning when the Labor Department announced that 204,000 payroll jobs were created in October. So it’s time for the same question everybody asks every time the jobs report comes out: What does this mean for quantitative easing and when the Fed decides to taper?

Actually, even with today’s strong report, the Fed still has a green light to continue pumping money because the unemployment rate went up. Still, Wall Street is weighing the possibility that the Fed could taper sooner than later, and the yield on 10-year Treasury bonds immediately surged to 2.7% after the October payroll report was released this morning.

Fed watching will remain a favorite pastime for the Street in the coming months, so it’s in our best interest to keep on top of the latest news. Let’s get up to speed on the latest economic headlines:

The Big Picture:

In the third quarter, gross domestic product grew at a 2.8% annualized rate. This topped economists’ estimates of a 2.5% growth rate and represents an improvement over the second quarter, which also grew at a 2.5% annual rate. The strongest component to this report was inventory growth, which was revised up from an annualized $56.6 billion to $86 billion. Meanwhile, consumer spending perked up and government spending cuts were less of a drag on growth.

This positive GDP revision was a big surprise and generally great news. The only fly in the ointment is that an inventory surge of this kind typically precedes a contraction in inventories, which then weighs on economic growth. In other words, the third-quarter inventory boost will likely give way to a negative impact in the fourth quarter.

The Conference Board announced that its Leading Economic Indicators (LEI) rose 0.7% in September, following August’s 0.7% rise. Economists were expecting this economic outlook gauge to rise 0.6%, so this was a stronger-than-expected report as fully seven of the 10 LEI components rose in September. An economist at the Conference Board, Ken Goldstein, said that “Beyond the immediate fallout of the shutdown, the biggest challenge is whether relatively weak consumer demand, pinned down by weak wage growth and low levels of confidence, will recover during the final stretch of 2013 and into 2014.” So we’ll be keeping a close eye on developments here, but it does look like the economy continues to slowly—but surely—improve.

The U.S. Jobs Market

In October, 204,000 payroll jobs were created. This was substantially higher than economists’ estimates of 100,000 new payrolls. Also significant is that numbers from the past two months were revised up. The September payroll report was revised up to 163,000 (from the initial estimate of 148,000), while August was revised up to 238,000 (from the previous estimate of 193,000). Despite more robust job growth, the unemployment rate rose slightly to 7.3% in October (up from 7.2% in September). Also notable is that the labor force participation rate declined further to 62.8% in October (down from 63.2% in September).

This cumulative upward revision of 60,000 payrolls between August and September is good news. However, the fact remains that the labor force participation rate is now at the lowest level since 1978. As workers continue to exit the workforce, it puts downward pressure on the unemployment rate, so the U.S. economy is still not creating enough jobs to lower unemployment, despite a shrinking workforce.

Last week, jobless claims by 9,000 to an annual rate of 336,000. Economists had forecast a rate of 335,000, so this was about in line with expectations. Meanwhile, the four-week moving average fell 9,250 to 348,250. These numbers may still include some numbers from the government shutdown, but they’re likely the best numbers we’ve seen in two months—since if you recall we experienced some glitches in the California computer system in September and October. On the whole, we still need to see a better pickup in hiring before we really get back to firing on all cylinders.

The American Consumer

In September, consumer credit grew by $13.74 billion to $3.05 billion. This was a larger gain than expected, with economists calling for a $12 billion increase. Credit card debt fell $2.06 billion—this is the fourth month in a row that revolving credit has fallen. Meanwhile, nonrevolving credit, which accounts for auto and student loans, surged $15.8 billion. While American consumers are increasing their spending on big-ticket items like new cars, they are also becoming more hesitant to rack up credit card debt. This pattern, which has lasted for at least four months, may change once we enter the holiday shopping season.

In September, personal income climbed 0.5%. This is the second month in a row that personal income has grown at that rate. This lived up to economists’ expectations. Meanwhile, consumer spending advanced 0.2%. Much of the spending went towards services while spending on durable goods declined. While spending matched estimates, it was lower than the 0.3% rate we saw in August. The personal savings rate rose from 4.7% to 4.9%. These results align with what we saw in the earlier consumer credit report. While consumers across the board are earning a little more, they’re not spending the gains immediately. Instead, we’re seeing more people saving for a rainy day, perhaps due to declining confidence in our elected leaders’ ability to steer the U.S. fiscal ship.

That’s all I have for you this week. I’ll be back on Monday with the latest market commentary and a fresh set of stock ratings in Portfolio Grader.

Have a nice weekend!

Sincerely,

Louis Navellier

Louis Navellier

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