October Recap and November Outlook
Economic data showed some movements in the right directions, both up and down. The Federal Reserve responded by talking about letting the economy catch up to the rate increases already enacted. Does that mean that the path forward will be smoother and potentially skirt a recession?
Let’s get into the data:
- The October non-farm payroll number was 261,000. The report from the Department of Labor marked the slowest increase since December of 2020. This was a slight decrease from the September number, released in early October, of 263,300.
- The unemployment rate increased to 3.7%. The unemployment figure that includes discouraged workers and those holding part-time jobs increased to 6.8%.
- 12-month CPI was 8.2% September. The Bureau of Economic Statistics reported a slight decrease in the annual figure, from 8.3% in August.
- Third quarter GDP came in at 2.6%. The positive number is a bounce back from the negative first and second quarter numbers.
What Does All of That Data Add Up To?
The combination of even slightly declining inflation and unemployment releases over the course of October, and then a positive GDP reading for the third quarter, resulted in some much-needed optimism in the equity markets. The values of stocks have been benefiting from historically low interest rates.
Fed Chairman Powell’s relentless campaign of increasing interest rates to tamp down inflation has been having two impacts: the cost of capital for future growth is going up, and the fear that the Fed will overshoot and push the economy into recession compounds with every rate increase. The economic news provided some rationale to believe that the Fed would slow rate increases going forward.
After the FOMC meeting on November 2, The Fed indicated it is prepared to do exactly that. The statement on the rate increase included the key wording “the lags with which monetary policy affects economic activity and inflation.” The was taken to mean that the Fed could potentially decrease the size of rate increases.
The enthusiasm rally in the market was short-lived, as Powell elaborated in the press conference that the overall level of rate increases would likely be higher than previously communicated.
In practical terms, this means that uncertainty shifts from the amount of each monthly or semi-monthly increase in the Fed funds rate, to how many rate increases there will likely be in total. In other words – when will the Fed stop?
And more importantly, will it read the economic tea leaves correctly and stop short of recession?
Chart of the Month: Quarterly GDP
Quarterly GDP has rebounded to a more normal, positive level. Two consecutive quarters of negative GDP is one measure of recession, but the overall strength of the economy counterbalanced the dip in GDP in the first and second quarter.