Commentary Directory

The Week Behind

That's that. Tapering has begun. As many expected, the FOMC announced the beginning of the end of its asset purchase program on Wednesday to cap the November meeting in which FOMC members determined that the economy had made "substantial further progress" towards the Fed's goals. The long awaited announcement served as a signal that the economy has recovered enough to be taken off of life support. To support the Fed's decision, a strong jobs report pointed to another drop in the unemployment rate, down -0.2% to 4.6% in October.

On inflation, Chair Powell and company are still appearing to take a pass. The biggest shift in the FOMC statement text was an adjustment to the wording of the sentence that summarized the committee's inflation expectations. The September press release described the forces that are creating elevated inflation as "transitory factors." In the October release, it seemed that the FOMC backed off the transitory narrative for a moment by noting that elevated inflation is reflecting "factors that are expected to be transitory." The shift in phrasing likely reflects the rise in inflation projections seen in the September meeting and another rise in the PCE Price index in September (up 4.4% YoY vs 4.2% YoY in Oct). Whether or not these things will cause the path to rate hikes to shorten, right now, is anyone's guess. There are still a lot of roadblocks to a safe post-pandemic landing. Wells Fargo ended the week with a commentary piece asking the question on everyone's mind "when will the shortages end?"

Powell and fellow FOMC members' hawkishness leans on the strides the labor market is making towards full employment. The addition of 531,000 jobs in October is a strong improvement on September, and a sign the effect of the Delta variant is falling away. This was also evident from an auxiliary question in the survey where only 3.8 million people reported that they had been unable to work because their employer closed or lost business due to the pandemic, down -1.2 million from the previous month. Job gains were, again, dominated by the leisure and hospitality sector, but other sectors kept up with solid job gains. Expect to see further gains in leisure and hospitality with wages up a whopping 11.2% YoY there in preparation for Thanksgiving and Christmas. Consumers will almost certainly be paying for these wage increases with more expensive holiday services.

The September US trade report that came out last week detailed a substantial increase in the US international trade deficit in September. The deficit was driven by a -4.7% decrease in goods exports which was a result of a -9.9% decrease in industrial supply exports, another symptom of the slowdown in US industry. Strong demand supported imports which grew 0.6% on the month boosted by capital goods and industrial supply goods. It seems, at the moment, with the US ahead of most economies on the recovery, foreign trade partners are enjoying a strong US consumer. The deficit will continue to weigh on growth until the rest of the world can catch up and capacity pressures ease.

Chart of the Week

The US trade deficit has reached new highs in recent months as exports fail to keep up with imports. The trade imbalance is likely to ease when supply disruption eases pressure on the cargo shipping.

The Week Ahead

Economic news rolls in relatively quietly next week. The biggest reports will feature updates on US and German inflation as well as an update on job openings. The NFIB survey will also describe the status of small businesses which have been struggling with high input prices and labor shortages.