GDP Growth Moderates Slightly, Labor Market Strong, but the Fed Cuts Anyway

by Thomas Cooley and Peter Rupert

The BEA Announced the Advanced Estimate of Third Quarter GDP and it showed an economy still growing but moderating to 1.9%. Consumers continued to power the economy with personal consumption expenditures increasing by 2.9% and residential fixed investment increasing by 5%.

While consumers have remained positive and keep the economy humming, the worry for some time has been the about the impact of weakness in our trading partners and the ongoing trade wars on business and particularly on business investment. The latter reflects something about firms views of the future state of the economy. Business fixed investment slowed in the third quarter, although less than it did in the previous quarter. Inventories increased in the quarter and it may be that these will hold back production in future quarters.

Labor Report

The BLS announced that non-farm payroll employment from the establishment data increased 128,000 for October. On top of that there were very large upward revisions to August (up 51,000) and September (up 44,000) of a total of 95,000, making the labor market much stronger than originally reported.

The private sector added 131,000 while government shrank by 3,000. The decline in government employment was led largely by a federal government cut of 17,000, many of which were 2020 census workers. In addition, there was a 41,600 decline in the motor vehicles and parts category reflecting the recent UAW strike. Retail trade has shown two consecutive months of an increase, rising 6,700 in September and 6,100 in October.

Average weekly hours hours kept steady at 34.4 despite the decline in manufacturing hours. Average hourly earning were also up slightly.

The household survey also showed serious labor market strength with the labor force rising 325,000 and employment up 241,000. The labor force participation rate increased from 63.2 to 63.3. The unemployment rate inched up slightly from 3.52% to 3.56%.

Big Picture

It is not clear what is driving Fed decision-making and the communications have been woeful. Chairman Powell cited the desire for insurance against the impact of trade worries. It is unclear that such insurance works or why it would affect the investment decisions of firms. The Fed also signaled that it is finished with rate cutting for a while. Once again there is no hint at what “rules” they are following.

In a serendipitous bit of timing, the BEA’s Advanced snapshot of the U.S. economy in the third quarter was released on the same day that Fed announced it’s policy decisions from the October FOMC meeting. In a sign of concern they decided to cut rates yet again in spite of the signs of a strong U.S. economy. So much for “data driven” Fed decisions?

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