U.S. economic data released this week was con-sistent with an ongoing moderate GDP expansion through the fourth quarter. While the international trade data for October was a net negative for Q4 GDP growth, we still have a decent shot at posting the third consecutive quar-ter of three percent or more GDP growth for the first time in this expansion cycle.
The U.S. international trade gap widened noticea-bly in October, by $3.8 billion, to -$48.7 billion. Exports for the month were little changed, but imports, particular-ly of goods, increased. We suspect that there may be some catchup on imports after the hurricanes slowed offloading in September. The October trade data imply a subtraction of about one percent on Q4 real GDP growth. That drag could be significantly reduced or reversed by the time we see the full set of trade data for Q4.
The payroll jobs data for November showed a stronger-than-expected gain of 228,000 for the month. Consensus expectations were about 195,000. Workers also got paid 0.2 percent more in November, and the av-erage workweek increased by 0.1 hours. We had the em-ployment trifecta for the month – more workers got paid more money for more hours – just in time for the heart of the holiday shopping season. We expect total holiday sales to be strong this year, even with some brick-and-mortar establishments seeing ongoing erosion. In addition to support from the employment, earnings and hours da-ta, holiday shopping will also be buoyed by strong con-sumer confidence and steady gains in house prices.
The November ISM Non-Manufacturing Index eased from a very strong 60.1 in October, to a still-strong 57.4. This represents ongoing growth in the nation’s ser-vice sector but at a slower rate than in October.
The solid payroll number for November removes the last vestiges of doubt about a fed funds rate increase next week on Wednesday. At this point, it would be a shock if the Fed did not increase the fed funds rate range to 1.25-1.50 percent at the conclusion of the December 12/13 Federal Open Market Committee Meeting. The fed funds futures market shows a 90.2 percent implied proba-bility of a fed funds rate hike this Wednesday. On Wednesday we will also see a new set of economic pro-jections from the Fed and a new “dot plot” showing FOMC member’s expectations for the fed funds rate over the next few years. We should discount the information in Wednesday’s dot plot more than usual given the turnover in leadership at the Fed. Wednesday will also feature Ja-net Yellen’s last post-FOMC-meeting press conference as chairwoman of the FOMC.
The U.S. Senate and House of Representatives have both passed versions of tax reform. Those bills have been sent to a conference committee for reconciliation and to tie up unintended loopholes and other errors. The conference report will be sent back to the Senate and House for a final vote, possibly before the end of this year. We expect tax reform to be signed into law soon.
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