This week I’d like to coddiwomple through making mistakes and staying data-dependent to gain a...
After this week's surprises on GDP and jobs, back to normal next week?
11/08/2013 7:54 pm EST
Today, U.S. stocks have rallied on good news—204,000 new jobs created in October instead of the 120,000 expected by economists surveyed by Bloomberg. One interpretation I’ve heard today is that the stronger U.S. economy forecast in today’s numbers offsets worries of an earlier than expected Fed taper.
Maybe. But I don’t buy that interpretation.
Here’s my take.
- The biggest reason for today’s upward move is yesterday’s downward move. Yesterday’s drop was a chance for traders to make some money today. Just as yesterday’s drop was a chance to make money on the short side. If you want to be completely honest, the move today—and yesterday--is essentially noise.
- With a day to think about yesterday’s GDP number, investors have discovered that the 2.8% headline number isn’t nearly as strong as it seems. Anemic growth in consumer spending and a slight drop in final sales argue that the economy isn’t as strong as that 2.8% number says. A big 0.4 percentage points of the quarter’s growth came from increase in inventories that are likely to be reversed in the fourth quarter. From this perspective yesterday’s drop was an over-reaction. Today’s jobs number isn’t strong enough to lead the Fed to move up the timing of a taper. Yes, 204,000 jobs is better than 120,000, but it doesn’t represent enough job growth to take down the unemployment rate. In fact the unemployment rate is, at 7.3%, still significantly above the 6.5% rate that the Fed has said it is looking for as a sign that the economy might be strong enough to handle a reduction in asset purchases by the Fed. That unemployment rate looks even worse if you understand, as the Fed does, that much of the improvement from the October 2009 peak at 10% is due to a drop in the labor force participation rate. If so many workers hadn’t left the workforce, if the participation rate was the same 65% as it was in October 2009, the unemployment rate would be 10.4% now.
In other words, these numbers have left the economy, the Federal Reserve, and the stock market pretty much where they all were before the data hit. The economy isn’t falling off a cliff but it isn’t growing fast enough to lead the Fed to move up the date of its taper from sometime in 2014.
The biggest effect of these two big economic reports is that with their release, the markets have put uncertainty, the worry about what they would say, behind them
I’d guess we go back to business as usual—a mildly upwardly trending market—next week.
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