Three for Three—An Economic Hat Trick - November 4, 2019

Three big economic events landed at the feet of investors last week. For all practical purposes, they were favorable.

Let’s start with the preliminary number from Q3’s GDP report. GDP is the broadest measure of economic activity.

U.S. GDP slowed from Q2’s annualized pace of 2.0% to 1.9%, topping the consensus forecast of 1.6% (U.S. BEA, Wall Street Journal). As we saw with Q2, the consumer led the charge as spending by businesses remained soft.

While the 1.9% advance in GDP topped expectations, the graphic illustrates that growth has slowed over the last four quarters. Nonetheless, there wasn’t anything in the data that suggested the economy is slowing too quickly or that growth might be stalling.

Second, October’s payroll report came in well ahead of expectations.

Nonfarm payrolls rose by 128,000 in October, easily beating the forecast of 90,000 (U.S. BLS, Econoday). Job growth would have been about 190,000 had it not been for the strike at General Motors (GM $38), which lopped 42,000 jobs from payrolls (Wall Street Journal), and the release of about 20,000 temporary census workers (Reuters).

Even more impressive, the U.S. BLS said payrolls were revised up by a healthy 95,000 in August and September. Although job growth has slowed from a year ago, there’s nothing recessionary in October’s report.

Finally, the Federal Reserve cut the fed funds rate by ¼% to a range of 1.50–1.75% as expected. The good news: The Fed’s statement and subsequent press conference with Fed Chief Jerome Powell signaled we probably won’t see another cut at the December meeting.

While the Fed will maintain its flexibility to support the economy, a Fed that’s on hold suggests a degree of confidence in the economic outlook. Further, any odds of a rate hike in the foreseeable future are low.

Powell pointed out, “We would need to see a really significant move up in inflation that's persistent before we even consider raising rates to address inflation concerns.” The keywords are ‘significant move up,’ ‘persistent,’ and ‘even consider.’

As the week ended, the S&P 500 Index and the NASDAQ Composite closed at new highs.