Popular Economics Weekly
Will tomorrow’s unemployment report be disappointing, and so cause the Fed to hesitate in raising their overnight interest rate above 0.25 percent, as they’ve been saying they will do this month? The most current economic indicators show that Fed Chair Yellen may be overoptimistic in her predictions for future growth, and so the need for higher rates.
The ADP private payroll report out yesterday is showing strength in Friday’s employment report, at a higher-than-expected gain of 217,000 for payrolls in November. But month-to-month, this report is not always an accurate indicator for the government’s data, forecasting a much lower reading than what turned out for October and a much higher reading than what turned out for September.
Another sign that tomorrow’s report may be weaker is the ISM’s non-manufacturing survey index just out that dropped to 55.9 in November from 59.1, which is the lowest rate of monthly growth since May. And service sector activity now accounts for some 70 percent of economic activity.
Readings across the report have also edged down to growth levels last seen in the second quarter including new orders (57.5), backlog orders (51.5), and employment (55.5). New export orders, at 49.5, had their first contraction since April, showing a weaker manufacturing sector that is more dependent on exports.
The Employment Index decreased 4.2 percentage points to 55 percent from the October reading of 59.2 percent and indicates albeit slower growth for the 21st consecutive month. This is though the breadth of strength across industries, with 12 showing growth and six in contraction, is positive.
So what might tomorrow’s unemployment report be? The consensus is 200,000 payroll jobs, with a slightly higher unemployment rate of 51 percent. And Calculated Risk reports that Goldman Sachs maintains wages are still too low for longer term growth. “Our wage tracker—which also now includes the Atlanta Fed wage measure—stands at 2.6 percent. Apart from a technical blip in late 2012, this is the highest reading of the recovery, although it is still somewhat below our 3-3.5 percent estimate of the full-employment equilibrium rate,” reports Goldman economist David Mericle.
I therefore believe Fed Chair Yellen is being overly optimistic about future economic growth, when she said recently, “I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labor market slack, and a rise in inflation to our 2 percent objective.”
These indicators tell us that Fed Chair Yellen is still premature in predicting what may never happen, if they begin to raise interest rates at this time.
Harlan Green © 2015
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