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Economic and Market Review

By: Ryan McCarroll
Senior Risk Analyst


The dust has begun to settle from the latest fiscal squabble and subsequent government shutdown. With the return of the government’s statistical reports, the extent of the damage can begin to be assessed. At first glance, the economy appears to have continued along its modest pace without much attention paid to the calamity in Washington. Both output and labor have surprised to the upside in the most recent releases.

Third quarter GDP came in at a stronger than anticipated 2.8% annual rate. This was 0.8% better than the consensus expectation. A closer look at the data indicates that a noteworthy portion of this growth could well be reversed in the fourth quarter. Business inventory building contributed 0.8% to third quarter growth. A large quarterly increase in inventory is often met with slower inventory growth in the following quarter. Secondly, government spending increased quarter over quarter for the first time since Q3 2012. This contribution is expected to diminish in the fourth quarter due to the sixteen day shutdown.

The October payroll report was a rather significant surprise to the upside. Non-farm payrolls increased by 204 thousand, 84 thousand better than the consensus expectation. Upward revisions to the previous two months resulted in an average monthly gain of 202 thousand during the past three months. As is often times the case, the payroll report moved in the opposite direction of the unemployment rate which increased by 0.1%. The unemployment rate is determined by a survey of approximately 60,000 households. As a result, the October data was perhaps impacted by furloughed federal employees not understanding their employment status in survey responses.

One aspect of the economy that has shown a noticeable reaction to the shenanigans in Washington is consumer confidence. The University of Michigan consumer confidence index declined for the fifth consecutive month in November. This has implications for consumer spending which is the largest component of GDP. Reasonably good employment growth coupled with a 2.2% year over year increase in average hourly earnings could help confidence turn a corner heading into the holiday shopping season.

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