Global Daily: Yellen’s dashboard mixed

by: Nick Kounis , Maritza Cabezas

  • We update Fed Chair elect Yellen’s labour market dashboard and discover a mixed picture…
  • …this suggests that December might be a little too early for the Fed to taper
  • China’s economic data was mixed, but generally signal growth remains robust

Yellen’s labour market dashboard not conclusive enough for December taper

Fed Chair-elect Janet Yellen set out five indicators that she would use to define whether there had been a substantial improvement in the labour market in a speech earlier this year. These are the unemployment rate, the nonfarm payrolls, the hiring rate, the job quitting rate and overall spending and growth in the economy. The publication of the hiring and quit rates from the JOLT survey yesterday means we now have a full update of these indicators, so it is worth looking at each one and the general message of the overall dashboard. As reported earlier on these pages, the unemployment rate fell to 7% in November, from 7.3% in October, and 7.2% before the shutdown. This points to a clear improving trend. However, a note of caution is that labour market participation remains on a downward trend. The labour market participation rate rose to 63% in November, from 62.8% in October, but was still down from 63.2% in September. So there might be some concern that the unemployment rate is biased somewhat downwards by weak labour supply, which is seen as a sign of labour market weakness. On the other hand, the second labour market indicator – the nonfarm payrolls – has been robust. Payrolls were up by 203K in November and are trending at the 200K level that some other officials have suggested is an important benchmark. Unfortunately, the two indicators from the JOLT survey failed to support this improved picture. The hiring rate fell in October, to 3.3% from 3.4%. This still leaves it off its lows (of 3.1% in March of this year) but also way off its pre-recession highs (4.1% in November 2006). Furthermore, the quit rate has been flat at 1.7% for the last four months in a row, where as Mrs Yellen has asserted that a rise in this rate would signal that workers perceive their chances of being re-hired as being good. On the surface, the final metric is pointing at the right direction, with GDP growth accelerating markedly in Q3. However, final demand growth remained moderate. We expect this to improve markedly in coming months, and many indicators are starting to point in this direction, but the hard data are not yet completely convincing. Overall, therefore, the ‘Yellen dashboard’ is still a bit mixed. This suggests that the Fed may wait a little longer than the December FOMC to taper, though we think that it will not be too long now. Our base case remains that March is the most likely month.

China data mixed, but consistent with growth stabilising at decent rates in Q4…

November’s package of economic data out of China showed that economic activity remains firm. Although fixed investment (down to 19.9% from 20.1% in October) and industrial production (10% yoy down from 10.3% yoy) slowed, retail sales (13.7% yoy from 13.3% yoy) and exports (12.7% yoy from 5.6%) continued to show a strong growth momentum. This is consistent with economic growth that is stabilizing, with a stronger drive coming from consumption. We expect that GDP growth will moderate somewhat in the fourth quarter, but that the underlying data will remain strong.

…while we stick to 8% growth forecast for 2014

The annual Central Economic Conference which started yesterday will lay out the official targets for GDP growth in 2014 and supporting measures. It could be that that authorities set a more moderate target for growth of 7% for 2014, but this should be seen as a bottom limit. Still, it shows that despite the improving economic data, a strong rebound in the coming year is not likely. Consumption will support domestic demand, while the pace of growth in infrastructure investments will continue gradually declining. Export growth should also offset the slowdown in investment. Overall, we stick to our forecast for GDP growth of 8% in 2014 on the back of stronger global demand, while domestic demand is expected to remain solid.