Uncertainty over the will they/won’t they tapering question has been nibbling away at investor confidence all week on Wall Street and we haven’t seen anything today to clear the issue up, despite the release of some significant pieces of data.
The Commerce Department announced a big upward revision to third-quarter US GDP, upping an earlier estimate of annualised growth of 2.8% to 3.6%, which on the face of it sounds like the economy is surging and therefore should tip the scales in favour of those at the Fed calling for stimulus to be cut back.
Most of the increase in GDP growth can be attributed to revisions in inventories (goods produces by businesses that remain unsold) though, while demand looks no less sluggish. That isn’t a positive sign to me, and the implication is that as businesses draw down on those inventories in the next quarter it may constrain GDP growth. Imports were revised higher and exports lower, meaning a downward revision to net exports. While rising imports is not necessarily a bad thing, and can be indicative of higher consumption, it does point to a reduced level of activity at domestic producers.
This would tend to tally with today’s factory orders report, which showed a 0.9% drop in October and could portend some choppy waters ahead for the manufacturing sector.
Jobless claims were upbeat though, dropping 23,000 last week to 298,000, one of the best results we have seen post-recovery. While the labour market has clearly been improving, the real question is whether the magnitude of the advances have been sufficient for the Fed to consider their goals to be safely secured.
Atlanta Fed President Dennis Lockhart didn’t give too much away in a speech today, but did say that at the December FOMC meeting the Fed will be ‘looking for positive evidence of momentum as well as the absence or retreat of factors that could restrain or even torpedo progress.’ The committee will surely be mindful of another bout of Washington fiscal wrangles just around the corner which could just be one of those factors.