Must-know FOMC review: Is growth outpacing inflation?

Market Realist

Important takeaways from the December 2013 FOMC minutes (Part 2 of 8)

(Continued from Part 1)

Review of the economic situation

Lately, there are two adjectives the Fed uses to characterize economic data points—”moderate” and “modest.” The Fed chose to characterize the economic growth as “moderate.” On the other hand, it referred to inflation as “modest.” While it’s probably a fool’s errand to read too much into the word choice, it does seem to indicate that growth is outpacing inflation.

The Fed noted that the employment situation seemed to be improving, as non-farm payrolls rose faster in October and November than they did in the previous two quarters. The unemployment rate declined, but remained elevated. The employment-to-population ratio, a favorite indicator of the Fed, remained at the same place from September to November. The share of workers employed part-time for economic reasons declined slightly, and the long-term unemployment rate was little changed. Still, it’s obvious the Fed would like to see a lot more improvement in this area.

Real personal consumption expenditures rose modestly in the third quarter, but rose at a faster pace in September and October. The Fed noted that some of the components that the Bureau of Economic Analysis uses to construct its estimate of November PCE came in a bit better than expected. It mentioned the fact that increasing home prices are likely driving some more consumption as consumers de-leverage the easy way.

Manufacturing “accelerated briskly in October and November” (note the new word—a break from the “modest” and “moderate” characterization we’ve been experiencing since 2008). The gains were generally broad-based across most industries. The outlook for the automakers was bright as well.

Inflation remained muted, as did capital expenditures. However, nominal new orders exceeded shipments, which is a good sign for the future. The Fed noted the government spent less due to the shutdown, although this was offset by spending by state and local governments. Government payrolls expanded.

Continue to Part 3

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