Week In Review
In a widely anticipated move, the Federal Reserve Open Market committee (FOMC) announced its decision to lower the federal funds rate by 25 basis point to a range of 1.5% to 1.75%. This is the third time the Fed has lowered rates this year. The Fed’s assessment of the economy remained relatively unchanged with solid consumer spending versus a backdrop of weakness in business investment and exports. Inflation continues to run below the target rate of 2%. Notably, the FOMC removed a key clause from recent statements citing its commitment to “act as appropriate to sustain the expansion,” replacing it with more tempered language to “assess the appropriate path” going forward.
The Fed continues to hold a positive view on the economy but recognizes there are potential headwinds stemming from international uncertainties. Although the path forward is not clear, the moderating of the language in the post-meeting statement hints that the Fed may take a pause in rate cuts from here.
Nonfarm payrolls increased by 128,000 jobs in October, while revisions to the previous two months added an additional 95,000 jobs. The unemployment rate rose from 3.5% to 3.6%, as the number of new workers outpaced the number of jobs gained in the household survey. Average hourly earnings rose 0.2% and aggregate hours worked increased 0.1%.
The jobs report was far better than expected. As the consumer remains the main driver of economic growth, a solid employment picture remains necessary for continued consumer spending.
Third quarter GDP grew at an annualized pace of 1.9%. Consumption rose 2.9%, while business fixed investment fell 3.0%.
Compared to most of the rest of the world, the U.S. economy can best be described as resilient. Consumers continue to carry the economy, as full employment has resulted in strong spending. However, the trend in year-over-year GDP has been toward slower growth over the last five quarters, as slowing business investment has tempered strong consumers.
Prime Minister Boris Johnson’s first attempt to dissolve Parliament and have a general election did not get the 2/3 approval needed due to Labour opposition. Following this, the EU granted an extension of the Brexit date to January 31. A second attempt to call for an election succeeded with the support of other opposition parties, and the UK will have a general election on December 12. Johnson shelved legislation implementing his Brexit deal until after the election.
The upcoming election will be decided mostly around the question of whether to proceed with Brexit, although Labour leader Jeremy Corbyn will also try to campaign for a dramatic shift toward socialism. With the immediate threat of a no-deal exit removed, attention will now shift to the election campaign and the likely makeup of the Parliament that will determine the way forward in January.
The October ISM Manufacturing index rose from 47.8 to 48.3. The Chicago PMI index fell from 47.1 to 43.2.
While the ISM index rose during the month, it rose less than expected and is still in contractionary territory. Results of the Chicago index were abysmal. The manufacturing sector continues to languish as a result of slowing world economies and continued trade tensions.
The Chicago Teachers Union ended their 11 day strike and returned to the classroom on Friday. The CTU tentatively agreed to a five-year contract, which must now be ratified by its members. The new contract includes a 16% raise, hiring additional nurses and social workers so that each school has a nurse and a social worker by 2023, and additional resources for training and recruitment. In addition, class size limits will go into effect beginning with the 2020-2021 school year. The CTU had originally requested to make up all 11 of the missed school days during the strike, but finally agreed to make up five of the missed days.
It is a relief that the Chicago teachers strike has come to an end, as parents, students and teachers had been in limbo for the last few weeks. As the new contract is likely to come with a hefty price tag, taxpayers will be watching closely to see how the Chicago Public Schools plan to finance the additional costs.