Wednesday’s Federal Reserve meeting was a bit of a shocker to the markets. Since the summer, it appeared that the Fed had laid the groundwork for the reduction of asset purchases, and the market certainly expected something like that coming into yesterday’s meeting. When Ben Bernanke declined to taper purchases — and took a dovish tone in the press conference that ensued — markets made immediate adjustments. By the end of the day, stocks were up big, as were bonds; but the U.S. dollar hated the thought of the Fed keeping its foot on the gas pedal.
With the payroll tax in effect and the sequester beginning to slowly phase in, many have worried that the U.S. economy is on thin ice. But those looking for the economy to fold might have been caught off-guard with the economic data starting to surprise on the upside since the beginning of February.
Just two days ago the 4th quarter GDP came out as a negative number, which was much worse than expected. In fact, not one of 83 analysts had anticipated a negative number, meaning they were all too bullish on the 4th quarter growth number. But yesterday the Chicago Purchasing manager’s index, a growth barometer, was way above expectations for growth, and not one of 48 analyst estimates was in the ballpark, meaning they were all too bearish on growth.
When I look at nonfarm payrolls, I try to disregard the headline figure and look at the year-over-year percent change in unadjusted total payrolls. This allows me to remove any seasonal effects from the series without making any of the hard assumptions required by “fancier” seasonal adjustment methodologies. The November report that came out Friday puts us at 1.42% year-over-year growth, up from 1.38% in the previous month. The exponential three-month moving average, which serves to smooth out some of the month-to-month volatility in the series, sits now at 1.41%, down slightly from 1.43% last month. This moving average is plotted as a green line in the chart below. The purple line in the chart is a measure of the six-month trend in year-over-year payrolls growth. This measure will be positive (negative) if in the previous six months year-over-year payrolls growth has been accelerating (decelerating) and near zero if it has been relatively steady. Currently, the six-month trend reads 0.19%, which is remarkably close to zero. In fact, over the past six months year-over-year payrolls growth has been range-bound between 1.3% and 1.5%. Analyzing the entire sample, which goes all the way back to the 1930s, we found that the following two conditions almost always coincide with economic recessions: