Over the last two weeks, we have received positive news about two key economic measurements: 3rd quarter Gross Domestic Product and the October Jobs Report. Positive results on these two indicators lead me to predict the long anticipated Fed rate hike will finally be announced during Federal Reserve Board’s December meeting.
Real gross domestic product increased at an annual rate of 2.9 percent in the third quarter of 2016, up 1.5 percent from the second quarter, according to the “advanced” estimate released by the Bureau of Economic Analysis. This increase in the third quarter is the direct result of increased personal consumption, an increase in exports, and an increase in business inventory/investment.
Then there is the October Jobs Report. Our economy added a modest 161,000 net jobs and reported an unemployment rate falling from 5% to 4.9%. Many economists now consider the U.S. to be at full employment. Revisions to the August and September numbers in the October report added a total of 44,000 more jobs. Lastly, average hourly wages rose 10 cents to $25.92 and are up 2.8% year to date.
With the combination of wage growth finally rising and a low unemployment rate that is forcing employers to bid up wages to attract from a smaller pool of available talent has giving rise earnings gained, which in turn, fuels stronger inflation. These are the reasons that lead me to my prediction above.
This isn’t necessarily bad news as the economy is expected to continue its current expansion, now the 4th longest in U.S. history, through 2017. If the economy can chug along through June 2019, it will become the longest economic expansion in U.S, history. We (all of us with kids in college) have our fingers crossed.
Most modern recessions have been proceeded by a cycle of Fed interest rate hikes that make loans (car loans, mortgages, personal and corporate credit) more costly to obtain. This is where the Fed is struggling because it is a balancing act between raising rates and throwing the economy into a recession versus keeping rates close to zero and allowing inflation to “get some legs.”
I am glad that I am just a contractor!