The positive data this week should be ignored. The Labor Department reported on Thursday that weekly jobless claims dropped to 191,000, down from 218,000 in the previous week. This dramatic drop in jobless claims is being blamed on a “sloppy seasonal” adjustment from Thanksgiving, according to Pantheon’s Chief Economist, Samuel Tombs.
reported on Wednesday that 32,000 private payroll jobs were eliminated in November, which was well below economists’ consensus estimate of a 10,000 gain. However, ADP revised October payrolls to a 42,000 gain after reporting a decline of 5,000, so October represented the first monthly private payroll increase since July. One glaring statistic in the ADP report was that small businesses with fewer than 50 employees shed 120,000 jobs, while businesses with more than 50 employees created 90,000 jobs. Naturally, due to lackluster private payroll data, the Fed has to cut key interest rates due to its unemployment mandate.
Financial markets are fully anticipating a December 10th key cut after Mary Daly, Stephen Miran, Christopher Waller, and John Williams all spoke out in favor of a December Fed rate cut due to labor market weakness. Although there are other Fed officials who remain more cautious, such as Boston’s Susan Collins and Chicago’s Austan Goolsbee, New York Fed President John Williams is a close ally of Fed Chairman Jerome Powell, so he will likely get Powell to also call for a December 10th key interest rate cut.
The Fed’s survey showed that economic activity was little changed over the past few weeks, but that employment declined slightly. Much of the Beige Book survey was conducted during the federal government shutdown. Multiple Fed districts, including New York, Atlanta, and Minneapolis, reported that spending among upper-income consumers was resilient, but was flagging for low and middle-income households. This “K-shaped” consumer spending pattern, where the boomer spending is healthy, is a persistent characteristic this year. The Minneapolis Fed said, “Contacts noted that higher-income customers were unconstrained, but ‘customers in the middle to lower end of the financial spectrum are tightening the belt.”
The other reason for the Fed to cut on December 10th is real estate, since home and rental prices across the U.S. remain soft. In my opinion, there is more risk of deflation than inflation at the present time. Not only are real estate prices falling, but the U.S. is importing deflation from China and other countries. The U.S. dollar is strengthening as more countries sputter economically, cut interest rates, and speculation of currency devaluations escalates. Britain is now in the midst of a budget crisis due to lower-than-expected tax revenue after some wealthy individuals fled, plus Japan’s proposed budget spending is causing its government bond yields to rise, so central banks are going to have to step in to bail out these troubled countries with lower interest rates and/or quantitative easing.