Back to top

Economic Highlights

Zacks Equity Research

July 31: Fed Meeting in Limelight

Save at Trade

Markets have plenty to chew on today, with the ADP and GDP reports already out and the Fed announcement later this afternoon. The picture emerging from this morning's data is broadly positive, likely indicating that even though the Fed may not show its hand on the ‘Taper’ issue this afternoon, they are nevertheless moving in that direction.

The first read on Q2 GDP came in better than expected, with the economy growing at +1.7% pace instead of the +0.9% that everyone expected. What gave us the ‘positive surprise’ was modestly better than expected consumer spending (up +1.8%), less drag from government spending (down -1.5%), partly offset by lower than expected business spending. The fun of the positive Q2 GDP read was diluted to some extent by the negative revision to GDP growth for the prior quarter, which was revised down to +1.1% from the original +1.8%.

The ADP report was all around positive, with better than expected +200K private sector jobs in July and positive revision to the prior month’s data. With the BLS number on Friday expected to show ‘headline’ gains of about +183K, the ADP report would be indicative of some positive revisions to expectations for Friday (or the whisper number would be higher than the published consensus number).

The labor market strength was broad-based. Small businesses, with employers having less than 50 employees, added +82K jobs in July. Medium-sized businesses (less than 500 employees) added +60K jobs, while large businesses (1000+ employees) added +57K jobs during the month. The goods-producing sectors added +22K jobs in July, with gains in construction offset by weakness in the manufacturing sector. Most of the July jobs came from the services-providing sectors, with gains on that side at 177K, the most since November last year.

The ADP report adds to the disconnect between GDP growth and labor market gains that we have been observing the last few quarters. The roughly +200K monthly job gains that we have been observing lately would be typically be consistent with the U.S. economy expanding at a rate of more than +2%. What we have instead is an economy that barely managed +1.4% in the first half of 2013, with government spending acting as a key restraint on the growth trend. The expectation is that government spending cuts become less of a drag in the second half of the year, pushing GDP growth to around +2.5% in the second half and above +3% in 2014.

This growth outlook underpins the ‘Taper’ talk. As long as the economy is moving in that direction, which it is at present, then we should expect the Fed to move towards pulling back on the QE program in a few months time. The Fed’s often-repeated ‘data dependence’ and not having ‘a pre-set timetable’ mean that they will remain cautious and deliberate in removing the excess liquidity. The market seems to be ok with this outlook, but we wouldn’t know for sure till we reach that point. It will be useful if the Fed provides further guidance to that end in today’s post-meeting statement. But the consensus view is that they wouldn’t do that today.