November employment report key for Fed rate lift-off

U.S. economic data remained relatively mixed last week, likely indicating U.S. growth remains modest with no acceleration, but does not appear to be slowing toward recession.

Retail sales were somewhat disappointing for October due to softness in gasoline sales. However, confidence indicators for both small business and consumers remain solid. Some of the softness in retail sales may actually be due to falling prices, as indicated by the October decline in producer prices by 0.4%, rather than declining consumer unit sales.

Economic data on inflation and jobs will be key as we head into the Federal Open Market Committee’s December meeting. October consumer prices are expected to rebound modestly in this week’s report from a decline in September. Also key in the Federal Reserve’s equation will be the November employment report, which should show solid employment gains based on continued low jobless claims data and job openings rebounding from the August decline.

Economic data outside the United States also indicates economic activity remains relatively mixed. European third quarter growth rose 0.3%, maintaining the modest pace of activity while Japan slipped into recession as gross domestic product contracted for the second quarter in a row on softer business spending. Quantitative easing policies by the Bank of Japan and the European Central Bank are likely to expand to support their economies.

October data for China remain mixed. Inflation pressures continued to ease and export activity continued to slide. Retail sales activity remained strong relative to industrial production, indicating rebalancing toward consumer spending from investment-driven growth. Overall, economic activity in China is unlikely to accelerate due to this rebalancing. However, growth is likely to remain much faster than developed markets, such as the United States, Japan, and the eurozone. Urbanization, rising wages and rising consumer spending are likely to keep growth in China at these higher levels.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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