News in Charts: US Outlook Unchanged After Key Developments Last Week

Our forecasts for US GDP growth and monetary policy are unchanged following progress on tax reform, the nomination of Jerome Powell for Fed Chair, and the employment report for October.

Nonfarm payrolls rebounded last month, as we expected, suggesting that most of the damage to the labour market from the recent hurricanes was short-lived. For more see ‘How Hurricanes Harvey and Irma affected the US economy’. The US economy added 261,000 net payrolls last month, which may have been a little less than our forecast of a gain of 300,000, but there were a combined 90,000 upward revisions to payrolls gains in the previous two months. The six-month moving average edged higher suggesting that the labour market remains in decent shape.

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The earnings figures for October were soft — annual growth in average hourly earnings dropped from 2.8% to 2.4% — but this appears to be due to the large reversal in payroll employment in the leisure and hospitality sector, where workers earn a lot less than the national average. The unemployment rate edged down to 4.1%, the lowest level since December 2000. We expect earnings growth to resume its upward trend before long and we think that it is only a matter of time before this is reflected in core inflation.

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Meanwhile, the tax bill presented by Republicans may not reduce federal revenues by as much as some had expected following the outline released in September, but changes with the biggest economic impact, such as corporate tax cuts, are still included in last week’s bill — the inevitable horse-trading among members of Congress is likely to delay its passage into law until next year. In the absence of further progress this year, the US dollar and US equities are likely to drift sideways.

Finally, assuming Jerome Powell’s nomination for Fed Chair is approved by the Senate, we see little change in the outlook for US monetary policy — Mr Powell has served on the Board for the last five years and has supported current Fed Chair Janet Yellen’s stance.

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