History in the making

A committed relationship 

The Fed announced this week, as broadly expected, that it was keeping interest rates unchanged close to 0%. The Fed’s statement published shortly after the meeting earlier this week acknowledged that economic activity and employment have continued to recover though remain well below the levels at the beginning of the year. This language from the Fed was slightly less optimistic compared to last month’s statement that acknowledged economic activity had picked up in recent months.

Moral of the story: Cutting interest rates is a mechanism used by the Fed to stimulate economic activity. Since rates are already at 0%, it leaves little room to impact policy through this tool. However, Fed Chair Powell confirmed the Fed still has ammunition left in its arsenal and is “strongly committed” to using the tools at its disposal to support the economy as long as needed. The market is expecting the Fed’s accommodative policy to be here for a while.

Slowly recovering

The manufacturing sector grew in October for the sixth consecutive month. Of the 18 industries that are tracked by the ISM manufacturing index, 15 reported growth in October. At this point of the pandemic, companies and suppliers are figuring out how to operate in the COVID-19 environment and becoming more productive. While sentiment was optimistic, it was slightly less so compared to last month. This caution was even more apparent in the services sector for October. Though the ISM services index expanded in October as well, businesses are facing more uncertainty regarding the resurgence of cases heading into the winter months and seem to be cautiously optimistic. 

Moral of the story: Business activity is growing and indicative of an economic recovery. Even though some sectors are still experiencing difficulties that will continue in the near term, the overall manufacturing sector, especially, has continued to exceed expectations. 

Holy jobs

The October jobs report was released Friday morning and brought happy news. The US added 638k jobs in the month compared to economists’ expectations of 580k. This headline number is even stronger than it seems because it includes the drop of 147k temporary Census workers. The unemployment rate fell to 6.9% and the labor force participation rate increased 0.3%, which indicates a stronger than expected recovery in the labor market. The leisure and hospitality industry added 271k new jobs in October, which is a meaningful step down from the 406k jobs added in September and potentially signals a cautious outlook as cases increase and declining temperatures endanger outdoor dining. 

Moral of the story: The US has regained fewer and fewer jobs each month since June when new jobs increased by 4.78m. Employment is still down by about 10m and 21.5m people are still receiving some form of unemployment benefits. However, this jobs report reflects a much better economic situation than most expectations and is likely weigh on the magnitude of any future stimulus packages that get passed in the near future. 

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