This Week In The Economy: US Midterms-Something Old/Something New, Fed’s Momentary Pause, Oil’s Bearish Outlook

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers

The U.S. midterm elections have come and gone, Republicans tightened their hold on the Senate while Democrats took back the House after eight years in the minority. Much has been written about what this means for economic policy next year — gridlock on the Hill, maaaybe an infrastructure spending bill, no more tax cuts for corporations. In terms of what will not change, don’t expect a shift in the administration’s ‘America First’ trade policy, its tough stance on China, federal agencies’ deregulatory push, or for Congress to soften its scrutiny of the tech industry.

Given the polarizing nature of the current administration, the state of the U.S. economy — not surprisingly — was not a major influence on how voters chose their preferred candidates this week. Nonetheless, new data shows economic activity remains robust and the number of jobs available exceeding the pool of workers searching for work.

Federal Reserve Notes Strong Economy But Also Singles Out Reduced Spending By Businesses

Federal Reserve policymakers unanimously voted to leave interest rates unchanged this week, but the accompanying statement makes it likely the central bank will raise rates when the Federal Open Market Committee meets again in December:

“ The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

Of a slight concern is the FOMC’s comment about the moderated pace of business fixed investment compared to the start of the year. This could be due to the administration’s tariff policies, and the growing level of uncertainty among companies about whether the trade war will be resolved soon or escalate further to become a prolonged affair.

Rate of Job Openings Highlights Strong Economy And Skills Shortage

The Bureau of Labor Statistics report showed the rate of job openings remain high despite a dip in September. The job openings level fell to 7.0 million from a series high of 7.3 million in August — resulting in a job openings rate of 4.5%. The were 188,000 less job openings in the private sector and 96,000 in government. Not surprisingly, the number of wanted ads increased in health care and social assistance, while the largest decreases were in professional and business services (-118,000), finance and insurance (-82,000), and state and local government, excluding education (-67,000).

In terms of hires, 5.7 million employees were taken on in September, down from a series high of 5.9 million in August — resulting in a 3.8 percent hires rate and underscoring businesses’ ongoing struggles to fill their demand for labor.

The National Federation of Independent Business’ monthly jobs report showed a large number of small businesses had openings they could not fill, with few or no qualified applicants.

“The labor force is not growing quickly enough to satisfy the demand. The unemployment rate is expected to be lower which means that the increase in labor force participation will not be sufficient to meet new labor demands.” — NFIB Chief Economist Bill Dunkelberg.

The small supply of eligible workers is also driving up compensation, with a significant number of respondents to the NFIB survey saying they had to raise overall compensation to attract and retain employees.

US Wholesale Prices Jump In October Fueled By Higher Energy Prices

The BLS’ report on wholesale prices this week showed the Producer Price Index for final demand rose 0.6% in October, up from a 0.2% increase in September and a 0.1 decline in August. (See table A.) The index is up 2.9% for the 12 months ended in October. Excluding foods, energy, and trade services, the index rose 0.2% in October after a 0.4% jump in September. On an annual basis, prices for final demand less foods, energy, and trade services advanced 2.8%. The BLS noted that “Nearly three-fourths of the October increase” in prices for final demand goods can be traced to higher energy prices which, more on that below, is unlikely to be repeated in November’s data.

Oil Prices Forecast To Keep Heading Downwards Next Year

Since peaking around $85 per barrel last month, global oil prices have been on a downward path in November, and a division of the U.S. Energy Department expects that trend to continue into next year.

In the November 2018 update of its Short-Term Energy Outlook, the U.S. Energy Information Administration (EIA) lowered its price forecast for Brent crude (the global benchmark) to $72 per barrel in 2019, down $3 from its previous forecast. EIA expects prices for U.S. benchmark West Texas Intermediate (WTI) will average about $7 per barrel lower than Brent prices next year. The agency cited “increased indications of a global economic slowdown,” which will cool demand, as well as “higher than expected global petroleum supply” as reasons behind the downgrade.

With soaring crude oil output by heavyweights Saudi Arabia and Russia, less than expected declines in oil exports from Iran and Venezuela, and a upturn in Libya’s production, the EIA upgraded its estimate for OPEC oil production this year and in 2019.

Quick-Fire Round

ECB Warns Ireland of Greater Risks From Hard Brexit Compared To Rest of Eurozone: European Central Bank President Mario Draghi this week warned Republic of Ireland lawmakers of the increased risks to the Irish economy should the UK exit the European Union without an agreement in place would have a greater negative impact

Referencing a potential “no-deal scenario,” Draghi told members of the Irish Parliament during a hearing that “ While the direct trade effects of a hard Brexit would be limited for the euro area as a whole, Ireland is more exposed due to its very close trade relations with the United Kingdom.”

EU Retail Sales Slowdown In September: Retail sales are a key indicator of consumer confidence and broader economic activity, and data released this week will be of concern to Euro Area policymakers. Data from Eurostat showed the volume of retail trade in the eurozone was unchanged in September compared to August, and actually declined in the EU as a whole. This follows increases of 0.3%, respectively, in August.

UK Economy Experiences Modest Expansion In Q3: The Office of National Statistics estimated UK gross domestic product in volume terms increased by 0.6% between Q2 and Q3, with the largest contribution from the services industries at 0.3 percentage points. Household spending grew by 0.5% while business investment fell by 1.2%. Compared to the same quarter a year ago, the UK economy has grown by 1.5%.

Consumer Prices In Turkey Remain Sky-High: Turkey’s Consumer Price Index rose slightly by 25.2% in October compared to a year ago, up from 24.5% in September. Core inflation (excluding food and energy prices) rose from 24.1% to 24.3%. This is now the highest rate since 2003, and it remains to be seen if the central bank will again raise interest rates this year to put downward pressure on prices.

Arab Gulf Countries To Bahrain’s Rescue: Governments that make up the Gulf Cooperation Council this week announced $10 billion in financial aid to help fellow-member Bahrain shore up its budget and appease investors. Bahrain’s economy cannot rely on oil wealth to same extent as GCC nations such as Saudi Arabia and Kuwait, and its sizable budget deficit means the financial market demands higher yields to lend to the government, increasing the risk of default and causing its currency to depreciate in value.

The GCC is a political and economic bloc made up of Bahrain, Kuwait, Oman, Saudi Arabia, the United Arab Emirates, and Qatar.