Economic news was generally positive last week, with the
highlight being a strong November payrolls report. In response,
many investors are wondering
if the positive data means that the Federal Reserve (Fed) will
tapering its asset-purchase programs
What's my take? As I write in
my new weekly commentary
, while a December taper is certainly still possible - I'd put
the odds of it at around 30% - I see an early 2014 as the more
likely timing. Here are three reasons why:
While November's nonfarm payroll numbers were better than
expected, they were not so good as to cement a December
November's jobs data marked the second straight month in which
more than 200,000 jobs were created, and the unemployment rate
significantly dropped to 7.0%. However, while job creation has
modestly accelerated from last year's levels, it's still not so
strong as to necessitate an early end to
quantitative easing (QE)
Wage growth remains weak.
Though job creation is accelerating, it's not accelerating fast
enough to push wages up. Hourly earnings are only growing by 2%
on a year-over-year basis, while another report showed that U.S.
personal income fell by 0.1% in October. Anemic wage growth is
a long-term structural problem
, since without faster rising wages, consumer spending is
unlikely to improve.
Inflation remains subdued.
has significant latitude to take its time
. Most measures of inflation are closer to 1% rather than the
Fed's long-term target of 2%. If anything, over the next year,
deflation is probably a greater threat than
The bottom line: Thanks to a slowly improving labor market,
anemic wage growth and a still reluctant consumer, economic
growth is likely to remain modest and inflation low. As such,
while it's still possible that the Fed will announce tapering of
its bond purchases this month, early 2014 seems the more likely
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts