Retail sales and unemployment claims: A bunny-hill taper?

Retail and food-service sales increased 0.7% in November (0.4% when excluding the volatile motor vehicles and parts category). There were healthy gains across most big-ticket categories, like furniture and electronics, and marginal declines in food and clothing. Gasoline station sales declined 1.1%, probably because gasoline prices in November were lower than in October.

Despite the healthy increase in retail sales, unemployment insurance claims jumped to 368,000 in the week that ended December 7, from 300,000 the week before. This time of year, weird things can happen with the seasonally adjusted data, thanks to the holidays. The four-week moving average smooths out some of these irregularities. It came in at 328,750, which is close to where it was prior to the financial crisis.

With continued gains in retail sales, mediocre numbers for unemployment insurance claims, and the possibility of the government passing a budget to avoid a government shutdown over the next year, the Fed may shift its focus from trying to bring down the unemployment rate to fighting what it views as too low inflation. Given the Fed’s predilection for using what some people call an “open-mouth policy” for monetary policy, I would not be surprised if next week’s Federal Open Market Committee (FOMC) statement gives more emphasis on trying to juice up the inflation numbers than in talking down the unemployment numbers. The FOMC has been shifting that direction since May.

Decent growth with too-low inflation could justify a gradual slope to any sort of tapering of the FOMC’s asset purchase program. Tapering will not be like going off a cliff; it will be more like a bunny hill.

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