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World Economy

12

OPEC Monthly Oil Market Report – November 2017

Business sentiment and consumer confidence may also be supported by the US Administration’s efforts to

implement a tax reform in Congress. If this materializes in the near term, growth next year will also likely be

higher. Importantly, the Federal Reserve (Fed) acknowledged the improvements and highlighted that the

normalisation of interest rates would continue and it seems likely that the key policy interest rate will be

revised up again in December by 25 basis-points. The main driver for the strong numbers seen in 3Q17 was

personal household consumption, which expanded by 2.4% q-o-q SAAR, the outcome of a considerably

strengthening labour market. It is estimated that 3Q17 exports rose by 2.4% q-o-q SAAR, while imports have

declined by 0.8% q-o-q SAAR, bringing down the US trade deficit. Investments continued to grow, with a

considerable share coming from the energy sector. Private investments advanced by 6.0% q-o-q SAAR, with

investments in the oil sector and related activities – so-called investments into mining exploration, shafts, and

wells – rising by 21.7% q-o-q SAAR.

The

tax framework

is still under discussion and while some form of a framework has been established, it

remains to be seen how negotiations in Congress will develop. It is likely that this will boost GDP growth in

the short-term, but the magnitude may vary, depending on the depth and the details of the reform. Both the

proposal of the Senate and the House are now suggesting a deficit increase of $1.5 trillion over 10 years. A

valid concern is that this rising deficit, in combination with growing underlying inflation, may require the Fed

to raise interest rates less gradually than currently anticipated. In combination with the discussions on the tax

reform, a potentially upcoming debate on the debt ceiling will also need close monitoring as the debt-ceiling

agreement expires in December and would need to be extended. This has also been intensively discussed in

the past and remains important in light of the likely perspective of a rising budget deficit.

While the Fed has highlighted that its

monetary policies

are contingent on the development of the domestic

economy in general, the labour market, inflation and potential spill-overs to the global economy, recent

comments seem to indicate that the Fed will pursue its tightening cycle as planned. It is expected that the

key policy rate will be increased by 25 bp in the upcoming December meeting.

Inflation

stood at 2.2% y-o-y

in September, again rising for a third consecutive month and confirming a solid trend that would also allow

the Fed to continue tightening. Core inflation, excluding volatile items such as food and energy, remained at

1.7% y-o-y for the fifth consecutive month, below the Fed’s inflation target of around 2%, but should also be

expected to pick up, given the tightness in the labour market.

The

labour market

’s positive momentum continued and clearly recovered after the negative impact by the

hurricane season in August and September. Non-farm payrolls increased again by 261.000 jobs in October,

after they rose by only 18.000 in September, as shown in the latest labour market report. The sector that was

mostly affected by the hurricanes - leisure and hospitality – recovered almost all job losses from August and

September, as the sector saw 106.000 job additions in October. Positively, the unemployment rate fell to

4.1%, while average hourly earnings growth for the private sector stood at only 2.4% y-o-y, the lowest since

the beginning of 2016. This is, however, expected to pick up again given the ongoing improvements in the

labour market. Long-term unemployment numbers fell slightly to stand at 24.8% in October, after 25.5% in

September. On the slightly negative side, the participation rate fell again to stand at 62.7% in October, after

63.1% in September.

While having picked up in September,

industrial

production

nevertheless seems to have been

impacted by weather conditions during the month,

to increase by just 1.6% y-o-y, after August’s low

rise of only 1.1% y-o-y, both numbers compared

with around 2% growth in previous months.

Domestic demand

held up very well in September,

supported by growth in retail sales, which stood at

4.1% y-o-y, after an already strong August number

of 3.9% y-o-y. The generally positive trend in

domestic consumption was also visible in the

Conference Board’s

Consumer Confidence Index

,

which increased to 125.9 in October, a multi-year

high and which compares to 120.6 in September.

Graph 3 - 1: US consumer confidence index

125.9

90

100

110

120

130

Oct 16

Nov 16

Dec 16

Jan 17

Feb 17

Mar 17

Apr 17

May 17

Jun 17

Jul 17

Aug 17

Sep 17

Oct 17

Index

Sources: The Conference Board and Haver Analytics.