Weekly Economic Update: December 18 – December 22, 2017

December 18, 2017

CHART OF THE WEEK

Small Business Optimism Surges

Small Business Optimism Nears Record

The National Federation of Independent Businesses (NFIB) has surveyed small business optimism since 1974. As tax reform advances, small business optimism surged in November, driven largely by an improved economic outlook, nearly reaching the record high of July 1983. The sentiment expressed by small businesses suggests that the U.S. economy has ample untapped potential. Notably, one of the largest increases occurred just after last year’s election.

LAST WEEK

Category (seasonally adjusted levels)	Oct	Sep	Aug
Job Openings (thousands)	5,996	6,177	6,090
Hires (thousands)	5,552	5,320	5,420
Separations (thousands)	5,178	5,244	5,273

Job Openings, Hires, Seperations

Noteworthy: Historically, the number of hires has always exceeded the number of openings. However, since late 2014 this has changed. There were 5.6 million hires in October, the highest since March 2001. The number of job vacancies fell below 6 million for the first time since May—JEC held a hearing on the unusually large number of job vacancies earlier this year.

Consumer Price Index (November 2017)

Category (percentage change from same month last year)	Nov	Oct	Sep
Headline CPI	2.23%	2.05%	2.23%
Core CPI (excludes food and energy)	1.71%	1.77%	1.69%

Key Inflation Rate Measures

Noteworthy: Since reaching a high of 2.26% in January, the core CPI trended downward or remained relatively flat until October, when it rose to 1.77%. In November, core CPI resumed its downward trend. The headline CPI inflation rate increased from 2.05% to 2.23%, mostly as a result of higher energy prices.

Federal Reserve FOMC Meeting Statement (December 2017)

Note: Before 2008, the Federal Reserve’s (the Fed) key monetary policy interest rate was the market-determined fed funds rate, which the Fed would influence by making small interventions in the fed funds market. Since 2008, an administratively determined interest on excess reserves (IOER) rate has supplanted the fed funds rate as the Fed’s key monetary policy interest rate. The Fed pays IOER on funds banks keep on deposit with the Fed rather than lending to consumers, businesses, etc. All else equal, a higher IOER rate portends a tighter monetary policy, because it encourages banks to hold reserves, which tends to slow inflation, rather than to make more loans.

A much-reduced level of trading still occurs in the fed funds market because government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac), are ineligible to earn IOER. They can lend their idle cash to banks in the federal funds market, and the banks in turn can deposit that cash at the higher IOER rate. The Fed intervenes on a rolling basis with overnight-reverse repurchase (ON-RRP) agreements by which it sells some of its securities for cash and buys them back the next day, causing the fed funds rate to rise. However, the continued existence of the fed funds market and the Fed’s interventions in it should not distract from the fact that the Fed uses IOER as the key rate to conduct monetary policy.

Category	Before FOMC meeting	After FOMC meeting
Interest on excess reserves (IOER)—upper bound	1.25%	1.50%
Federal funds rate target (average of IOER and ON-RRP rates)	1.13%	1.37%
Overnight reverse repurchase (ON-RRP) rate—lower bound	1.00%	1.25%

Federal Funds Rate target range

Noteworthy: Although inflation continues to run below the Federal Reserve’s 2 percent target, the Fed opted to raise its key policy rate, the IOER rate, from 1.25% to 1.50% last Wednesday. Please see JEC’s FOMC Review for more details.

Industrial Production and Capacity Utilization (November 2017)

The Fed’s industrial production index covers nearly everything tangible produced in the United States.

Category	Nov	Oct	Sep
Industrial production (year-over-year percentage change)	3.4%	2.8%	2.1 %
Capacity utilization (percent of capacity in active use)	77.1%	77.0%	76.2%

Industrial Production and Capacity Utilication

Noteworthy: After temporarily slowing in August and September due to Hurricanes Harvey and Irma, industrial production growth resumed its upward trend. November saw the fastest rate of increase since November 2014.