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Look Back: Week of December 17, 2018

The December 17 week was one crowded with economic data releases scheduled before the quiet period between Christmas and New Year’s. However, it was the FOMC meeting of Tuesday/Wednesday that drew the most attention.

The FOMC decision to increase short-term rates by 25 basis points for the fed funds target, discount rate, and overnight repurchase rate, and 20 basis points for the Interest on Excess Reserves (IOER) was well-anticipated, although not very welcome by many in financial markets where the more dovish tone of the statement did not go far enough. Neither were they satisfied with the Summary of Economic Projections that indicated the FOMC forecasts now anticipate two rate moves in 2019 rather than three. However, Chair Jerome Powell made it clear that the Committee is looking at the available data and will set policy now and in the future based on its best thinking and judgment. And he emphasized it will do so without consideration of political influence. He did note that the emergence of some stresses in financial market contributed to the more dovish rate outlook.

Also, there were a fair number of questions in the press briefing regarding reductions in the balance sheet. It appears the worry is that the path of unwinding is leading to faster removal of policy accommodation than is apparent by moves in interest rates. Powell made it clear that at present no change is anticipated in either the size or the pace of reductions, and that the FOMC is not concerned that it is having a negative impact on financial conditions.

The economic data held a few surprises – both to the up- and downside.

There was little to be surprised at in the third estimate of third quarter GDP. The composition of the scant downward revision to 3.4% after 3.5% in the second and advance reports did not materially change the picture for growth. Personal income and spending are both about on track and as expected. The PCE deflator indicated a downtick in upward price pressures but remained quite close to the Fed’s 2% objective.

On the upside, the December University of Michigan’s Consumer Sentiment Index offered an upward revision that showed consumer attitudes are buoyant as gasoline prices decline and the labor market remains strong (final 98.3 after preliminary 97.5, up from final November 97.5). Consumer expectations for inflation were more-or-less on trend for mild upward pressure, but far from overheating.

Initial jobless claims for the week ended December 15 rose 8,000 to 214,0 but was on the low side of expectations. The normal end-of-year layoffs are not as prevalent as businesses hold on to workers in a tight labor market.

Existing home sales in November took a turn higher that was more than expected, but levels appear to have settled at a lower trend than in 2017 and the early part of 2018. Housing starts and permits issued were also above expectations, but mainly due to the volatile multi-unit sector. The December NAHB/Wells Fargo Housing Market Index for December fell for a second month to 56, its lowest level in over three years. Generally, the blame is falling on higher mortgage interest rates and still rising prices that are keeping some buyers out of the market.

Regional data for the factory and service sectors showed activity was by-and-large slower – sometimes much slower – at the end of the year. The reports for manufacturing from the New York, Philadelphia, and Kansas City Feds all reflected weaker conditions in substantial declines in their main indexes. New York’s general business conditions was reported down to 10.9 in December from 23.3 in November, Philadelphia was lower at 9.4 from 12.9, and Kansas City fell to 3 from 15. For the service sector, the New York Fed’s business activity index was down to 5.6 from 8.6 and lower for a third month in a row. The Philadelphia Non-Manufacturing Index plunged to 3.9 after 43.3. While one month – or even two – does not make a trend, it is evident that activity is at a less hectic pace of expansion.

The Conference Board’s Leading Economic Index posted a mild increase of 0.2% for November, but it was the downward revision to October that startled. The previous up 0.1% was reset to down 0.3%. It does not change the longer-term picture for an upward trajectory for the economy, but it does suggest a few wobbles may be emerging.

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