A look back at the June 17 week sees no more important development than confirmation that Fed policymakers are indeed considering a cut in short-term interest rates dues to the variety of uncertainties facing the US economy. The FOMC statement on June 20 stopped short of language that would suggest it might come as soon as the July 30-31 meeting, but it did raise the specter of sustained too low inflation and/or inflation expectations softening unacceptably in addition to the risks facing growth.
St. Louis Fed President James Bullard’s dissent in the vote was no surprise, nor was the content of a statement on his dissent that was issued Friday. He is in favor of an insurance cut in short term rates to see the economy through a patch of softer inflation and elevated risks.
Bullard may be at the extreme end of policymakers’ views, but there was a definite shift in the so-called “dot plot” that suggested the consensus on the FOMC is divided between those who think a rate cut may be needed and those who prefer to wait until the data is clearer.
The FOMC meeting and its outcome put most of the economic data in the shade. It wasn’t a busy week for numbers and on balance the news was mildly positive. However, some of the most current data does raise a few warning flags.
The manufacturing surveys for June from the New York and Philadelphia Fed showed that many businesses in the factory sector moved up activity into April and May to get ahead of possible impacts should punitive tariffs on trade with China go into effect. The surveys’ respective general business conditions indexes both took a sharp turn lower. New York actually pointed to contraction for the first time since late 2016, while Philadelphia suggested that activity had stalled while remaining just above neutral. The detail indexes – which are not used to calculate the headline numbers – differed in that New York’s were broadly weak in tone while Philadelphia managed to convey that conditions were not that bad. Still, both raised the alarm that national manufacturing data for June could be softer than previously anticipated. The New York Fed’s service sector survey for June echoed the downbeat tone in the factory sector, albeit less drastically.
Data for the housing market was a bit of a mix, although the bottom line is consistent with improved overall health for home building and sales. If the NAHB/Wells Fargo Housing Market Index came in below expectations, the level is a solid one and a positive for home building in June. Starts of new homes were off slightly in May from April, but April was a strong month and the number was above expectations. The number of permits issued in May was up a tad and on expectations. Sales of existing homes in May were stronger than expected and the highest in 9 months. Low mortgage rates are encouraging builders to start construction to meet renewed demand while housing supplies are low. The state of mortgage rates also encourages homeowners to bring units to market in hope of a speedier sale and more pricing power. Consumers are taking advantage of improved affordability while rates have retraced the increases of 2018.
Initial jobless claims in the week ended June 15 and the insured rate of unemployment in the week ended June 8 are both telling a tale of a tight labor market where businesses are holding on to skilled workers and layoffs are not necessarily the first thought when cutting costs.
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