A look behind at the August 19 week concludes a tweetstorm on Friday from President Trump in advance of his arrival at the G7 summit. Trump’s aggressive tone and unrealistic demands served only to add to the uncertain outlook for the US economy by raising the punitive actions on the part of the White House. Whatever good Chair Powell’s speech may have done in reassuring markets that the Federal Reserve was prepared to act as necessary was swiftly undone by Trump. Whatever comes out of the G7 talks over the weekend are unlikely to soothe concerns about the headlong pronouncements from the President.
Powell’s speech was clear that trade is a huge unknown for gauging the risks to the economic outlook and that the central bank does not have the same experience and tools to address it as they do for inflation and employment conditions. It is also clear that at present the economy does not look bad to most policymakers within the context of the dual mandate even with heightened risks.
The minutes of the FOMC meeting released on Wednesday were already three weeks old, but they did serve to confirm that Fed policymakers as a whole were not in close consensus about the decision to lower short-term rates by 25 basis points on July 31. At least two wanted a 50 basis point cut, while probably about a third of the 17 FOMC participants wanted no change at that time. At least until President Trump’s remarks on Friday, most were likely of the same mind through the current week. However, an intensification of antagonistic trade talk and the imposition of punitive tariffs could start to tip the US economy into a downturn, not just a period of modest expansion. What Fed policymakers think will be clearer when the next Summary of Economic Projections is prepared at the September 17-18 FOMC meeting.
In the meantime, policymakers are starting to assess the information gathered over a series of “Fed Listens” events to review the framework for monetary policy. The one trend that seems to be emerging is that the Fed is likely to express its inflation objective as a range as a better way to communicate its symmetric inflation objective, and to allow for inflation to run a little warm for a time to make up for some of the periods of cooler price pressures without alarming Fedwatchers about overshooting its goals.
The week’s economic data was scant, but it offered a few insights on economic conditions.
Sales of homes in July were generally solid. If not as robust as might be expected with mortgage rates dropping, there is still support from consumers committing to a home purchase in spite of some worries about the economy edging toward recession. Sales of existing homes were up 2.5% to 5.42 million units (SAAR), the highest since 5.48 million in February when it was apparent there was some pent-up demand for homebuying that had waited for mortgage rates to look more appealing after the run up in the second half of 2018. Sales of new single-family homes were sharply lower at 635,000 in July, but the decline was a return to a pace more like the underlying trend after a huge gain in the prior month. Even with some month-to-month volatility, sales of single homes – existing and new – have revived nicely after the slowdown in the second half of 2018.
What is looking a bit more ominous for the economy are the August regional surveys of conditions in manufacturing. The Philadelphia and New York reports were released in the August 12 week and were mixed in the message. This week adds the data from the Kansas City Fed Manufacturing Index which has been falling since March and has been negative for the past two months with -6 in August after -1 in July. Survey respondents were worried about the impact of lack of a trade agreement with China and about the implications for prices and supply chains. If the Dallas and Richmond reports for the manufacturing sector in the coming week are also weak, it bodes poorly for the national report for the ISM Manufacturing Index for August at 10:00 ET on Tuesday, September 3.
The service sector is maintaining a pace of modest expansion in the regional data for August. This week included the Philadelphia Fed’s Non-Manufacturing Index which fell to 7.5 after 21.4 in July. The index has been alternating firmer and softer readings in the past few months, so the big decline isn’t necessarily worrying, just a return to fundamentally modest conditions. The New York Business Leaders index was reported last week and was little changed at a middling 9.1 in August after 9.7 in the prior month. These two reports don’t have the best correlation with the ISM Non-Manufacturing Index, so the more definitive reading on conditions will fall to the reports from the Dallas and Richmond Feds in the coming week. The ISM index won’t be reported until 10:00 ET on Thursday, September 5.
The July Leading Economic Index from The Conference Board turned around two months of declines to an increase of 0.5%. The change in momentum was largely due to a redound in housing permits issued for July and a relief rally in the stock market, not from a broad-based increase in most components.
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