A look behind at the October 14 week shows numerous appearances by Fed officials, none of whom made an absolute commitment to another rate cut at the October 29-30 meeting. Clearly some are inclined to impose one, others less so. On net, the data and information available counsel that one is likely due to a more downbeat tone to the data and concerns about geopolitical developments. However, the FOMC does not have a lot of room to for more “insurance” cuts in rates before it starts knocking up against the effective lower bound (ELB) and the need to resort to unconventional monetary policy.
To my mind, the contents of the Beige Book released on Wednesday encapsulate current conditions and the conundrum facing Fed policymakers. No District Bank reported contraction in economic activity. One was more-or-less at neutral and the other 11 reported at least some growth. Labor markets are far from loosening up even if there is a little fraying at the edges. Wages and benefits are still on the rise, although perhaps to a less broad range of occupations and less generously than previously. Prices are rising only modestly and there has been no evidence that prior increases in wages have leaked into inflation. So much for the dual mandate. However, most Districts noted some sectoral weakness – notably in manufacturing – and other signs that demand has fallen off and consequently resulted in sluggish activity. The outlook for the future is considerably less positive. In other words, the US economy isn’t in recession, but it could easily slip into one. Fed Chair Jerome Powell has stated the FOMC will act to sustain the expansion. With global growth not providing much support, and domestic business investment reluctant, it will fall to consumers to carry growth. Confidence that that will be the case may have received a blow in the week.
For history on the Fed’s Beige Book, see the Whetstone Analysis Reference Library.
Retail and food sales for September were forecast to end the third quarter on an up note. Instead, total spending unexpectedly fell 0.3% overall and was down 0.1% excluding motor vehicles. It managed to eke out a 0.1% rise at the “core” – sales excluding motor vehicles, building materials, and gasoline. It is possible to find some reasonable explanations. The GM strike may have resulted in cutbacks in spending in some areas, the drop in building materials and motor vehicles is something of a reset after a strong prior month, and gasoline prices didn’t rise much while consumers were using less gasoline. Although year-over-year spending was still up a solid 4.1% and many of the reasons for the declines were one-offs, it doesn’t change that consumers may also be adjusting spending as their confidence in the outlook is shaken by the news cycle. It there is no rebound in spending next month, it could be bad news for the holiday shopping season.
See the Whetstone Analysis “On the radar: Holiday shopping period a short 27 days in 2019, but consumers may be in the mood to spend” from October 14.
Residential housing is holding on to its revival since early 2019 and could even be adding a little upward momentum. The NAHB/Wells Fargo Housing Market Index reached 71 in October, its highest since 71 in February 2018. Builders have reason for optimism as limited supplies of the more sought-after existing units have helped drive homebuyers to new construction, especially as builders have started to provide units in smaller sizes and lower price ranges to address that segment of the market. Data on housing starts and permits issued in September registered declines month-over-month. However, the softening was only a partial retracing of big gains in the prior month. The underlying trend for starts is up compared to last year, and permits increases suggest that demand for new homes is going to keep construction active for at least a few more months.
The earliest surveys of the manufacturing sector for October point to only mild expansion in the New York and Philadelphia Districts. The general business conditions index for New York had a slight increase to 4.0 from 2.0 in the prior month, but at best could be considered part of a trend of sluggish growth. The index for the Philadelphia Fed fell to 5.6 in October from 12.0 in September and has been losing momentum for four months. Neither fully reflects the softness in the ISM Manufacturing Index but are not far above it either.
The report on industrial production and capacity utilization for September was down 0.4%. It was no surprise that the UAW strike cut into manufacturing activity which fell 0.5%. However, excluding motor vehicles, manufacturing was still off 0.2%. Mining output was down 1.3%, in part on declines in oil and gas drilling and extraction. Utilities continued to reflect weather changes with a 1.4% increase as more seasonal weather arrived in most parts of the US.
The New York Fed’s Business Leaders Survey for October is the first of the District Bank surveys for the service sector. Its current activity index fell to -4.3 from 4.9 in September. It should be read with caution in isolation. Nonetheless, it suggested that the service sector is preparing to follow manufacturing into contractionary conditions.
The Atlanta Fed’s Business Inflation Expectations reading for October dipped a tenth to 1.8%. It isn’t a big move down and it isn’t that far from the Fed’s 2% inflation objective. However, it arrives at a time when policymakers might be a little more concerned about the credibility of the inflation objective and when they are more willing to defend it with some increased interest rate accommodation, especially after the softening in the University of Michigan Survey of Consumer inflation expectations numbers.
The Conference Board’s Leading Economic Index for September was down for a second month in a row, falling 0.1% after the down 0.2% in August (previously unchanged). Not surprisingly, the largest negative contribution was from the ISM new orders index and on the dip in the number of building permits. This is another piece of evidence for the weakness in the manufacturing sector and the less positive outlook for the US economy as a whole.
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