A look behind at the October 21 week doesn’t really clarify the outlook for the FOMC meeting of October 29-30. With the communications blackout period in effect, Fed policymakers provided no comment on monetary policy. The economic data was fairly sparse and what there was suggested that conditions haven’t worsened particularly of late, but neither have things improved.
September data on new orders for durable goods was down 1.1%, dragged down in part by a 2.7% decline in transportation. Excluding transportation, orders were off 0.3% from the prior month. Orders for nondefense aircraft fell 11.8%, although defense aircraft managed a 6.3% rise. Motor vehicle orders were down 1.6%, in part on soft demand for new cars and light trucks. Weakness in transportation also played a part in keeping unfilled orders flat, with orders for motor vehicles down 1.3% and nondefense aircraft down 0.2%. Defense aircraft had an increase of 1.9% in September. However, low orders mean that order backlogs are being filled and there is less in the pipeline to keep activity going unless orders pick up again.
The regional surveys for the manufacturing sector don’t suggest that is going to happen in the near term. The week saw the October numbers from the Richmond Fed Survey of Manufacturing and Kansas City Fed Manufacturing Survey. Taken in context with the New York and Philadelphia surveys released in the prior week, activity in manufacturing has taken a hit as new orders have slowed to a meager pace. The Richmond Fed’s Composite Manufacturing Index did rebound to 8 in October from -9 in September. However, recent month’s readings suggest that it is feast-or-famine month-to-month. The Kansas City Manufacturing Index remained in contraction for a fourth month in a row with a -3 reading after -2 in September.
The outlook may be somewhat better for the service sector. Regional surveys are mixed, but on balance seem a little more positive. The Richmond Fed’s revenues index in Survey of the Service Sector jumped to 24 in October after 6 in September and was the highest in 14 months. This is most likely a one-off as service businesses closed contracts at the end of the government fiscal year. Nonetheless, the index has managed to avoid a contraction for over three years and is eking out mild growth. The Philadelphia Fed’s Non-Manufacturing Index rose to 12.6 in October from 9.5 in September. It may also be seeing some upward momentum as government contracts are signed. The level does not hint at any substantive change of underlying conditions which remain for modest expansion.
In spite of evidence of slower economic conditions, consumers remained fairly optimistic. The final University of Michigan Consumer Sentiment Index for October rose a bit to 95.5 in October from 93.2 in September. In the historical context, this is a solid reading. Consumers are seeing low interest rates – especially for mortgages – low inflation, and rising incomes with reasonable job security. They may be more concerned that this will change in the future, but for now they are confident enough to spend and enjoy the gains.
Sales of existing homes and new single-family homes in September declined 2.2% and 0.7%, respectively. I wouldn’t put too much importance on a one-month decline, especially since both reports had strong readings in the prior month. Nonetheless, with mortgage interest rates reaching a near-term bottom in September and starting to rise in October, it may be enough to persuade some potential home buyers to keep out of the market until the direction of the economy is clearer.
The FHFA House Price Index for August indicated that home buyers are likely having some leverage in negotiating a purchase price. The index was up 4.6% from August 2018, the slowest increase since 4.5% in October 2014. Even with limited housing stock, sellers are having to make concessions.
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