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The biggest economic news last week was also the most predictable. The Federal Open Market Committee (FOMC) left short-term interest rates unchanged at the conclusion of its September 20–21 meeting as expected. While the Federal Reserve felt that “the case for an increase in the federal funds rate has strengthened,” it will hit the pause button for now, setting up the possibility of a rate hike at itsDecember 13–14 meeting, mirroring consensus expectations. (The FOMC does have another meeting scheduled for November 1–2 but will not likely act just a few days before Election Day.) Moreover, the Federal Reserve’s economic projections would seem to imply one increase this year (in December), with two rate hikes next year and three rate hikes in both 2018 and 2019.
Looking more closely at the Federal Reserve outlook tables, participants slightly lowered their estimates of growth for this year. They now see the U.S. economy growing 1.8 percent in 2016, down from an estimate of 2.0 percent in June. In addition, FOMC members predict the unemployment rate will be 4.8 percent at year’s end, or marginally higher than the 4.7 percent forecast three months ago. The Federal Reserve outlook calls for 2.0 percent growth in 2017, with the unemployment rate falling to 4.6 percent. In terms of pricing pressures, participants see personal consumption expenditure (PCE) inflation of 1.3 percent this year, with core PCE growth of 1.7 percent.
As noted in the past two Monday reports, much of the economic data of late has been disappointing, particularly for August. This has included manufacturing production, employment and retail sales, and last week, we added housing starts to that list. New residential construction activity decreased from an annualized 1,212,000 units in July to 1,142,000 units in August, a decline of 5.8 percent. Existing home sales were also off, down from 5.38 million units at the annual rate in July to 5.33 million units in August, with inventories continuing to drift lower. Both of these reports stood in contrast to a strong jump inhomebuilder confidence. That figure suggested builders were quite optimistic about the next six months, spurred by modest economic growth and historically low mortgage rates. Along those lines, I continue to expect 1.21 million housing units started by year’s end despite the weaker-than-desired numbers for August, particularly for single-family activity.
Manufacturing data were mixed last week. The Markit Flash U.S. Manufacturing PMI edged down from 52.0 in August to 51.4 in September, falling to a three-month low. This speaks to the sluggishness of manufacturing activity, with new orders decelerating to the slowest pace of growth since July 2011. Exports also returned to negative territory after three months of gains, as manufacturers in the United States struggled with the strong dollar and weaknesses abroad. On the positive side, however, manufacturing activity rebounded in the Kansas City Federal Reserve Bank’s district in September.
Meanwhile, Eurozone reports were somewhat split, with manufacturing sentiment ticking higher, up to its highest level since June, but service-sector growth dropping to its slowest growth rate since December 2014. The overall Eurozone data mirror the report from Germany for manufacturing (up from 53.6 to 54.3), including achieving a three-month high, while the contraction in activity in France (up from 48.3 to 49.5) slowed on a stabilization in output.
We will get new reads on the manufacturing sector this week. This will include the latest data on durable goods orders and shipments for August and surveys from the Dallas and Richmond Federal Reserve Banks for September. More than anything, we will be looking for signs of a possible rebound in the September numbers. Beyond manufacturing, there will also be important reports on advance goods exports and personal income and spending that will be closely watched, with other highlights being a second revision for second-quarter real GDP and new releases for consumer confidence and new home sales.