NAM: Monday Economic Report

The stock market experienced tremendous volatility last week, with the Dow Jones Industrial Average down 5.4 percent in declines from Tuesday through Thursday before rebounding slightly on Friday. While many factors contributed to the decline in equities, selling accelerated sharply following the release of input costs data on Wednesday. Producer prices for final demand goods and services rose 0.2 percent in September, or 2.7 percent over the past 12 months. Year-over-year growth in the headline producer price figure has moderated somewhat since June’s pace (3.3 percent), which was the fastest since December 2011. Meanwhile, core producer prices—which exclude food, energy and trade services—have increased 3.0 percent over the past 12 months, continuing a steady acceleration in the year-over-year rate and up from 2.1 percent in September 2017.

This figure spooked financial markets, largely on an expectation that the Federal Reserve might become more hawkish. In addition to equities, traders were also selling bonds, pushing up the yield on 10-year Treasury bonds to 3.23 percent at Wednesday’s close, a rate not seen since May 2011, before pulling back on Thursday and Friday. Similarly, Freddie Mac reported that the average interest rate on a 30-year fixed rate mortgage rose to 4.90 percent last week, also a seven-year high. Interestingly, financial markets continued to correct on Thursday even with consumer price index (CPI) data suggesting inflationary pressures have moderated recently, differing from the producer price index findings.

Consumer prices edged up 0.1 percent in September, easing slightly from 0.2 percent gains in both July and August. Lower energy costs, which fell 0.5 percent in September, helped reduce pricing pressures for the month, with food costs flat. More importantly, the CPI has risen 2.3 percent over the past 12 months, slowing from 2.9 percent growth in July (the highest year-over-year rate since February 2012) and 2.7 percent in August. Similarly, core consumer prices, which exclude food and energy costs, remained at 2.2 percent year-over-year for the second consecutive month. Core inflation had been 2.3 percent in July, an 18-month high. Therefore, while core inflation remains higher than one year ago (1.7 percent year-over-year), price growth appears to have stabilized for consumers, at least for now.

Speaking of consumers, confidence eased somewhat in preliminary data for October from the University of Michigan and Thomson Reuters, but with continuing positive assessments about the outlook. The Index of Consumer Sentiment declined from 100.1 in September to 99.0 in August. Even as the public’s perceptions about the economy have slipped a little since March’s reading (101.4), which was the highest since January 2004, the data remain upbeat. The headline index has averaged 98.5 through the first 10 months of 2018, up from 91.0 and 96.7 over the same time periods in 2016 and 2017, respectively. The press release notes accelerating prices were one possible factor in explaining October’s deceleration, with higher costs leading to “less favorable assessments by consumers of their personal finances.”

Meanwhile, the National Federation of Independent Business reported that the Small Business Optimism Index pulled back from the record set in August, with confidence remaining at the highest levels in the survey’s 45-year history. The headline index eased from 108.8 in August to 107.9 in September, the same figure as in July. The percentage of respondents saying the next three months would be a “good time to expand” edged down from 34 percent in August—matching the all-time high set in May—to 33 percent in September. Sales and capital spending expectations strengthened, which was promising. At the same time, the labor market continues to be solid, with the pace of job openings remaining the highest in the survey’s history.

There will be several key readings on the state of manufacturing this week, including updates on production and job growth. This includes new data for September on industrial production. In August, output in the manufacturing sector rose 0.2 percent, with 3.1 percent growth over the past 12 months, the best year-over-year rate since June 2012. It is hoped the new data will continue this positive trend. With manufacturers citing the difficulty in hiring as their top concern in the latest NAM Manufacturers’ Outlook Survey, the job openings figures for August are likely to continue to show labor market strength. There were 506,000 manufacturing job openings in July, a new record high, with postings in the nonfarm sector also soaring to another all-time high.

Other highlights this week include manufacturing surveys from the New York and Philadelphia Federal Reserve Banks and the latest data on housing starts and permits, leading indicators, retail sales and state employment.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers