Economic Data and Growth

The still-robust U.S. economy and tight labor market could mean further interest rate hikes, Federal Reserve Chair Jerome Powell said Thursday, Reuters (subscription) reports.

What’s going on: “We are attentive to recent data showing the resilience of economic growth and demand for labor,” Powell said during a talk at the Economic Club in New York. “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

• The Fed’s aim in raising rates has been to reduce inflation to 2%.
• Since it began raising rates in March 2022, however, unemployment has stayed largely steady, and “economic growth has generally remained above the 1.8% annual growth rate Fed officials see as the economy’s underlying potential.”

A delicate balance: While Powell said there is evidence of a cooling labor market, the Fed must account for new “uncertainties and risks”—including the Hamas–Israel war—as it seeks “to balance the threat allowing inflation to rekindle against the threat of leaning on the economy more than is necessary.”

• Data since the central bank’s last meeting, in September, have shown unexpected U.S. job growth and surprisingly strong retail sales, “offering inconsistent signals about whether inflation is on track to return to the Fed’s 2% target in a timely manner.”

Hike likely: Most Reuters-polled economists expect the Fed to raise interest rates at its next meeting on Oct. 31–Nov. 1.  
 

Sales of existing homes fell to their lowest level in 13 years in September, according to Reuters (subscription).

What’s going on: “Existing home sales fell 2.0% last month to a seasonally adjusted annual rate of 3.96 million units, the lowest level since October 2010, the National Association of Realtors said on Thursday. They are counted at the closing of a contract, and last month’s sales likely reflected contracts signed in August, when the rate on the popular 30-year fixed mortgage vaulted above 7%.”

• Sales fell 1.1% in the South, 4.1% in the Midwest and 5.3% in the West. They rose 4.2% in the Northeast.

Anemic inventory: There was 3.4 months’ worth of unsold existing home inventory for sale in September, a decline of more than 8% from a year ago.

• “A four-to-seven-month supply is viewed as a healthy balance between supply and demand.”

Why it’s happening: Mortgage rates have spiked recently, “mostly because of expectations that the Federal Reserve will keep interest rates higher for longer in response to the economy’s resilience.”

The number of new homes being built “showed a substantial rebound” in September, while the number of permits to build declined, according to Markets Insider.

What’s going on: “The Commerce Department said housing starts spiked by 7.0 percent to an annual rate of 1.358 million in September after plunging by 12.5 percent to a revised rate of 1.269 million in August.”

• At the same time, permits—an indicator of future demand for housing—dropped by 4.4% to an annual rate of 1.475 million, following a surge in August.

Less than predicted: Economists had predicted that September housing starts would spike to a rate of 1.380 million from the previous month.

Why it’s important: Mortgage rates have risen to record highs recently, pushed by the Federal Reserve’s still-elevated interest rate target.

• Higher rates have led to a decline in home sales and prices.

Industrial production and retail sales both rose in September and exceeded growth expectations, according to MarketWatch and CNBC.

What’s going on: Industrial production increased 0.3% for the month, above the 0.1% gain expected, MarketWatch reports.

• Meanwhile, retail sales rose 0.7% for the month, more than twice the 0.3% rise estimated by Dow Jones, according to CNBC.

The details: In industrial production, “[m]anufacturing rose 0.4% and motor vehicle production rose 0.3%, held down by the ongoing strike against three automakers,” MarketWatch reports.

• For retail, “the biggest increase [was] at miscellaneous store retailers, which saw an increase of 3%. Online sales rose 1.1% while motor vehicle parts and dealers saw a 1% increase and food services and drinking places grew by 0.9%, good for a yearly increase of 9.2%, which led all categories,” according to CNBC.

What it means: The retail numbers “indicate that consumers more than kept up with price increases,” CNBC said, though that could change as employment growth is expected to slow.
 

Economists polled by The Wall Street Journal (subscription)—including NAM Chief Economist Chad Moutray—say they now believe that the U.S. will likely avoid a recession.

What’s going on: “In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the probability of a recession within the next year, from 54% on average in July to a more optimistic 48%. That is the first time they have put the probability below 50% since the middle of last year.”

• Economists on average expect gross domestic product to increase 2.2% in Q4 of this year from a year earlier, which is “a sharp upward revision” from the last survey.

Why it’s happening: Playing a role in the revised outlook are declining inflation, an interest rate that the Federal Reserve has held steady at its past two meetings, a robust job market and surprisingly strong recent economic growth.

A “soft landing”: While that growth and job creation are both expected to weaken in the first half of next year, “the latest forecasts suggest confidence in the Fed’s ability to achieve a so-called soft landing, in which inflation falls without a recession.”

• However, recent events—such as the Israel–Hamas war—could alter the accuracy of these predictions, given the potential effect on energy prices.

Our take: “Despite weaknesses in manufacturing demand and production and a multitude of challenges globally, consumers and businesses continue to spend, providing resilience to the U.S. economy,” Moutray told us.

• “Even with recent cooling, the labor market and wage growth remain solid, and firms continue to make investments in the domestic market. While real GDP is likely to slow in the next few quarters following a very strong Q3, the ‘soft landing’ scenario has become more probable in recent months.”

America’s aging population is one reason consumer spending has remained robust even as the Federal Reserve has raised interest rates, The Wall Street Journal (subscription) reports.

What’s going on: As of August, a record 17.7% of the U.S. population was 65 or older.

• Senior citizens, whose finances tend to be relatively robust, “accounted for 22% of spending last year, the highest share since records began in 1972 and up from 15% in 2010,” according to Labor Department data cited by the Journal. 

Why it’s important: “Our large share of older consumers provides a consumption base in times like today when job growth slows, interest rates rise and student-debt loan repayments begin again,” Susan Sterne, chief economist at Economic Analysis Associates, told the news outlet.

Longer lives, more spending: In addition to living longer, the elderly are more active than ever before, spending on traveling, hiking, cruises, e-bikes and more.

• “The average household led by someone age 65 and older spent 2.7% more last year than in 2021, adjusted for inflation, according to the Labor Department, compared with 0.7% for under-65 households.”

Recession buffer: Baby boomers have amassed more than $77 trillion in wealth, according to the Fed—and some economists say that money will help prevent an economic recession.
 

Prices paid by consumers for a variety of goods and services rose faster than expected last month, according to CNBC.

What’s going on: “The consumer price index, a closely followed inflation gauge, increased 0.4% on the month and 3.7% from a year ago, according to a Labor Department report Thursday. That compared to respective Dow Jones estimates of 0.3% and 3.6%.”

Core CPI: Core CPI, which excludes often-volatile food and energy costs, were in keeping with economist expectations, inching up 0.3% on the month and 4.1% year over year.

The details: Housing costs accounted for most of the inflation uptick.

• The shelter index—which composes about a third of the CPI weighting—rose 0.6% in September and 7.2% from September 2022.
• Food and energy costs rose 0.2% and 1.5%, respectively.
• Prices for services, “considered a key for the longer-run direction for inflation,” rose 0.6% excluding energy services.

What it means: “These data are not likely to change the trajectory of monetary policy, with the Federal Open Market Committee likely to pause [interest-rate hikes] once again at its Oct. 31–Nov. 1 meeting,” said NAM Chief Economist Chad Moutray. “Interest rates are not likely to see a cut until mid-to-late 2024.”
 

U.S. producer prices for final demand goods and services rose more than expected last month, largely owing to higher energy costs, Reuters (subscription) reports.

What’s going on: “The producer price index for final demand rose 0.5% last month, the Labor Department said on Wednesday. Data for August was unrevised to show the PPI accelerating 0.7%.”

• Reuters-polled economists had expected the PPI to increase 0.3%.
• “In the 12 months through September, the PPI increased 2.2% after advancing 2.0% in August.”

Core PPI: Core producer prices—prices excluding food, energy and trade services components—rose 0.2%, the same increase seen in August.

• “In the 12 months through September, the … core PPI increased 2.8% after climbing 2.9% in August.”

Coming up: The Federal Reserve is expected to leave current interest rates unchanged when it meets Oct. 31 and Nov. 1, according to Reuters. 

After months of slow growth, China’s economy is showing signs of picking up speed, “offering a glimmer of hope” for the U.S. and Europe, according to The Wall Street Journal (subscription).

What’s going on: “Factories in September reported their first expansion in activity since the spring, while railway and flight bookings point to a bumper week ahead for tourism as China takes a break to celebrate its weeklong National Day holiday.”

The big picture: While economists say it’s too early to call an economic turnaround—owing in large part to China’s continuing property-market slump—there are signals that things are improving.

• “An official gauge of activity in the nation’s manufacturing sector rose to 50.2 in September from 49.7 in August, China’s National Bureau of Statistics said Saturday, the first time since March that its purchasing managers index crept over the 50 mark that separates expansion from contraction.”
• Similar gauges for nonmanufacturing sectors and construction also expanded at a faster pace.
• With that said, the country’s manufacturing and overall economic growth are well below what was expected earlier in the year—particularly in the aftermath of last year’s “zero-COVID” policies. That has implications for both China and the global economy, according to NAM Chief Economist Chad Moutray.

What’s next: Many economists believe that to continue this growth, China needs more government stimulus. This could come in the form of household tax breaks, or cash or vouchers that consumers can spend directly. 
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New orders for manufactured goods increased in August after declining in July, according to U.S. Census Bureau data.

Factory orders: New orders rose 1.2% in August following a 2.1% decrease the previous month.

• Factory orders for durable and nondurable goods increased 0.1% and 2.1%, respectively, but declines in nondefense aircraft and components pulled down durable goods demand.
• Excluding transportation equipment, new factory orders jumped 1.4%, rising for the third month in a row.

Core capital goods: New orders for core capital goods—or nondefense capital goods excluding aircraft, a proxy for capital spending in the U.S. economy—increased 0.9% to a record high of $73.95 billion in August.

Factory shipments: Factory shipments rose 1.3% in August, marking the fourth consecutive monthly increase.

• Total factory shipments have risen 0.5% over the past year, dipping 0.9% year over year when transportation equipment is excluded.
• Factory shipments excluding transportation equipment have increased 1.0% year to date.

Shipments of core capital goods: Shipments of core capital goods rose 0.7% in August, to an all-time high of $74.38 billion, reflecting 2.6% growth over the past 12 months.