The Fed Stays Put Again (But Some Were Ready to Make a Move): What We Learned During the Week of September 19 – 23

Despite the dissent of 3 of its voting members, the FOMC keeps its interest rate target steady once again. Meanwhile, tight inventories clip home sales during August. Here are the 5 things we learned from U.S. economic data released during the week ending September 23.

#1Yes, the Federal Reserve held firm with its interest rate target …but some voting members were ready to make a move. The policy statement released following the conclusion of last week’s meeting of the Federal Open Market Committee noted that the labor market “has continued to strengthen” and that economic growth “has picked up from the modest pace” of the first half of 2016. It also characterized consumer spending as “growing softly” but did note that business investment “remained soft” and that inflation was below the Fed’s 2% target rate. The statement also reaffirmed FOMC members’ expectations that both economic growth and labor market conditions will continue to improve and that inflation will slowly move towards its 2% target rate. With all of that in the backdrop, the FOMC members’ maintained its 0.25%-0.50% target for the fed funds rate, although the committee “judge[d] that the case for an increase…has strengthened.” 3 voting members of the FOMC did not vote with the majority and instead wanted to hike the target rate by a ¼ point to 0.50%-0.75%.

Released in conjunction were the latest economic forecasts of the FOMC members, which showed only minor changes. The median forecast for 2016 GDP slipped by 2/10ths of a point to +1.8%. The 2017 and 2017 GDP forecasts held steady at +2.0%. While the median 2016 unemployment forecast inched up 1/10th of a point to 4.8%, the 2017 and 2018 remained at 4.6% and 4.5%, respectively. The Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) deflator not expected to hit its target of 2.0% until 2018.  As a result, FOMC members anticipate one rate hike this year, 2 rates hikes in 2017, and 3 rate hikes in 2018.fomc-fed-funds-forecasts-092316

#2Existing home sales took a half step back for a 2nd straight month during August. The National Association of Realtors’ measure of sales of previously owned homes decreased 0.9% to a seasonally adjusted annualized rate (SAAR) to 5.33 million units (+0.8% vs. August 2015). Sales declined in 3 of 4 Census regions, with the Northeast (+6.1%) being the positive outlier. The press release links tight inventories of homes for a major reason for the lagging sales pace. Inventories of unsold homes totaled 2.040 million units, down 3.3% from July 2016, 10.1% below August 2015 levels, and a 4.6 month supply. As a result, the median sales prices was 5.1% above that of a year earlier at $240,200.

#3Housing starts slowed in August, but homebuilders grew more confident during September. The Census Bureau estimates housing starts declined 5.8% during August to a seasonally adjusted annualized rate (SAAR) of 1.142 million units. This was 0.9% above the year ago rate. Starts of single-family units declined 6.0% from the July rate to 768,000 units while multifamily properties with 5 or more units slowed 6.9% to 403,000 units. August’s slowdown was centered in the South, where starts declined 14.8% during the month. Starts improved in the Northeast (+7.6%), Midwest (+5.6%), and West (+1.8%). Looking towards the future, the number of issued construction permits slipped 0.4% during the month to 1.139 million units (SAAR), which was 2.3% below the August 2015 rate. The SAAR of issued permits for single-family units increased 3.7% during the month while the equivalent measure for multi-family units (5+ units) dropped 8.4%. While the SAAR of completions fell 3.4% during August to 1.043 million units, it represented an 8.3% gain from the August 2015 pace of completions.

Meanwhile, the Housing Market Index (HMI), a measure of homebuilder sentiment from the National Association of Home Builders, jumped 6 points to a seasonally adjusted reading of 65. This was the 27th straight month in which the index was above 50 (indicative of a greater percentage of surveyed homebuilders seeing the housing market as “good” rather than “poor”) and its highest reading since October 2005. The HMI improved in all 4 Census regions, with the highlight being a 14 points surge in the West to a reading of 82. The current and expected sales indices rose 5 and 6 points, respectively, to matching readings of 71.  The index tracking the traffic of prospective buyers added 4 points to 48. The press release said that a number of homebuilders were “ seeing more serious buyers, a positive sign that the housing market continues to move forward.”

#4Chicago Fed data indicate economic growth slowed in August. The Chicago Fed National Activity Index (CFNAI) plummeted by 79-basis points during the month to -0.55. The CFNAI is a weighted index of 85 economic index set so that a reading 0.00 indicates economic growth is at the historic average. Of those 85 indicators, just 19 made a positive contribution to the headline index while the other 66 made negative contributions. All 4 major categories of indicators were drags on the CFNAI, led by those associated with production that made a negative contribution of -0.33 (down sharply from a positive +0.15 contribution in July). All pulling down the CFNAI were indicators associated with employment (-0.09), consumption/housing (-0.08), and sales/orders (-0.05). Despite the big drop, the moving average actually improved by 2-basis points to -0.07. This reading is indicative of economic growth that is slightly below its historic average.

#5An index of leading economic indicators also slipped during August. The Conference Board’s Leading Economic Index declined by 2/10ths of a point to a seasonally adjusted 124.1. The decrease in August followed gains during the 2 prior months and left the index 1.1% above its year ago mark. Only 4 of the index’s 10 components improved from their July readings, including the interest rate spread and stock prices. The biggest drag on the index was the average weekly manufacturing hours. The coincident index eked out a 1/10th of a point increase to 114.1 (+1.6% vs. August 2015), with 3 of 4 index components gaining from their July readings (nonagricultural payrolls, personal income net of transfer payments, and manufacturing/trade sales). The adding index inched up 2/10ths of a point to 122.1 (+3.0% vs. August 2015) as 4 of 7 index components improving during the month. The press release stressed that data still “points to moderate economic growth in the months ahead” despite the decline in the leading index.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending September 17, 2016, First-Time Claims, seasonally adjusted): 252,000 (-8,000 vs. previous week; -19,000 vs. the same week a year earlier). 4-week moving average: 258,500 (-5.7% vs. the same week a year earlier).
Regional/State Employment (August 2016, Nonfarm Payrolls, seasonally adjusted): vs. July 2016: increased in 4 states & District of Columbia, down in 3 states, and essentially unchanged in 43 states. Vs. August 2015: increased in 35 states, declined in 2 states and unchanged in 13 states and the District of Columbia.

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

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