The Fed Is About to Normalize…Very Slowly: September 18 – 22

The Federal Reserve takes a small step forward while the housing market takes a small step backward. Here are the five things we learned from U.S. economic data released during the week ending September 22.

#1The Fed will begin the next stage of tightening next month. The policy statement released following last week’s meeting of the Federal Open Market Committee (FOMC) noted that labor market “has continued to strengthen” and that “economic activity has been rising moderately so far this year.” At the same time, inflation remained below the Federal Reserve’s two-percent target and wage pressures remained weak. The statement also noted that Hurricanes Harvey and Irma may lead to some short-term economic disruptions but “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.” With all of that in mind, the voting FOMC members voted to keep the fed funds target rate at a range between 1.00 and 1.25 percent. But the news from the policy statement was that the Fed would begin to normalize its balance sheet starting in October by shedding $10 billion of its holdings during the month. This is a small first move—the Fed’s balance sheet was at nearly 4.46 trillion in mid-September.

The other headline in the release comes from the updated economic forecasts from the FOMC members. The median forecast suggests that there will be one more quarter-point hike in the fed funds target rate this year (presumably at the December meeting). While was surprising to some analysts, this would be consistent with the comment above that the voting members do not believe the recent hurricanes will have a lasting detrimental impact on economic growth. In fact, the median Gross Domestic Product (GDP) forecast for 2017 increased from +2.2 percent (as reported in the previously released forecast this summer) to +2.4 percent. Holding firm was the forecasted 2017 unemployment  (4.3 percent) and inflation (+1.6 percent) rate. Looking forward, the FOMC members currently anticipate there being three rate hikes (a quarter point each) in 2018.FOMC Economic Forecast 092217

#2Existing home sales slipped for a third straight month. The National Association of Realtors reports that sales of previously owned homes decreased 1.7 percent during August to a seasonally adjusted annualized rate (SAAR) of 5.35 million units. This was the third straight monthly decline and the measure’s lowest reading in a year. The sales decline was isolated to both the South (-5.7 percent) and West (-4.8 percent) as sales grew in both the Northeast (+10.8 percent) and Midwest (+2.4 percent). The press release lays blame on “inadequate levels of available inventory and the upward pressure” and on rising home prices. There were 1.88 million homes available for sale at the end of August, down 2.1 percent from July, 6.5 percent from a year earlier, and the lowest inventory reading since March. The median sales price of homes sold has grown 5.6 percent over the past year to $253,500.

#3Housing starts also slowed a bit during August. Per the Census Bureau, housing starts slipped 0.8 percent during the month to a seasonally adjusted annualized rate (SAAR) of 1.180 million units (+1.4. percent versus August 2016). Single-family unit starts grew 1.6 percent during August. Starts increased in both the Midwest (+22.0 percent) and West (+4.0 percent) but lost ground in both the South (-7.9 percent) and Northeast (-5.8 percent). Looking towards the future, the SAAR of issued building permits jumped 5.7 percent during August to 1.300 million permits, although the rate of issued permits for single-family homes cooled 1.5 percent. The annualized rate of housing completions fell 10.2 percent during the month to 1.040 million units. This was 3.4 percent above the year-ago rate.

#4Homebuilder confidence remains firm if slightly nicked due to recent hurricanes. The National Association of Home Builders’ Housing Market Index shed three points during September to a seasonally adjusted reading of 64. This was the 39th straight month in which the index was above a reading of 50, indicating that a greater percentage of homebuilders see the housing market as being “good” rather than being “poor.” The index dropped by six points in the Midwest (59) and four points in the South (59) but increased in both the West (up two points to 79) and Northeast (up a point to 50). Losing four points each were measures of both current sales (70) and expected sales (73) of single-family homes. The index of traffic of prospective buyers lost one point to 47. While describing homebuilders’ confidence as being “on very firm ground,” the press release noted that Hurricanes Harvey and Irma “have intensified [builders’] concerns about the availability of labor and the cost of building materials.”

#5Forward-looking economic indicators suggest continued economic growth for the rest of the year. The Conference Board’s Leading Economic Indicators had a half point during August to a reading of 128.8 (2010=100). This was up 4.4 percent from its year-ago reading. Seven of the ten components to the leading indicators made positive contributions, led by housing building permits, the interest rate spread, and consumers’ expectations for business conditions. The coincident index was unchanged in August but was 1.9 percent above its August 2016 reading. A drop industrial production matched the positive impact of the coincident index’s three other components (nonfarm payrolls, personal income net of transfer payments, and manufacturing/trade sales). The lagging index added 4/10ths of a point to 125.2 (+2.5 percent versus August 2016). The press release noted that the data do not reflect the impact of recent hurricanes on the economy but also stated that “the underlying trends suggest that the current solid pace of growth should continue in the near term.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending September 16, 2017, First-Time Claims, seasonally adjusted): 259,000 (-23,000 vs. previous week; +7,000 vs. the same week a year earlier). 4-week moving average: 268,750 (+4.7% vs. the same week a year earlier).
Import Prices (August 2017, All Imports, not seasonally adjusted): +0.6% vs. July 2017, +2.1% vs. August 2016. Nonfuel Imports: +0.3% vs. July 2017, +1.0% vs. August 2016.
Export Prices (August 2017, All Exports, not seasonally adjusted): +0.6% vs. July 2017, +2.3% vs. August 2016. Nonagricultural exports: +0.7% vs. July 2017, +2.4% vs. August 2016.
Treasury International Capital (July 2017, Net Domestic Securities Purchased by Foreigners, not seasonally adjusted): vs. June 2017: +$5.1 billion, vs. July 2016: +64.9 billion.
FHFA House Price Index (July 2017, Purchase-Only Index, seasonally adjusted): +0.2% vs. June 2017, +6.3% vs. July 2016.

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

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