Rate Cut: September 16 – 20

The Federal Reserve lowered its short-term interest rate target for the first time in four years. Here are the five things we learned from U.S. economic data released during the week ending September 20.

The Fed made its move. The statement released following the conclusion of the past week’s Federal Open Market Committee meeting noted that “job gains have slowed” even as the economy continues “to expand at a solid pace.” The statement noted that while inflation “remains somewhat elevated,” the Committee “has gained greater confidence that inflation is moving sustainably toward 2 percent.” As a result, the FOMC voted to cut the fed funds target rate by a half percentage point to a range of 4.75 – 5.00 percent. The statement also added “supporting maximum employment” to the Federal Reserve Bank’s commitment to “returning inflation to its 2 percent objective.” One voting member opposed the action, preferring a smaller quarter-point rate cut.

Release concurrently were the economic forecasts of Federal Reserve Board members and Federal Reserve Bank presidents. The median forecast has the U.S. economy growing at a modest 2.0 percent pace in both 2024 and 2025, unemployment at 4.4 percent in both years, and headline inflation falling to +2.1 percent in 2025 (core inflation would be slightly higher at +2.3 percent). Further, the median forecast has the FOMC cutting the fed funds target rate by another half percentage point before the end of this year and another whole percentage point (to 3.25 – 3.50 percent) by the end of next year.

Retail sales disappointed in August. Retail and food services sales advanced a modest 0.1 percent to a seasonally adjusted $710.8 billion. The Census Bureau measure was 2.1 percent above year-ago levels. Sales fell at auto dealers (-0.1 percent) and gas stations (-1.2 percent). Net of both, core sales increased by a still unexceptional 0.2 percent in August and 3.3 percent from a year earlier. Sales improved at retailers focused on health/personal care (+0.7 percent), sporting goods/hobbies (+0.3 percent), and building materials (+0.1 percent). Sales deteriorated at department stores (-1.1 percent), appliance retailers (-1.1 percent), furniture stores (-0.7 percent), and apparel retailers (-0.7 percent). Sales were flat at restaurants/bars.

Sales of previously owned homes faltered again in August. Existing home sales dropped 2.5 percent to a seasonally adjusted annualized rate (SAAR) of 3.86 million units. The National Association of Realtors measure was 4.2 percent below its year-ago level. Compared to July, sales were down in three of four Census regions (sales held steady in the Midwest). Inventories inched up 0.7 percent during the month to 1.35 million, up 22.7 percent from a year earlier and the equivalent of a 4.2-month supply. The median sales price of $416,700 was up 3.1 percent from a year earlier. NAR states that “lower mortgage rates coupled with increasing inventory…will provide the environment for sales to move higher in future months.”

Manufacturing production jumped in August. The Federal Reserve reports that manufacturing production rose a seasonally adjusted 0.9 after contracting three over the prior four months. Whereas durable goods output surged 2.1 percent (boosted by primary metals, electrical equipment/appliances, and aerospace), nondurables production slipped 0.2 percent. Overall, industrial production jumped by 0.8 percent, with mining output rising by 0.8 percent and utilities output holding steady. Compared to a year earlier, manufacturing production was up a modest 0.2 percent and overall industrial production held flat.

Forward-looking economic measures declined in August. The Conference Board’s Leading Economic Index (LEI) slipped 0.2 percent to a seasonally adjusted 100.2 (2016=100). The LEI was off 2.3 percent over the past six months. Six of ten LEI components positively contributed to the index, led by housing building permits. The Coincident Economic Index (CEI) increased 0.3 percent to 112.7, leaving the measure up 0.8 percent over the past six months. All four CEI components positively contributed to the index. The Lagging Economic Index (LAG) held steady at 119.5 (+0.3 percent versus February 2024). The press release predicts that the U.S. economy will “lose momentum in the second half of this year as higher prices, elevated interest rates, and mounting debt erode domestic demand.”

Other U.S. economic data released over the past week:

• Jobless Claims (Week ending September 14, 2024, First-Time Claims, seasonally adjusted): 219,000, +2,000 vs. the previous week, -12,000 vs. the same week a year earlier). 4-week moving average: 227,500 (+1.2% vs. the same week a year earlier).
• Housing Starts (August 2024, Privately-Owned Housing Starts, seasonally adjusted annualized rate): 1.356 million (+9.6% vs. July 2024; +3.9% vs. August 2023).
• Housing Market Index (September 2024, Index (>50=More Homebuilders View Housing Market As “Good” Than See It As “Poor,” seasonally adjusted): 41 (August 2024: 39; September 2024: 50).
• Business Inventories (July 2024, Manufacturers’ and Trade Inventories, seasonally adjusted annualized rate): $2.575 trillion (+0.4% vs. June 2024; +2.5% vs. July 2023).
• State Employment (August 2024, Nonfarm Payrolls, seasonally adjusted): Increased in 4 states, decreased in 1 state, and held steady in 45 states and the District of Columbia vs. July 2024. Increased in 30 states and held steady in 20 states and the District of Columbia vs. August 2023.   
• Treasury International Capital (July 2024, Net Foreign Purchases of U.S. Securities, not seasonally adjusted): +$134.7 billion (June 2024: +$116.4 billion; July 2023: +$49.7 billion).

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