Here is the summary from this week’s Monday Economic Report:
One of the biggest guessing games of late is whether the Federal Reserve will begin reducing the level of its asset purchases as soon as the Federal Open Market Committee (FOMC) meets on September 17 and 18, or whether it will occur later in the year. Currently, the Fed is buying $85 billion in long-term and mortgage-backed securities each month, and it is widely expected that the amount will taper off this fall. Indeed, the minutes from the July FOMC meeting confirmed that the Fed does plan to curtail its asset purchases in the coming months, ending all purchases by mid-2014. Chairman Ben Bernanke suggested as much in July, both in speeches and in Congressional testimony.
That said, some commentators speculate that the Fed might wait until after the meeting to gauge how the President and Congress resolve their fiscal and budgetary issues. Either way, it is clear that the Fed plans to maintain an easy monetary policy for the foreseeable future, with short-term interest rates near zero until the unemployment rate reaches 6.5 percent and/or long-term inflation expectations exceed 2.5 percent. The FOMC minutes suggest that changes to that guidance would be data-dependent.
The prospect of slowed asset purchasing has already influenced interest rates. Freddie Mac reported that the average 30-year mortgage rate reached 4.58 percent last week, up from 3.35 percent in the first week of May. Several indicators, including the most recent housing starts figures, signal dampening growth in the residential sector. Last week, the data were mixed. First, we learned that existing home sales rose significantly in July, up 6.5 percent for the month or 17.2 percent year-over-year. The National Association of Realtors® added, though, that higher mortgage rates might have been an impetus to close existing deals sooner, indicating forthcoming softness. This was followed later in the week by news that new home sales plummeted in July, down 13.4 percent. In addition, the inventory of single-family homes on the market rose to an 18-month high, with 5.2 months of supply on the market, up from 4.3 months in June.
On the manufacturing front, recent data releases have been mostly positive, indicating modest growth in the United States, with stabilizing economies in both Europe and China. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increased from 53.7 in July to 53.9 in August, suggesting that new orders and output have expanded at a moderate pace. More importantly, when combined with a generally favorable report from the Kansas City Fed, the data indicate a pickup in manufacturing activity in the United States, which is particularly notable given the softness experienced this spring. Nonetheless, survey respondents in Kansas City tempered their optimism with comments about the negative impact of across-the-board federal spending cuts and challenges with attracting a quality workforce and keeping up with rising health care costs.
Meanwhile, manufacturing activity in China edged just above neutral in August, with the HSBC Flash China Manufacturing PMI increasing from 47.7 to 50.1. Sales and production indices were higher, but exports and hiring remained contractionary. However, after contracting for three straight months, the positive PMI reading in China indicated a potential turnaround, which is a welcome development. We had already seen industrial production rise as well.
At the same time, news out of Europe has been equally encouraging, with the Markit Eurozone Manufacturing PMI rising from 50.3 to 51.3. This marks the second consecutive monthly expansion, with stronger growth in Germany helping to buoy the overall numbers. The Eurozone had contracted for 23 straight months prior to July’s report. This data mirrors the positive real GDP growth and other economic indicators, helping to provide a huge psychological boost to the continent.
This week, we will get the first revision of real GDP growth in the second quarter for the United States. The original estimate, released at the end of July, said that the U.S. economy grew 1.7 percent, with the first half of the year expanding at a disappointingly slow 1.4 percent. Beyond GDP, several upcoming reports will cover the health of the manufacturing sector, including July durable goods sales and surveys from the Chicago, Dallas and Richmond Federal Reserve Banks. Other key data points to follow include new data on consumer confidence, pending home sales, and personal income and spending.
Chad Moutray is the chief economist, National Association of Manufacturers.
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