Here is the summary for this week’s Monday Economic Report:
The headline of the week—by far—was the Federal Reserve’s decision to not pull back on its asset purchases, which most analysts had expected. Indeed, Chairman Ben Bernanke had been telegraphing the possibility of such a taper in the Fed’s quantitative easing program since the summer. In his Congressional testimony in July, the chairman said the following:
If the incoming data were to be broadly consistent with [modest growth and low inflation], we anticipated [at our June meeting] that it would be appropriate to begin to moderate the monthly pace of purchases later this year. And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear.
The Federal Open Market Committee (FOMC) voted to continue purchasing $85 billion in mortgage-backed and long-term securities each month. In doing so, the Fed felt that it needed “more evidence that progress will be sustained before adjusting the pace of its purchases.” In addition, the FOMC statement specifically referred to fiscal policy that is “restraining economic growth,” and Chairman Bernanke referenced the risks associated with political gamesmanship in funding the federal government and raising the debt ceiling. News of the Fed’s inaction sent long-term interest rates and the U.S. dollar somewhat lower.
The Fed also reduced its growth estimates for this year and next, with real GDP anticipated to increase 2.0 to 2.3 percent in 2013 and 2.9 to 3.1 percent in 2014. It also predicts inflation will remain under its 2.0 percent target. The latest consumer price data confirms that this is still the case for now, with core consumer inflation up 1.8 percent over the past 12 months. Producer prices have been similar.
Meanwhile, manufacturers continue to rebound from the softness seen mid-year. Production in the manufacturing sector rose 0.7 percent in August, with year-over-year growth of 2.6 percent. Much of that increase stemmed from automakers resuming production in August after slowing down in July to retool for the new model year. But, even beyond motor vehicles, the gains in output were fairly broad based. While this modest growth was still not as robust as we might like, it was definitely welcome news. The two Federal Reserve Bank surveys both showed expansion in their districts, but at clearly different paces. Manufacturers in the Philadelphia Fed region reported a surprisingly sharp increase in new orders and shipments, boosting optimism for the next six months. In contrast, activity decelerated in the New York Fed’s survey, with businesses more cautious.
Housing data were mixed, but not as negative as one might expect given higher mortgage rates. New residential construction climbed marginally (up from 883,000 in July to 891,000 in August). Although this is still lower than the peak seen in March, which started just more than one million units at the annual rate. Housing permits decreased, but new single-family unit permitting continued to grow, reaching a level not seen since May 2008. The volatility in housing continues to be at the multi-unit level (e.g., apartments, condos, etc.). At least for now, therefore, residential construction—particularly for single-family homes—continues to hold up, even as there are some signs of possible dampening. Existing home sales increased 1.7 percent in August, extending its 6.5 percent gain in July. But, there is some speculation that they might decline moving forward, with the jump in interest rates forcing some buyers to speed up their closings. For their part, home builders remain mostly positive.
This week, we will get even more data on the current health of the manufacturing sector. Markit will release Flash estimates for its purchasing managers’ indexes for the United States, China and the Eurozone this morning, and the expectation is for continued stabilization in China and in Europe, with modest gains in U.S. output. The Kansas City and Richmond Federal Reserve Bank districts will also release new sentiment surveys from manufacturers. Both had rebounded in their August reports, and we will be looking for continued expansion. Meanwhile, the Census Bureau will announce advance estimates for durable goods sales for August, which should recover from the significant decline observed in its July analysis. Beyond these reports, other economic highlights include the latest data on consumer confidence, new home sales, and personal income and spending.
Chad Moutray is the chief economist, National Association of Manufacturers.
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