What Is The FOMC Watching?
The July statement from the FOMC presented the following snapshot of the economy, "Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months..." but as Stone McCarthy notes, tomorrow's FOMC post-meeting statement could well be less upbeat in tone, with hints of a slowing in the pace of improvements in the labor market, housing, consumer and business spending, and inflation remaining well below the 2% goal. A look at the housing and spending data certainly raises eyebrows but it is clear that the Fed remains cornered by deficits, sentiment, technicals, and international ire.
What Is The Fed Watching? Spending and Housing (via Stone McCarthy),
The August data on retail and food sales was a little below expectations, and its main strength was in sales of motor vehicles. On a month-over-month basis, retail sales seem to have faded over the course of the summer along with consumer confidence, but some of the softness in August may be due to slow back-to-school shopping in a few categories. There has been a shift as purchases for students in August are more about ticking the checkboxes for necessary school supplies. More discretionary items -- like clothing -- are waiting for September. The underlying trend for retail spending seems fairly stable, and for steady gains.
We looked at shipments of capital goods excluding aircraft and parts as a proxy for business fixed investment. The most recently available data is only through July, but the last few months point to some volatility and an uneven downward move in activity in the wake of the cutbacks in government spending that went into effect in March. However, some of the national and regional measures of activity for the manufacturing and services sector point to a rebound in August, and policymakers could be expecting a move upward in business investment. Certainly the Beige Book has been consistent with a measured pace of growth in its descriptions of business activity.
One of the most hopeful signs for the housing market has been a steady upward move for home values. Both the S&P/Case-Shiller Home Price Index and FHFA House Price Index continue to show a firming in home prices. Improved home valuations means fewer homeowners underwater on their mortgages, mortgage lenders having more confidence in issuing mortgages, and homebuyers having an incentive to enter the market before prices go higher. Recent increases in mortgage interest rates have cut into some sales in the last month or so, but that could be a short-term impact. Higher rates will hurt affordability for buyers on the margins, but current rates are still low by historical standards. Many consumers will want to lock in rates in advance of further increases.
Source: Stone McCarthy
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