Comerica Economic Weekly

The big economic news of the week was non-news, or non-tapering, from the Fed. On Wednesday, the Federal Open Market Committee voted to continue their program of asset purchases, known as QE3, at the rate of $85 billion per month. It was widely expected that the Fed would announce the beginning of the tapering process on Wednesday. So the announcement of no taper came as a surprise and financial markets reacted sharply.

With more money flowing from the Fed than anticipated, stock prices rallied on Wednesday afternoon and Treasury bond yields declined. By mid-day Friday, equity prices were cooling. The yield on a 10-Year Treasury bond has elevated slightly from the late Wednesday low, but remains lower than earlier in the week at 2.725 percent.

 The murky forward guidance about the beginning of the QE3 tapering process leaves much in doubt. So far, Chairman Bernanke has not contradicted his statements that he would like to begin tapering this fall.   That leaves two regularly scheduled opportunities for the FOMC to announce tapering, October 30 and December 18.  December feels late given the uncertainties surrounding the upcoming turnover in leadership and membership of the FOMC. Therefore, we assign a subjective probability of 60 percent  to a late October/early November taper, a 30 percent probability to a mid-December taper, and a 10 percent probability to a taper beginning in 2014.

Larry Summers has withdrawn his name from consideration for the next chairman of the Federal Open Market Committee. President Obama appears likely to nominate Janet Yellen.

Economic data for August are consistent with moderate GDP growth in the third quarter. Industrial production increased by 0.4 percent for the month, the strongest monthly gain since last February. Motor vehicle production drove the August IP numbers.

Retail sales for August were up just 0.2 percent, despite strong unit auto sales. Topline auto and parts sales gained 1.0 percent. Excluding autos, retail and food services sales for August were up a scant 0.1 percent. Drags came from building materials, down 0.9 percent, clothing stores, down 0.8 percent, and sporting goods stores, down 0.5 percent. Modest retail sales growth over July and August suggest only moderate gains in personal consumption expenditures for the quarter.

Producer prices for finished goods gained 0.3 percent in August, pushed by energy prices. Consumer prices were up by just 0.1 percent in August. Housing data for August has been positive so far. Existing home sales gained 1.7 percent. Housing starts were up 0.9 percent. New home sales data for August is due out this Wednesday. August leading indicators gained 0.7 percent, nice.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly092013.

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