The Federal Open Market Committee voted Wednesday to leave the fed funds rate unchanged, continuing near-zero interest rate policy at least until December 16. The Fed’s assessment of economic conditions was tweaked, saying that household spending and business fixed investment have been increasing at solid rates, but the pace of job growth has slowed. In this statement the Fed dialed down its previous emphasis on global economic and financial conditions. But they did say that they were monitoring global economic and financial developments.
Significantly, the Fed dropped a hint that a December rate hike is still on the table. The fed funds futures is giving an implied probability of 50 percent for a rate hike in December. Over the next few weeks we could see clarifying statements by FOMC members. Also, FOMC will see the October and November jobs reports before their next meeting. Strong job creation would increase the odds of a December rate hike.
Both the House and the Senate have approved a two-year federal budget deal that increases the debt limit. The bill is expected to be signed by President Obama soon. The budget deal will reduce uncertainty and financial market volatility at year end, and bolster the hawkish case for Fed tightening sooner rather than later.
New home sales for September were weaker than expected, declining 11.5 percent to a 468,000 unit annual rate. This does not derail our expectation for an upward trend in new home sales through next year, but it does get our attention. The Case-Shiller U.S. National House Price Index increase by 0.3 percent in August, and was up 4.7 percent over the previous year.
New orders for durable goods fells by 1.2 percent in September after declining by 3.0 percent in August. Commercial aircraft orders were a big drag in both months. But even core orders (nondefense goods excluding aircraft) were down moderately for the two months.
Third quarter real GDP growth stepped down to a 1.5 percent annual rate. Inventories were a big drag in Q3 after the inventory run-up earlier in the year. Real consumer spending was solid, increasing at a 3.2 percent annual rate. We expect fourth quarter real GDP growth to increase at about a 2.4 percent annual rate.
Nominal personal income increased by a scant 0.1 percent in September as wage and salary income was flat. After adjusting for inflation and taxes, real disposable personal income gained 0.2 percent. The personal consumption expenditure price index dipped by 0.1 percent for the month. For the year, the PCE price index was up only 0.2 percent. Nominal consumer spending gained 0.1 percent, weighed down by lower gasoline prices. Real consumer spending was up by 0.2 percent.
Initial claims for unemployment insurance remain exceptionally low, gaining 1,000 for the week ending October 24, to hit 260,000. Continuing claims dropped by 37,000 to hit 2,144,000, the lowest number since November 2000.
The Conference Board’s Consumer Confidence index dipped in October, to 97.6, showing a flat trend this year.
The Employment Cost Index for Q3 increased by 0.6 percent and was up a sedate 2.0 percent over the previous year.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-30-2015.