The drama continues as weaker-than-expected employment data for September challenge the Federal Reserve’s new-found conviction to raise interest rates this year.
Yesterday, San Francisco Federal Reserve Bank President John Williams joined a chorus of FOMC officials in saying that he still expected to see a fed funds rate increase this year. Further, Williams hinted that the October 28 date was still in play. Today, we saw that payroll job growth in September was well below expectations, at +142,000 jobs for the month, while August and July payroll levels were revised down. There will not be another monthly payroll number before the end-of-October FOMC meeting to counter today’s soft report. So we are dialing down our expectations for an October fed funds rate hike. Our subjective probability for an end-of-October rate hike is now 30 percent. December gets 35 percent, and all of 2016 gets 35 percent.
Federal Reserve Chair Janet Yellen is in a difficult spot. With her very technical speech last week focusing on inflation, she appeared to fulfill her inflation criteria for a fed funds rate hike. Now the labor market criteria is back in doubt. International pressure for the Fed not to raise rates soon is increasing. The FOMC mentioned international concerns in their policy announcement of September 17, but did not set any criteria for evaluating international events. If the FOMC does not lift the fed funds rate at the end of October, then much depends on U.S. and international economic and financial market conditions heading into their December 15/16 meeting.
Failure to raise the fed funds rate this year would damage the Fed’s credibility. It would also likely contribute to ongoing uncertainty and financial market volatility at year end.
Other labor data from September looks good. Initial claims for unemployment insurance for the week ending September 26 increased by 10,000 to hit 277,000, still well below the benchmark 300,000 level. Meanwhile, continuing claims for the week ending September 19 fell by 53,000, to hit 2,191,000, the lowest number since the onset of the recession of 2001.
Auto sales roared ahead in September, to a 18.2 million unit annual rate. This is not sustainable, but it is an important indication that households are feeling wealthier and more confident. Numbers were good across the board, with the notable exception of Volkswagen, which we expect to lose a significant amount of market share in the months ahead.
Consumer confidence did improve in September, according to the Conference Board. Their survey showed a small gain to 103.0 in September after a bigger increase in August.
The ISM Manufacturing index for September fell to almost neutral at 50.2. As it stands now, the index shows expansion in the manufacturing sector for 33 consecutive months. But, it also shows a clear decline through 2015. The strong dollar, weaker oil field activity, and the likely cyclical peak of the auto industry are contributing to a flatter outlook for U.S. manufacturing. We expect the ISM MF Index to fall below the break even 50 mark soon. This may come even as consumer spending improves and the service sector continues to show moderate expansion.
The value of construction put in place increased by 0.7 percent in August. Private residential construction increased by 1.3 percent, paced by a strong increase in multi-family projects. Private nonresidential construction spending gained a modest 0.2 percent. Public construction spending was up by 0.5 percent.
The Case-Shiller U.S. National House Price Index increased by 0.4 percent in July, after seasonal adjustment. However, the 20-City Composite Index was down by 0.2 percent, with half of the 20 cities showing small to moderate declines. On a year-over-year basis, the Case-Shiller national HPI is up 4.7 percent. San Francisco led the cities with a 10.4 percent year-over-year gain, with Denver right behind at 10.3 percent.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-02-2015.