It was a heavy week for U.S. data releases. Key metrics were softer than expected, pulling down the odds of a September 21 fed funds rate hike.
The August jobs report left something to be desired as it showed that payroll employment for the month increased less than expected, up 151,000 jobs. Taken in isolation this is not a terrible payroll number, but it is a significant step down from the heady 273,000 average for June and July. The unemployment rate for August held steady at 4.9 percent, where it has been since June. Average hourly earnings ticked up by just 0.1 percent after increasing by 0.3 percent in July. Average weekly hours dipped to 34.3.
Initial claims for unemployment insurance were up by 2,000 to hit 263,000 for the week ending August 27. Continuing claims gained 14,000 to reach 2,159,000 which is still a very low number.
The ISM Manufacturing Index for August hit a sour note, falling into contraction territory at 49.4 percent. The new orders sub-index, the production sub-index and the employment sub-index all fell below the break-even 50 mark for the month. Strangely, anecdotal comments went the other way and were generally favorable. Of the 18 reporting industries, six reported expansion and 11 reported contraction for the month.
July personal income and spending data shows that income growth was good at the start of the third quarter. Nominal personal income for the U.S. increased by 0.4 percent in July. Wages and salaries increased by 0.5 percent. After accounting for inflation and taxes, real disposable income increased by 0.4 percent in July. Nominal consumer spending increased by 0.3 percent. Over the 12 months ending in July, the PCE price index was up by just 0.8 percent, while the core PCE price index (excluding food and energy) was up by 1.6 percent.
The Conference Board reported that U.S. consumer confidence increased in August to 101.1, showing an upward trend since May.
August auto sales fell to a 17.0 million unit pace after climbing to 17.9 million in July. Like the employment numbers, this is not a bad number taken in isolation, but it was weaker than expected.
The U.S. international trade gap narrowed in July to -$39.5 billion. The real trade gap in goods for July is down from the second quarter average, meaning that trade may be supportive of real GDP growth in the third quarter. July nominal exports increased by $3.4 billion, while nominal imports decreased by $1.8 billion.
House prices in many major markets eased in June but were still up moderately over the previous 12 months. The Case-Shiller U.S. National Home Price Index increased by 0.2 percent in June, showing a 5.1 percent gain over the previous year.
Overall mortgage applications stepped up at the end of August, with stronger gains for refis. Mortgage apps for purchase showed no clear trend through August.
Lukewarm data are left on the Fed’s plate to digest over the Labor Day weekend. Next week, as they prepare for the upcoming FOMC meeting over September 20/21, Fed officials may not have an appetite for a rate hike later this month. The data-dependent Fed will see that August data was not robust, and we believe that they will once again refrain from raising the fed funds rate. In our upcoming September macroeconomic and interest rate forecast we will keep our near-term fed funds rate forecast unchanged, with one 25 basis point increase coming in December. Currently, the fed funds futures market places the odds of a September 21 fed funds rate hike at 21 percent, down from the 27 percent probability that it showed prior to the release of the August payroll.
However, Fed stasis is not a fait accompli. But with weaker-than-expected labor, manufacturing and auto sales data, and a drop in the implied probability shown in the fed funds futures market, Janet Yellen knows that communication will be important next week if the FOMC still intends to raise the fed funds rate on September 21.
We are maintaining our forecast for one fed funds rate hike this year, coming in December.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-02-2016.