KEY DATA: Imports: +0.6%; Nonfuel: +0.3%; Exports: +0.6%; Less Fuel and Food: +0.1%/ Starts: -0.8%; 1-Family: +1.6%; Permits: +5.7%; 1-Family: -1.5%
IN A NUTSHELL: “With the housing sector entering a period of hurricane-induced uncertainty and inflation pressures building only slowly, the Fed’s decision tomorrow will not be made easily.”
WHAT IT MEANS: The Fed has started its two-day meeting and the data they are looking at couldn’t be less clear. Take today’s numbers. Import prices jumped in August, led by a surge in petroleum and petroleum-related goods costs. It also looks like food expenses are picking up. But excluding those two volatile components, there really were not a lot of cost issues coming from the import side. Consumer goods, vehicles and capital goods prices increased a touch, but over the year every one of those three categories were up less than 0.5%. That is hardly anything for the Fed to fear. In contrast, U.S. firms are beginning to push through somewhat higher price increases for the goods they sell overseas. A wide variety of non-food or fuel prices were up decently in August.
Meanwhile, the housing market continues to post strange numbers. In August, housing starts fell, but only for multi-family dwellings. Single-family construction improved. Did Harvey have a hand in the overall decline? Hard to say since single-family starts rose in the South, even as multi-family activity dropped sharply. The Northeast was the weakest link and I don’t remember us getting hit by any major storm. And then there were the permit requests. While they were up, it is the levels that are odd. Over the past three months, permit requests have run about 6% above starts, implying that that construction should surge in the months ahead. That is especially true for single-family units. But starts have outpaced permits by 33% for multi-family structures and that points to a major slowdown in that sector. And when you add in the uncertainty from the hurricanes, who knows what the housing data will look like in the months ahead?
MARKETS AND FED POLICY IMPLICATIONS: The summary of the data going into the FOMC meeting was that growth in the third quarter looked like it was moving back toward trend before the storms hit. Now, it is likely to come in below 2%. But all those vehicles, homes, businesses and infrastructure have to be rebuilt, demolished, repaired or whatever, and that means an awful lot of spending will have to occur over the next six to twelve months – at a minimum. With labor shortages already an issue in the construction sector, much of the rebuilding will have to wait, possibly for years. If you can do anything in construction, there will be a job waiting, and at a very good salary. But that means inflation could pick up, especially for building supplies and used vehicles. I believe that Fed will indicate, in both the statement and during Chair Yellen’s press conference, that they will monitor the data, but will be moving forward with the interest rate and balance sheet normalization process. The only issue is timing. I expect a specific start-data for balance sheet reduction will be communicated, if not at tomorrow’s meeting, then after the October 31/November 1 meeting and a rate hike to occur before year’s end.