KEY DATA: Sales: +1.3%; Over-Year: +2.6%; Prices (Over-Year): +4.7%/ LEI: 0%/ Phila. Fed: -4.8 points; Jobs: +12.2 points; Expectations: -11.8 points
IN A NUTSHELL: “All signs point to continued but sluggish economic growth. ”
WHAT IT MEANS: The Fed cut interest rates again yesterday but the small reduction is not likely to do much. Consider one of the major “interest sensitive” sectors, housing. The National Association of Realtors reported that existing home sales rose a touch in August, led by a solid increase in demand in the Northeast. The level was the highest in seventeen months. Sales gains were moderate in the Midwest, modest in the South but down in the West. Both single-family and condo purchases improved at nearly the same pace. As for prices, they were up at a decent but hardly excessive pace. Basically, the housing market is neither a major positive or negative for growth.
Will the economy pick up from its more moderate pace in the near future? The Conference Board’s Leading Economic Index doesn’t point to that. For the second time in three months, the index was flat. The report itself said it best: “The recent trends in the LEI are consistent with a slow but still expanding economy…”. So don’t look for any major reacceleration in growth anytime soon, but a recession is not likely to take hold in the near future either.
The manufacturing sector has been coming back recently and the Philadelphia Fed’s manufacturing survey supported that view. Yes, the overall index indicated that general business conditions in the Mid-Atlantic region moderated a touch in August into September, but the details of the report were generally good. Orders still expanded solidly, backlogs built and hiring and hours worked were up. However, optimism continues to fade. The expectations index level was in the range we saw in 2007, also when the economy was slowing.
Jobless claims rose modestly last week but the level remains extraordinarily low. MARKETS AND FED POLICY IMPLICATIONS: I read the FOMC statement and listened to Fed Chair Powell’s press conference but the truth of the matter is I am not sure the Fed knows what it is doing or what it should do. Housing is stable to up and that is actually just fine. We don’t want another bubble to form. Given the lack of supply and changing demographics/tastes, the sector is not in bad shape. And small changes in rates will do little to change that. It’s just that too many people want the hare rather than tortoise. The markets want lower and lower rates so growth can accelerate. That the lower rates may be creating major risks is not something investors tend to spend a lot of time thinking about. If the future mattered, would we have had the cot.com or housing bubbles? Feeding the beast is the greatest investor concern and a 25 basis point cut will not do much to stave off hunger pains.It will also not do much to “insure” the economy doesn’t go into recession if the trade war’s impacts worsen. The idea that the Fed is taking out insurance with such a modest move is a joke. And then there is the 2020 election. Janet Yellen got fired for keeping rates too low for too long. The same person who fired Yellen wants to fire Powell because he is not keeping rates at Yellen’s level. And people want politicians to run the Fed. Just what we need. Anyway, the data are at least consistent. They point to continued trend-level growth and no need for the Fed to do anything.