KEY DATA: IP: -0.4%; Manufacturing: -0.5%/ Starts: -9.4%; Permits: -2.7%/ Phil. Fed (Manufacturing): -6.4 points; Expectations: +13 points/ Claims: +4,000
IN A NUTSHELL: “Another day, another set of disappointing economic numbers.”
WHAT IT MEANS: “And the beat down goes on, and the beat down goes on. The data keep pounding the message into my brain” – that the economy is slowing! Today, two major reports, industrial production and housing starts, were released and to put it simply, they were not very good. Let’s start with output, which is the Fed’s own data release. The key number was manufacturing, which declined sharply September. The GM strike cratered vehicle production and that was the most glaring drop in the index. However, of the remaining ten components in the durable goods segment, five others were down. Indeed, excluding vehicles, durable good production still fell, though modestly (0.1%). Also, nondurable goods output declined, so you cannot say the weakness in manufacturing was simply a labor-related issue.
On the housing front, starts posted a huge decline in September. Again, the number needs to be viewed in context. The August number was up over 15%, to the highest in over twelve years. There didn’t seem to be a logical reason that so high a level would be reached. Consequently, a decline was expected. But, the September construction pace was pretty much in line with average for the year and below the average for the quarter, so the best you can say is that homebuilding continues, but it is not rising very rapidly. As for the future, permit requests, while down over the month, are still running well above starts, so we should see a pick up in activity over the next few months.
The Philadelphia Fed’s October manufacturing index posted a moderate decline. This index bounces around quite a bit, so what may seem like a large drop was really not that much. Orders remained solid and hiring picked up, which is good news. As for expectations, they were up solidly across the board. At least in the Mid-Atlantic region, manufacturing may be slowing, but not by much.
Jobless claims remained quite low as firms continue to scramble for workers.MARKETS AND FED POLICY IMPLICATIONS:Third quarter growth is setting up for a disappointing number. We get the first estimate of GDP on October 30th and the FOMC will have the number. Assuming the growth rate comes in close to expectations, which is between 1.5% and 2%, I don’t think it will change any thinking. The minutes of the last meeting and comments from members indicate two things: The trade war is the overarching issue facing the Committee and the members are split on how to deal with the potential impacts, given the outcomes are so potentially different. A full-fledged trade/tariff war likely means recession. An agreement means more 2% or so growth. So, doing more or doing nothing both come with real risks. That is likely to be the debate.