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An Overview of the U.S. Economy as the Federal Open Market Committee Convenes for Policy Meeting

Employment

Jobless claims continue to steadily drop in 2013, though a computer error may be responsible for the latest “eye-popping” numbers. For the September 7 week, just 292,000 people claimed unemployment benefits, which is by far the lowest level of the recovery. The previous reading was 323,000. Continuing claims also reached a recovery low level as well, hitting 2.871 million for the August 31 week and 2.953 million for the four-week average. (Labor Department)

As far as payroll growth, 169,000 jobs were added in August and the unemployment rate dipped to 7.3%.  (Bureau of Labor Statistics)

The economy needs 90k to 125k jobs added per month to keep up with population growth, and a healthy economy would be adding 200k to 250k jobs per month. The problem is that over 10 million people lost jobs during the recession. Payroll growth in the 100k level just isn’t enough. The unemployment rate has declined in part due to an increase in part-time jobs and a decline in work force participation.

 

Gross Domestic Product (GDP)

Second quarter (2Q) GDP growth was revised up to 2.5% after an initial racing of 1.7%. The upward revision came “mainly due to a sharp upward revision to net exports.”

 

Manufacturing & Industrial Production

Industrial production rose 0.4% in August and was unchanged in July. Manufacturing, which had notably slowed to begin 2013, jumped by 0.7% in August – a nice monthly rebound after July activity fell by 0.1%. Durable goods orders rose 1.2% monthly. (Federal Reserve data)

The ISM index of manufacturing activity rose to 55.7 in August after a reading of 55.4 in July. New orders surged to 63.2. A reading over 50 reflects expansion, and the strength comes after a dip into contraction territory (below 50) earlier in the year. (ISM Manufacturing Index)

 

Consumer Spending (retail sales) and Prices

Inflation in the consumer price index (CPI) rose 0.1% month-over-month in August, for a total yearly rise of 1.5%. Less food and energy – which are more volatile – the gain was 1.8% over 2012. Inflation remains within the Federal Reserve’s target rate, which could suggest it will begin to reduce quantitative easing.

Retail sales had month-over-month gains of 0.4% in July and 0.2% in August.

 

Housing News (Home Sales, Home Prices, Construction)

Over the past two months, construction jobs have dropped by a net of 3,000. New home sales dropped by 61k from June to July, though construction spending remains on the rise month-over month and was up 5.2% year-over-year in July. Rising mortgage rates might be slowing the market.

[Read More: Why Rate Increases Could Hit Home Builders Hard (WSJ)]

On the other end of the spectrum, the pace of existing home sales jumped by 382,000 to 5.390 million in July and the median sales price rose 13.7% year-over-year to $213,500. It is possible that the threat of higher rates caused the spike in sales, as shoppers are trying to “get in” before too late.

 

UP NEXT…

All eyes are on the Federal Open Market Committee (FOMC) – the policy setting wing of the Federal Reserve – whose meetings on September 17 and 18 will provide clarity. It has been expected for months now that the Fed would “taper” its stimulus program of $85 billion per month (quantitative easing) in bond purchases.

How will mortgage rates respond? The Federal Reserve had induced mortgage rates to fall by adding $40 billion in mortgage bond purchases per month in its third iteration of quantitative easing (QE3).  When speculation began that the Fed would “taper” QE, investors began to price in a future drop in the bond market. As a result, mortgage rates jumped.

Much of the cost of tapering is already priced in, so we wouldn’t expect to see another major bump after the meeting. Still, some upward movement is expected if the FOMC reduces QE. Check in with our website www.CentralCoastLending.com on Wednesday (September 18) for a recap of the latest news.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile
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