Week in Review
This week’s economic data painted a mixed picture of the U.S. economy, with housing and consumer confidence showing signs of resilience, while spending and manufacturing data were more subdued. Inflation remained elevated, keeping monetary policy at the center of investor attention.
Housing data were generally steady, with some signs of stronger-than-expected demand. Tuesday’s building permits were steady, totaling 1.398 million, roughly in line with expectations of 1.400 million and slightly below the prior month’s 1.403 million reading. New home sales provided a more positive signal, coming in at 676,000 compared with expectations of 651,000. The report showed new home sales declined just 0.6% month-over-month, significantly less than the 4.5% decline anticipated. Following August’s stronger-than-expected report, the latest data further suggests housing demand has remained relatively resilient despite higher borrowing costs.
Consumer data was less consistent. The Conference Board Consumer Confidence Index rose to 91.7 in October, well above expectations of 81.2 and reversing some of the weakness seen in recent months. Meanwhile, September personal spending rose 0.5%, below expectations and notably slower than the prior month’s 0.9% increase. Importantly, the reports cover different periods, making direct comparison difficult. Markets may therefore remain cautious until subsequent spending data show whether October’s improvement in sentiment translates into stronger consumer activity.
Elsewhere, preliminary core durable goods orders increased 0.5%, below the 0.6% consensus estimate but ahead of the prior month’s 0.3% increase, pointing to modest improvement in manufacturing activity.
On the policy front, the Federal Reserve left interest rates unchanged at 3.75% to 4.00% in a divided decision, with two policymakers favoring a 25-basis point increase. The Federal Open Market Committee (FOMC) continued to characterize inflation as elevated while describing economic activity as strong.
On the inflation front, September core and headline Personal Consumption Expenditures (PCE) inflation came in at 0.3% and 0.5% month over month, respectively. Year over year, core PCE remained at 3.1%, while headline PCE stood at 3.6%, leaving both above the Fed’s 2% objective. Despite persistent inflation, Treasury auction yields for 2-, 5-, and 7-year notes came in below their prior month levels. While yields reflect numerous factors, the decline provided an interesting counterpoint to the Fed’s cautious stance and persistent inflation data.
Week Ahead
Next week will be a busy one for economic data, with several reports providing updates on business activity, inflation pressures, and the labor market.
Markets will receive October manufacturing data on Monday with the release of the S&P Global Manufacturing Purchasing Managers’ Index (PMI) and Institute for Supply Management (ISM) Manufacturing Index, followed by their services counterparts on Wednesday. Beyond the headline readings, investors will likely pay particular attention to the prices and employment components for signs of changing inflationary pressures or labor market weakness. The services reports may be especially important given the sector’s larger contribution to overall economic activity.
Employment will remain a major focus throughout the week. September’s Job Openings and Labor Turnover Survey (JOLTS) on Tuesday will provide additional insight into labor supply and demand, while Friday’s employment report will include nonfarm payrolls, the unemployment rate, U6 unemployment, and labor force participation. A meaningful surprise in either direction could challenge the Federal Reserve’s recent characterization of economic activity as strong and influence expectations surrounding its next policy decision.
Inflation will also remain in focus. Preliminary University of Michigan inflation expectations are due Friday, providing another view of inflation pressures alongside the ISM price indexes. Third-quarter nonfarm productivity and unit labor costs will offer additional context. Productivity growth can allow wages to rise without creating the same degree of inflationary pressure, while unit labor costs provide insight into how labor expenses are evolving relative to output.
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