Data: A Heavy Load for the Fed
A heavy slate of U.S. economic reports released Sept. 14—including data on retail sales, trade prices, industrial production in August, business inventories in July, and a September reading on consumer sentiment—had a little something for everyone. But in the all-important matter of Federal Reserve policy, they failed to provide sufficient fodder for either the extreme hawks or doves on the Federal Open Market Committee (FOMC) to alter the market's expectation that the Central Bank will cut rates by a quarter point on Sept. 18.
Here is Action Economics' rundown of the Sept. 14 reports—and our Fed policy outlook in the runup to the Sept. 18 meeting:
For the U.S. retail sales report, the headline shortfall for sales in August of a restrained 0.3% overall gain, with a 0.4% ex-auto decline, was mostly attributable to lower-than-expected gasoline sales—likely price-related—as well as upward revisions to the July figures.
The mix of data overall remains consistent with a third-quarter bounce in real consumption growth to the 2.7% area, following the second-quarter lull to a 1.4% clip. Our retail sales forecast for September is for a 0.5% gain overall and a 0.4% gain without autos, with help this month coming from bouncing gasoline prices following the sharp drop in August.
A small downward bump in the June figures implies a tiny $0.5 billion downward revision to second-quarter consumption. We continue to expect a downward revision in second-quarter gross-domestic-product growth to the 3.6% area, from the 4% preliminary estimate, given likely downward adjustments for fixed investment and trade, followed by 2.8% GDP growth in the third quarter.
Import prices fell 0.3% in August, while export prices were up 0.2%. July's 1.5% surge in import prices was revised down to 1.3%, while the 0.2% increase in July export prices was revised to –0.1%. Petroleum prices fell 1.3% last month to weigh on the headline index, though food and beverage prices were up 0.7%.
The figures revealed the expected pattern of August import price restraint led by a temporary pause in commodity price strength, alongside continued export price gains. We still expect a hefty energy-led 1.2% headline drop in the August producer price index, alongside a 0.1% core figure (which excludes food and energy prices), and a flat headline consumer price index figure with a 0.2% core increase.
The trade price pause in August should be followed by hefty price gains in September, as surging food and oil prices have truncated the pause. A falling dollar ensures continued problematic trade price figures through the end of 2007.
Overall, the U.S. industrial production report revealed the expected 0.2% gain in August but with upward bumps to the July and May gains that left higher index levels over the past four months than previously assumed, and hence a stronger than expected trajectory. Utility output surged by more than expected, at 5.3%, but vehicle assemblies fell by a more-than-expected 4%, to a lean 10.9 million annual rate. The mix left a gain in August that was as expected overall, but with a higher capacity utilization rate of 82.2%.
We now expect a 4% third-quarter growth clip for industrial production, following an upwardly revised 3.6% (from 3.3%) pace in the second, but lean readings during the inventory correction of 1.1% in the 2007 first quarter and –1.5% in the 2006 fourth quarter.
For the U.S. business inventory gain of 0.5% in July, the hefty 1% retail inventory component gain was stronger than expected, following upward June revisions. This accompanied already released inventory gains of 0.2% for both the factory and wholesale sectors to leave a stronger trajectory of inventories than assumed in both the second and third quarters.
The preliminary September reading for the University of Michigan Consumer Sentiment Index came in at 83.8 (median 83), essentially unchanged from August's reading of 83.4. The report continues to leave sentiment well below June's reading of 90.4 and indicates that financial market turmoil and negative news headlines are continuing to weigh on sentiment.
Our forecast for the Conference Board's September consumer confidence index remains at an unchanged 105 reading.
The U.S. current account deficit for the second quarter of $190.8 billion reflected the expected jumbo 21.9% second-quarter growth clip for exports, alongside a 15.4% surge for the larger import component that left the deficit narrowing from $197.1 billion in the first quarter. We continue to expect bouncing oil prices to push the deficit back up to the $193 billion area in the third quarter, as was also signaled by the July trade deficit report released Sept. 11.
For the annual figures, the record $811 billion current account deficit in 2006 should be followed with a $776 billion gap in 2007.
The Fed Outlook
The U.S. data reports released Sept. 14 did little to alter the Fed's policy landscape for the Sept. 18 FOMC meeting. The best likelihood remains a 25-basis-point cut in the Fed funds target rate, to 5% from 5.25%. While a minority of FOMC members might prefer a 50-basis-point move, most members likely continue to prefer an unchanged rate but with recognition that the choice is unrealistic given downside economic risk.
As for the "timely data and anecdotal information" the Fed says it is seeking, only the August payroll report released Sept. 7 argues in favor of an outsized easing. And though some may see today's ex-auto retail sales drop as significant, mitigating factors include the gasoline price effect and upward revision, as well as the bounce in Michigan sentiment, other surveys, and retail anecdotal reports alongside steady stock price gains that suggest a still confident and healthy consumer.
Recent comments from Fed officials have been noncommittal, and we are now in the blackout period before the policy announcement. While the hawkish tone from most policymakers may suggest no easing, no one has argued strongly for an unchanged stance. We suspect the FOMC will acquiesce and give the markets a quarter-point cut on Sept. 18 but will offset that with a relatively hawkish statement indicating that the Fed is still monitoring price pressures. We have removed our assumption of a second easing in October, as we now expect that the Fed will try to hold the line at a 5% rate.