Last week was a busy one for economic data, with looks at business sentiment, the trade balance, and, most important, the job market. This week’s data digs into pricing and inflation, as well as gives us another look at consumer confidence.
Last week’s news
On Monday, the Institute for Supply Management (ISM) Manufacturing index did slightly worse than expected, dropping from 61.3 to 59.8. This is a diffusion index, where values above 50 indicate expansion, so even with the decline, this result is quite strong and is at a very high level historically. The pullback appeared to come from slowing global growth in general, as well as from the recent appreciation in the dollar, which has been increasing the costs of U.S. products to foreign buyers. Uncertainty over trade policy remains a headwind as well. Even with the small pullback, however, this measure remains a positive indicator for the economy as a whole.
On Wednesday, the ISM Nonmanufacturing index beat expectations by a substantial margin, rising further, after an increase in August, from 58.5 to 61.6. As with the manufacturing report, this is a diffusion index, so this result continues to indicate expansion on strong retail sales growth, as well as on strong regional surveys. With consumer confidence high and spending growth solid, this indicator suggests that the service sector may continue to strengthen.
On Friday, the international trade report showed that the trade deficit worsened, going from $50 billion to $53.2 billion. We knew from the advance report that the trade deficit in goods widened, as export growth has dropped back even as imports have increased. Given the consistently worsening readings, trade will likely be a drag on third-quarter growth.
Finally, on Friday, the employment report missed expectations. Only 134,000 jobs were added in September, against expectations for 185,000. Prior months were revised up significantly, however, which more than made up for the shortfall. With the August report rising from 201,000 to 270,000, the labor market looks to be holding strong. The unemployment rate confirmed this, dropping from 3.9 percent to 3.7 percent, the lowest level since 1969. Wage growth pulled back a bit on a monthly basis, from 0.4 percent in August to 0.3 percent in September, as well as on an annual basis, from 2.9 percent to 2.8 percent. While the headline number is disappointing, this is another healthy report overall and signals continued economic growth. It also supports the likelihood of another Fed rate hike in December.
What to look forward to
On Wednesday, the producer prices report is expected to show a 0.2-percent increase in the headline index, which includes energy and food, for September. This would be up from a decline of 0.1 percent in August. There may be some upside risk here from energy prices and tariff-driven increases in other input prices, especially steel and electronics. The annual change, however, is expected to drop—from 2.8 percent to 2.7 percent—indicating that longer-term inflation pressures are moderating but still elevated above the Fed’s target level of 2 percent. The core index, which excludes energy and food, is also expected to increase 0.2 percent for September, up from a 0.1-percent decline in August. Here, though, the annual figure is expected to rise to 2.6 percent from 2.3 percent. Such an increase would be due largely to base effects, but tariffs are reportedly driving faster input inflation, which could worsen next month as tariffs on Chinese goods increase.
On Thursday, the consumer prices report is expected to show continued inflation. The headline index, which, again, includes food and energy, is expected to rise by 0.2 percent for September. This would be on top of a 0.2-percent increase in August. The annual figure is expected to drop from 2.7 percent in August to 2.4 percent in September on base effects. The core index is expected to rise from a 0.1-percent increase in August to a 0.2-percent increase for September. In addition, the annual figure is expected to rise from 2.2 percent to 2.3 percent. As with producer prices, these figures indicate that inflation continues to run above the Fed’s target, which should continue to drive interest rate increases.
Finally, the University of Michigan’s consumer confidence survey, released Friday, is expected to show confidence rising from 100.1 for September to 100.8 for October. This is a high level historically and suggests that consumers are not yet worried about the effects of a trade war. Combined with a strong labor market and the fact that the stock market remains close to its high, this should continue to support consumer spending and economic growth.
Thanks for reading and have a great week!