For the most part, last week’s news came in worse than expected, with notable declines in business confidence and a lackluster employment report drawing the most attention. This week will be busy, with updates on producer and consumer inflation, minutes from the Fed’s most recent meeting, and a consumer confidence survey all scheduled for release.
Last week’s news
On Tuesday, the ISM Manufacturing index was released. Manufacturer confidence declined sharply, from 49.1 in August to a decade low of 47.8 in September. This result was very disappointing, as economists expected the index to increase to 50 rather than falling. In a diffusion index such as this, values below 50 indicate contraction. This is the second straight month we’ve seen a result below 50. Some of the drop can be attributed to a strike at General Motors in September. But slowing global trade is clearly affecting manufacturer confidence and threatening to draw this sector of the economy into a prolonged slowdown.
On Thursday, the ISM Nonmanufacturing index was released. This measure of service sector confidence also disappointed, falling from 56.4 in August to 52.6 in September. As was the case with the manufacturing report, this is a diffusion index. Values above 50 indicate expansion. Again, this result is very disappointing, as economists expected the index to come in at 55. With these declines in September, business confidence now sits at levels that have historically signaled a recession. These levels are not a perfect indicator of recession, however, as business confidence hit similar levels in 2016.
Friday saw the release of the September employment report, which was a bit of a mixed bag. Headline employment disappointed, with 136,000 new jobs added against expectations for 145,000. Wage growth was also disappointing, as average wages remained flat during the month and year-over-year wage growth fell to a 14-month low. On the brighter side, the unemployment rate fell to a 50-year low of 3.5 percent. While the headline jobs figure is well below 2018 levels, the moderate growth helped calm fears of a swift collapse in job creation following the disappointing business confidence figures.
Finally, we finished the week with Friday’s release of the August international trade report. The trade deficit widened by more than expected during the month, from $54 billion in July to $54.9 billion in August. Higher-than-expected import figures led to this result. International trade will likely be a drag on third-quarter economic growth and looks to be a headwind for fourth-quarter growth as well.
What to look forward to
On Tuesday, September’s Producer Price Index is set to be released. Economists expect to see a modest increase of 0.1 percent for the month, as declining fuel prices helped calm inflationary pressures. On an annual basis, producer inflation is expected to come in at 1.8 percent. Core producer inflation, which strips out the effect of food and energy prices, is expected to show monthly and annual growth of 0.2 percent and 2.4 percent, respectively.
On Wednesday, the minutes from the Fed’s September meeting will be released. This will be a closely followed release, as the Fed cut the federal funds rate by 25 bps at that meeting. Three of the voting members voted against the rate cut. The minutes are expected to provide details into why they dissented and what it could take to make them vote for further rate cuts. Given the disappointing data we’ve seen since the September meeting, market participants widely expect the Fed to cut interest rates by another 25 bps at its December meeting.
On Thursday, we’ll get a look at consumer inflation with the release of the Consumer Price Index for September. Consumer prices are expected to show an increase comparable to producer prices, with 0.1 percent monthly and 1.9 percent annual growth forecasted. Core prices that strip out gas and food are expected to come in slightly higher, with 0.2 percent and 2.4 percent monthly and annual growth, respectively. If results meet the forecasts, they would mark an 11-year high for core consumer inflation. There is potential for further price increases, as tariffs enacted at the beginning of the month on Chinese goods focused largely on consumer products.
Finally, we’ll finish the week with the release of the University of Michigan consumer confidence survey, which is expected to show a slight decline from 93.2 in September to 92 in October. These numbers are down sharply from a recent high of 100 in May. High levels of consumer confidence have supported the strong growth in consumer spending we’ve experienced in the past two quarters, so this projected drop is worth monitoring. It could indicate that consumers are losing confidence in the economic expansion and may be less willing to spend freely going forward.
That’s it for this week—thanks for reading!