Last week saw the release of a number of important economic updates, with a focus on international trade, service sector confidence, and the September employment report. Although the employment report showed that hiring continued to slow in September, reports from previous months saw upward revisions that partially offset the slowdown. This will be another busy week for updates, with reports to come on September’s inflation and retail sales, as well as a first look at consumer confidence in October.
Last Week’s News
On Tuesday, the August international trade report was released. The report showed that the trade deficit widened by more than expected during the month. It increased from a upwardly revised $70.3 billion in July to $73.3 billion in August, against calls for a more modest increase to $70.8 billion. This result marks a new record monthly deficit, breaking the previous record of $73.2 billion set in June. The widening of the deficit was caused by a 1.4 percent surge in imports, which was more than enough to offset a 0.5 percent increase in exports. Imports have grown notably throughout the course of the year, driven in large part by high levels of pent-up consumer demand for goods and services in the spring and early summer. Exports have been slower to recover due to tangled supply chains and the uneven nature of the global economic recovery.
Tuesday also saw the release of the ISM Services index for September. This widely followed measure of service sector confidence improved by more than expected, rising from 61.7 in August to 61.9 in September. The calls were for a decline to 59.9. This is a diffusion index, where values above 50 indicate expansion, so the result is a sign of faster growth for the service sector. The service sector accounts for the majority of economic activity in the country, so this result bodes well for overall growth during the month. High levels of pent-up consumer demand continue to support business confidence, and businesses have been attempting to meet this demand through investment and hiring. Business confidence remains well above pre-pandemic levels, which should support business spending throughout the rest of the year. This strong result for September was especially impressive given the headwinds businesses are facing due to rising input costs and labor shortages in some areas.
On Friday, the September employment report was released. During the month, 194,000 jobs were added, a figure down from the upwardly revised 366,000 jobs added in August and well below economist estimates for 500,000 additional jobs. This report, which marks two consecutive months with slowing job growth, represents the fewest jobs added in a month since December 2020. Part of the slowdown was due to a relative lack of local government education hiring, as this sector lost 144,000 jobs during September on a seasonally adjusted basis. The report showed upward revisions to the July and August job numbers, adding 169,000 jobs over those two months. Still, the continued slowdown in hiring in September is concerning, as it could indicate a slowdown in the overall economic recovery. The underlying data was a little more encouraging. The unemployment rate fell from 5.2 percent to 4.8 percent, and average hourly earnings increased by more than expected. That said, the labor force participation rate fell, so the improvement for the unemployment rate was partially due to folks leaving the work force. Overall, this report was relatively disappointing. It signals that, despite declining public health risks, the labor market recovery continued to slow during the month.
What to Look Forward To
Wednesday will see the release of the September Consumer Price Index. This measure of consumer inflation is expected to show a 0.3 percent increase during the month and a 5.3 percent increase year-over-year. If estimates hold, the report would be in line with August’s headline consumer inflation growth. It would also represent a slowdown in month-over-month price growth when compared with data from earlier in the summer. Core consumer prices, which strip out the impact of volatile food and energy prices, are set to increase by 0.2 percent in September and 4.1 percent year-over-year. Throughout the year, consumer prices have seen upward pressure, as tangled supply chains and limited business inventories combined with pent-up consumer demand to drive up prices. Although the Fed contends that much of the recent inflationary pressure will prove transitory, this monthly release will continue to be closely monitored monthly given rising concerns regarding the inflationary environment.
Wednesday will also see the release of the FOMC minutes from the Fed’s September meeting. Although no major changes to monetary policy were made at this meeting, the post-meeting press release and Fed Chairman Jerome Powell’s post-meeting press conference indicated that the Fed is considering tapering asset purchases this year. The minutes are expected to give economists a better idea of the timing and pace of the potential tapering efforts, which may be announced as soon as the Fed’s meeting in November. Currently, to provide liquidity for the market, the Fed is purchasing $120 billion a month in Treasury and mortgage-backed securities. With the anticipated taper, however, these supportive measures are set to be reversed in the months ahead as the Fed moves to normalize monetary policy. Given the potential for a taper to cause market volatility, this release will be widely monitored. It provides market participants with an idea of what to expect from the Fed at upcoming meetings.
On Thursday, the September Producer Price Index is set to be released. Producer prices are expected to increase by 0.6 percent during the month, down slightly from the 0.7 percent monthly increase recorded in August. On a year-over-year basis, producer prices are expected to increase by 8.8 percent in September, up from the 8.3 percent annual growth rate seen in August. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.5 percent during the month and 7.1 percent year-over-year. As is the case with consumer prices, producer prices have seen upward pressure this year due to high levels of demand and tangled global supply chains. Producers have also had to contend with increased labor costs over the past few months. The shortage of available workers has led to increased wage growth, pressuring businesses.
On Friday, the September retail sales report is set to be released. Forecasts are for headline retail sales to decline by 0.3 percent during the month, following a better-than-expected 0.7 percent increase in August. Much of the anticipated slowdown is due to slowing auto sales in September. Core retail sales, which strip out the impact of auto and gas sales, are expected to increase by 0.2 percent. If estimates hold, this report would mark two consecutive months with core retail sales growth, signaling that consumers continued to fuel the economic recovery despite lowered confidence in August and September. The total level of sales is well above pre-pandemic levels. Accordingly, any further growth in the months ahead would be a sign that consumers remain willing and able to spend and support the ongoing economic recovery.
Finally, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for October. Confidence should increase modestly to start the month, as the index is expected to rise from 72.8 in September to 73.5 in October. If estimates hold, this survey would mark two consecutive months with improving confidence. Still, it would leave the index well below the post-lockdown high of 88.3 we saw in April. Confidence fell sharply in August due to rising consumer concerns about the pandemic, higher inflation, and a slower economic recovery. While we’ve seen the public health risks decline since August, inflation remains above normal levels and job growth continued to slow in September. Given these headwinds, it is unlikely we will see a swift boost in confidence until further progress is made in getting people back to work and reining in inflationary pressure.
That’s it this week—thanks for reading!