After More-Troubling Data, Next Cut Likely to Come in October

While the September jobs report was solid, some disappointing data released earlier last week pushed us to move up our call for the next rate cut to October. Our call remains that there will be only one further rate cut this year, but we now see a higher probability that a cut in December will follow the October rate cut. As we wrote in our note discussing the change in our call, we haven’t substantially revised our outlook. We still see real GDP growth as having slowed to a trend-like pace in the second half of this year. But it had been a close call between October and December for the next rate cut, and some more troubling data were enough to push our call for the next rate cut to October. 

Policymaker Remarks 

Policymakers expressed openness to easing further, should the data warrant it, but they generally avoided sending strong signals about their views on specific upcoming decisions. For example, Evans (9/30) said,  “What we’ve done already might be sufficient, but I’m open-minded to suggestions that we might need more,  at the moment I’m going to be looking at the data.” Likewise, Bostic (10/4) said, “Depending on how things  play out, there may be more we need to do.” Williams (10/2) described the state of the economy as “very  strong” but explained that “the real issue is, where are things going from here, and that’s where it’s a much  more mixed picture.” Clarida (10/3) expressed confidence in the outlook, saying the economy is “in a good place” and “the consumer is in good shape,” but he left the door open to further adjustments in policy. He said, “I don’t think recession risks are particularly elevated under the appropriate monetary policy” (italics our emphasis). He clarified the comment he had made the week before that “U.S. inflation expectations today do reside in a range I consider consistent with our price-stability mandate” (9/26). He explained that he hasn’t upgraded his views on inflation expectations: “I do judge that inflation expectations are in a range consistent  with price stability, but I still believe it’s at the low end of that range.” Powell (10/4) also spoke last week  but said little of note on the economic outlook, repeating that the economy is “in a good place” and saying,  “our job is to keep it there as long as possible.” 

Several policymakers indicated more clearly that they are leaning against another rate cut. George (10/6) said  that to this point the apparent slowdown in growth has been “in line with [her] own outlook,” though she  would consider adjusting policy “should incoming data point to a broadly weaker economy.” Rosengren (10/5)  said, “If the economy grows at 1.7%, consumption continues to be strong, inflation is gradually going up and  the unemployment rate is at 3.5%, I would not see a need for additional accommodation.” Mester (10/4) also had a similar message: “What I am looking for is: Are the weaknesses that we are seeing in trade and manufacturing going to spill over to the consumer. So far, we have not seen that.” 

Kashkari (10/7), unsurprisingly, continued to advocate for easier policy: “As the economy appears to be  showing more risks, business investment is slowing, the global economy is slowing, and inflation continues  to come in below our target, my message is clear.”  

Nowcasts (2019:Q3) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.8% 2.1% 1.9%
New York Fed Staff Nowcast 2.0% 2.1% 2.2%
CNBC/Moody’s Survey 1.7% 2.0% 2.0%

Recent Data 

The market-implied probability of an October rate cut rose last week after some disappointing U.S. and foreign economic data releases, many of them relating to manufacturing and investment. The ISM manufacturing index, which had declined in August to reading below 50.0, fell somewhat further into contractionary territory in September. Construction spending edged up only modestly in August, well short of the consensus expectation. A couple of days later, the ISM non-manufacturing index for September declined more than expected, although to a level still representing expansion. That raised concerns that the weakness in manufacturing and investment maybe extending into services as well. There was also more bad news on investment, with core capital goods orders being revised down somewhat in the August factory goods report. 

While various disappointing data releases led estimates of Q3 real GDP growth to be marked down last week,  the September jobs report provided some reassurance. Payrolls increased 136K in September, and upward revisions to previous months totaled 45K. The unemployment rate declined two tenths, to 3.5%, despite the participation rate remaining at 63.2%. As we wrote in our note on Friday, however, a low unemployment rate is only a concern for the FOMC to the extent it suggests the economy is overheating, and there’s no sign of that. Indeed, the wage data were soft. Average hourly earnings were flat in September, and the 12-month  change declined from 3.2% to 2.9%.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
ISM Manufacturing Sep 47.8 50.0 — 49.1
Construction Spending MoM Aug 0.1% 0.5% 0.0% 0.1%
ISM Non-Manufacturing Index Sep 52.6 55.0 — 56.4
Core Capital Goods Orders MoM Aug F -0.4% — — -0.2%
Core Capital Goods Shipments MoM Aug F 0.3% — — 0.4%
Change in Nonfarm Payrolls Sep 136k 145k 168k 130k
Unemployment Rate Sep 3.5% 3.7% — 3.7%
Average Hourly Earnings MoM Sep 0.0% 0.2% — 0.4%
Average Hourly Earnings YoY Sep 2.9% 3.2% — 3.2%
Average Weekly Hours All Employees Sep 34.4 34.4 — 34.4
Labor Force Participation Rate Sep 63.2% 63.2% — 63.2%
Trade Balance Aug -$54.9b -$54.5b — -$54.0b

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