Q4 Looks a Touch Softer—But Far from a “Material Reassessment”

Powell testified before the Joint Economic Committee and the House Budget Committee last week. His remarks made clear that he was pleased with the results of the October FOMC meeting—both the message presented by the FOMC and the way that message was received—and saw no need for fine-tuning. Of course,  he said that the FOMC would respond accordingly “if developments emerge that cause a material  reassessment of our outlook.” (See our commentary for the full analysis.) 

Powell, President Trump, and Treasury Secretary Mnuchin met on Monday morning (11/18). The Fed issued a press release saying the meeting was held “at the President’s invitation” and that Powell’s remarks “were consistent with” with his recent testimony. Powell stressed that the policy path will “depend entirely” on  incoming information and reiterated that the setting of policy will comply with established law and will be  “based solely on careful, objective and non-political analysis.” The Fed said the meeting covered “the  economy, growth, employment, and inflation” and pointed out that Powell “did not discuss his expectations  for monetary policy.” President Trump described the meeting as “very good [and] cordial” and said, “Everything  was discussed including interest rates, negative interest, low inflation, easing, Dollar strength [and] its effect  on manufacturing, trade with China, E.U. & others, etc.” 

The Federal Reserve Board also issued its semiannual Financial Stability Report last week. Following the  report’s release, Brainard issued a statement calling for “heightened vigilance.” In his testimony earlier in the  week, Powell had said that “the overall level of vulnerabilities facing the financial system has remained at a  moderate level.” 

Policymaker Remarks 

FOMC participants reiterated the core message that it would take a significant reassessment of the outlook to spur action from the FOMC. Williams (11/14) noted, “The economy is in a good place, and monetary policy  is as well.” Clarida (11/14) repeated that he views inflation expectations as being at “the low end of a range  I consider consistent with our price stability mandate.” Daly (11/13) said, “I feel we can stay in that stance  for the period of time it takes to get inflation back up to 2% on a sustainable basis.” Harker would have  preferred fewer cuts, but he said (11/12), “I am of the mind that we stay put for now and see how things  work out.” Kaplan (11/14) thought “Inflation is going to be muted, and it’s given the Fed the luxury of running  the economy hotter than we have in the past.” 

Bullard (11/14) endorsed a somewhat prolonged pause: “The Fed has made a major move in 2019 and now  it makes sense to wait and see how the economy responds during the fourth quarter here and into 2020.”  Kashkari (11/12), a dove, had a benign outlook: “My own outlook for the economy is one of continued growth,  but somewhat cautious growth going forward because there are some risks on the horizon.” Both Kashkari and Bullard were encouraged by the return of the yield curve to a positive slope. 

Nowcasts (2019:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 0.3% 1.0% 1.1%
New York Fed Staff Nowcast 0.4% 0.7% 0.8%
CNBC/Moody’s Survey 1.5% 1.5% 1.5%

Recent Data 

Expectations for Q4 real GDP growth were trimmed after last week’s retail sales and industrial production reports were softer than anticipated. Sales in the retail control group—which includes only those categories of retail sales that are direct inputs into the PCE data—advanced a solid three-tenths in October, right at the consensus. However, the data for August and September was marked down slightly, indicating a weaker trajectory for consumer spending entering the fourth quarter. While it appears that consumer spending has slowed more than thought, it still looks like consumer spending is holding up and can continue to drive real  GDP growth. Industrial production declined 0.8% in October, with only some of that weakness attributable to the GM strike: Excluding motor vehicles and parts, which declined 7.1%, industrial production was down  0.5% and manufacturing was down only 0.1%. 

Last week’s price data were mixed, with the CPI and import price reports for October a bit soft relative to expectations and the PPI data firmer than expected. In any case, price pressures continue to remain “muted,”  as FOMC participants like to say. The data in hand suggest that the 12-month core PCE inflation will likely be reported as 1.7% in October, unchanged from September.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
CPI MoM Oct 0.4% 0.3% — 0.0%
CPI YoY Oct 1.8% 1.7% — 1.7%
Core CPI MoM Oct 0.2% 0.2% — 0.1%
Core CPI YoY Oct 2.3% 2.4% — 2.4%
PPI Final Demand MoM Oct 0.4% 0.3% — -0.3%
PPI Final Demand YoY Oct 1.1% 0.9% — 1.4%
Core PPI MoM Oct 0.3% 0.2% — -0.3%
Core PPI YoY Oct 1.6% 1.5% — 2.0%
Import Price Index MoM Oct -0.5% -0.2% 0.1% 0.2%
Import Price Index YoY Oct -3.0% -2.2% -2.1% -1.6%
Non Petroleum Import Price Index MoM Oct -0.1% 0.0% 0.0% -0.1%
Retail Sales Advance MoM Oct 0.3% 0.2% — -0.3%
Retail Sales Control Group MoM Oct 0.3% 0.3% -0.1% 0.0%
Industrial Production MoM Oct -0.8% -0.4% -0.3% -0.4%
Manufacturing (SIC) Production MoM Oct -0.6% -0.7% — -0.5%
Capacity Utilization Oct 76.7% 77.0% — 77.5%
Business Inventories MoM Sep 0.0% 0.1% -0.1% 0.0%
NAHB Housing Market Index Nov 70 71 — 71

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