Fed and consumers reveal differing views on health of economy

Has the Federal Reserve grown more confident in the direction of the U.S. economy than American consumers?
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Has the Federal Reserve grown more confident in the direction of the U.S. economy than American consumers?

Economy watchers could make a case for that point after seeing The Conference Board’s Consumer Confidence Index for October and the University of Michigan’s final Consumer Sentiment Index for October trend downward last week, even as the Fed made a point of saying a rate increase is something it will definitely consider in December.

The central bank’s declaration may only be a nod to the fact that the next meeting is the Fed’s last during a year in which it has repeatedly said it was expecting to raise rates. Or it may be something more.

"In determining whether it will be appropriate to raise the target range at its next meeting, the [Federal Open Market Committee] will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation," the Fed said in a statement after its latest two-day policy meeting last week.

The Fed struggled to convince the business community that a rate increase is imminent after the jobs report the government issued in early October that showed employers hiring less in August and September. But the Fed said last week that even slower hiring was still enough to get it closer to its goal of maximum employment.

Central bank policy-makers also pointed to "solid rates" of growth in consumer spending and business investment. They eliminated a reference from their previous statement that warned a global economic slowdown could sap U.S. economic strength.

Michael Feroli, a former Fed economist now at JPMorgan, told Reuters that the Fed statement was the first since 1999 in which policy-makers pointed to a possible rate increase at the next meeting.

"By specifically referring to that meeting, they are basically testing the waters a bit," said Aneta Markowska, an economist at Societe Generale in New York, told Reuters.

Consumers appear to be of a different mind. Last Tuesday, The Conference Board’s Consumer Confidence Index fell to 97.6 in October from a nine-month high of 102.6 in September.

“Consumers were less positive in their assessment of present-day conditions, in particular the job market, and were moderately less optimistic about the short-term outlook,” The Conference Board director of economic indicators Lynn Franco said in a statement. “Despite the decline, consumers still rate current conditions favorably, but they do not anticipate the economy strengthening much in the near term.”

When The Conference Board spoke, its gauge diverged from the University of Michigan’s preliminary index for October, which was 92.1, five points above the September reading. But last Friday the university’s final index reading of the month was 90, in step with The Conference Board’s reading of a somewhat darker public mood.

“The entire October rebound from September was due to gains in confidence among lower-income households, while confidence among households with incomes in the top third of the income distribution retreated a bit due to concerns about financial markets,” Richard Curtin, the University of Michigan survey’s chief economist, said in a statement.

U.S. household spending helps to drive the economy. Personal spending, which measures outlays on everything from toasters to haircuts, climbed a healthy 0.4 percent in August and 0.3 percent in July. But the pace slowed to 0.1 percent in September from a month earlier, the Commerce Department said Friday.

The Wall Street Journal said economists did not seem overly concerned about the more pessimistic consumer mood.

“On balance, we do not find the late-month dip in sentiment a concern and expect the recent strength in household consumption to prove durable,” Jesse Hurwitz, an economist at Barclays, told the Journal.

Among the data the Fed will watch this week as its mulls its December rate stance are a report today on motor vehicle sales for October (the consensus forecast is for 17.6 million, down from 18.1 million the previous month) and the October jobs report, which will be released Friday.

Forecasters believe the economy added 177,000 jobs in October, compared with 142,000 in September. The nation’s jobless rate is expected to stay at 5.1 percent.

“We think there is going to be a snapback in employment in October and November,” Phil Orlando, chief equity strategist at Federated Investors, told MarketWatch. “If those things fall into place, that puts a December [rate increase] on the table.”

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