Recent data support cautious Fed on rates

When will the Federal Reserve decide the moment is right to raise interest rates?

When will the Federal Reserve decide the moment is right to raise interest rates?

Last week the central bank’s Federal Open Market Committee, though with three of 10 members dissenting, decided once again that the U.S. economy is not showing enough sustained strength to justify increasing the federal funds rate.

And if the job, production, inflation and consumer sentiment numbers the Fed panel saw before the week started did not persuade them to act, nothing that arrived just before or after their two-day meeting is likely to change their minds.

As if echoing the Fed’s decision, two key reports on the housing market and the Conference Board’s Leading Economic Index showed how vulnerable the economy continues to be.

On Sept. 20 the Commerce Department said housing starts in August were 5.8 percent below the July pace, at a seasonally adjusted annual rate of 1.14 million, and 0.9 percent lower than they were a year earlier.

Bloomberg said a sharp decline in the South – 14.8 percent, to an annual pace of 543,000 -- hurt the national results. All other regions of the country showed gains.

“It looks like housing is taking a bit of a breather in the short term,” Jacob Oubina, senior U.S. economist at RBC Capital Markets LLC in New York, told Bloomberg. “I don’t think it’s anything to be overly concerned about, but I don’t think housing’s going to be as big a contribution” to growth in the second half of the year.

Building permits fell 0.4 percent to an annualized rate of 1.14 million.

“You don’t get a continued firming in starts if permits have been tailing off for a few months now,” Oubina said

On Thursday, the National Association of Realtors said home resales fell 0.9 percent in August, to an annual rate of 5.33 million. The decline surprised economists that Reuters polled. They expected a 1.1 percent increase.

The NAR said higher home prices and an insufficient inventory of homes for sale kept deals down despite mortgage rates that are near record lows.

"It's very concerning to see that inventory conditions not only show no signs of improving, but have actually worsened in recent months from their already suppressed levels a year ago," Lawrence Yun, the NAR’s chief economist, said in a statement.

"While recent data from the U.S. Census Bureau shows that household incomes rose strongly last year, home prices are still outpacing incomes in many metro areas because of the persistent shortage of new and existing homes for sale. Without more supply, the U.S. homeownership rate will remain near 50-year lows."

On Thursday The Conference Board said its Leading Economic Index declined 0.2 percent in August after increases in June and July.

“While the U.S. LEI declined in August, its trend still points to moderate economic growth in the months ahead,” Ataman Ozyildirim, director of business cycles and growth research at The Conference Board, said in a statement.

“Although strengths and weaknesses among the leading indicators are roughly balanced, positive contributions from the financial indicators were more than offset by weakening of non-financial indicators, such as leading indicators of labor markets, suggesting some risks to growth persist.”

Today The Conference Board will issue its Consumer Confidence Index for August. Economists’ median forecast is for a decline, to 98.6, from a 101.1 reading the month before.

The University of Michigan’s Consumer Sentiment Index, which is due out Friday, is forecast to be essentially flat, at 90.0, with a mid-month reading of 89.8.

Durable goods orders for August, set for release Wednesday by the Census Bureau, are expected to show a decline of 1.5 percent after a 4.4 percent gain in July. Durable goods are long-lasting products such as washing machines, refrigerators and other major appliances.

Friday will be an important day to gauge the consumer’s mood. Reports for August are due on personal income, consumer spending and core inflation, all of which are expected to have risen 0.2 percent.

Entering this week, the financial markets already had good news in the form of the Fed’s rate decision.

"The Fed statement just reinforces our view that this is going to be a very long business cycle," U.S. Trust macro strategist Jonathan Kozy told CNBC.

Kozy said the Fed's interest-rate forecast and its view that the economy is growing slowly has become more in sync with the way the markets see the economy.

"I think investors should consider we are in the sixth or seventh inning of a nine-inning game, so there's still room to run in terms of the business cycle," he added.


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