Federal Reserve Continues Buying Pace

The Federal Reserve will not scale back its bond buying program following the Federal Open Market Committee’s (FOMC) October meeting. The Federal Reserve will continue purchasing $85 billion per month in bond purchases.

Markets had largely expected the Federal Reserve postpone tapering its bond purchases following the government shutdown and lagging data.

This leaves one more FOMC meeting with a press conference while Bernanke is still Chairman. If he wants to begin tapering under his watch, he will likely do so at the December meeting.

The Fed’s statement suggested that the economy expands at a “moderate pace,” consistent with the previous release that labeled expansion as "moderate." They did note while the labor market has further improved in recent months, the unemployment rate remains elevated and fiscal policy constrained growth.

The FOMC stated in its release that, “Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth.”

The Fed also held interest rates at their current near-zero levels as expected.

Read the full FOMC statement below.  

Consumer Prices Rose 0.2% in September

The consumer price index increased 0.2% in September as energy prices rebounded from August. Food prices remained the same from the previous month. The year-ago change dipped to 1.2%, on par with the slowest since the recession ended. The headline index is on par with growth seen the last few months and below the 2.0% year over year growth goals of the Federal Reserve.

Core prices continue to grow at a consistent pace between 0.1% and 0.2%. September’s core prices were 0.1% higher than the previous month. Goods prices declined slightly by 0.1% while services increased by 0.2%. Goods declined 0.1% from year ago levels, while core CPI generally improved 1.7%.

Energy prices recovered in September, increasing 0.8% from the month prior. Compared to year ago levels, energy prices are 3.1% lower.

The report highlights that while the economy is improving, price improvement will remain at slower growth paces for the near future.

Read the BLS report.

ADP Employment Falls Below Expectations Again

According to ADP’s National Employment Report, the private sector added 130,000 jobs in October. The growth in October continues a 4 month declining trend, and the smallest growth since April. The government shutdown in October likely hampered private sector job growth. Gains were driven by both the goods producing and services sector.

The service sector produced 107,000 jobs in October, a big decline from the previous months. The last 6 month average is 138,000 jobs per month.

The goods producing sector improved by 24,000 jobs in October, an increase from the 16,000 jobs the month prior. Manufacturing contributed 5,000 jobs to the gain, after losing jobs in September.

Read the ADP release.

Retail Sales Decline 0.1% in September

Retail sales dropped 0.1% in September, largely due to declining car sales. It was the first decline since March. Year-over-year growth grew 3.2%. In the lead up to the government shutdown and debt ceiling, it’s not surprising that consumers were conservative, and similar weak trends are anticipated for October.

Core sales improved 0.4%. The strength in September’s report came from food and beverage, which improved 0.9% over the month. The introduction of the new iPhone 5 minimally impacted markets, below expectations.

Car sales fell sharply, declining 2.2% following modest 0.7% gains in August.

Read the Census report.

Producer Prices Shrank 0.1% in September

Producer prices shrank 0.1% in September, following 4 months of positive or stagnant growth. The index declined for the first time since April. The slight decline was due to a large drop in food prices, which more than offset any gains in energy and core finished good prices. Producer prices are now 0.3% above year ago levels, the weakest year-over-year growth since September 2009.

Prices for finished and intermediate core goods each improved 0.1% in September. Crude goods dropped 1.0% and 6.4% from year ago levels, in large part due to food prices and continued a declining trend. With little signs of future acceleration, near term consumer prices will remain at or near current levels, well within the Federal Reserve’s 2.0% inflation target.

Read the BLS report.

Home Prices Continued Improvements in August

According to the Case-Shiller’s 20-city index, existing home prices rose 1.3% in August. Gains from one year ago accelerated, with the 20-city index rising 12.8% above its August 2012 pace. August’s year-ago gain is the strongest since early 2006. The 10-city index improved at the same pace as the 20-city index, growing 1.3% over the month and 12.8% from year ago levels.

Continuing a trend since January, all metro regions reported gains on a year-ago basis. The growth isn’t consistent across the board, ranging from a 3.6% year-over-year price gain in New York to a 29.2% increase in Las Vegas.

The 20-city index still remains 20.3% below its peak in July 2006.

Read the Standard and Poor release.

Industrial Production Increased in September

Industrial production increased 0.6% in September, meeting expectations. It was the strongest monthly gain since February. September’s report included minor revisions to the previous 5 month’s gains.

Manufacturing output rose 0.1%, which was weak compared to the 0.5% growth seen the month prior. Motor vehicles and parts contributed heavily to the gain, increasing 2.0%. While durable goods increased 0.5%, nondurable goods declined 0.3%.

Mining growth improved 0.2%, the slowest pace since March. Utilities growth was strong, increasing 4.4%, the strongest growth since March.

The capacity utilization ratio increased to 78.3 from a revised 77.9.

Read the Federal Reserve release.

Consumer Confidence Dropped Sharply In October

Consumer confidence declined sharply in October, following a large drop in September, according to the University of Michigan’s Consumer Sentiment. The drop in consumer sentiment was driven by the government shutdown and debt ceiling uncertainty. The index in October was 73.2 a drop of 4.3 index points from September. The October level is the lowest value reported in 2013.

The present conditions portion of the index declined 2.7 index points to 89.9. Future expectations, similar to last month, really took a hit from Capitol Hill’s uncertainty, dropping 5.3 points to 62.5.

Inflationary expectations declined slightly from the previous month. The 1-year expectation dropped from 3.3% in September to 3.0% in October. The 5-year expectation also dropped to 2.8%.

U.S. Trade Gap Widened Slightly in August

The U.S. foreign trade deficit grew by 1% in August to $38.8 billion. August’s report also revised down July’s deficit to $38.6 billion. The increase in the deficit is due solely to small decline in exports.

Exports shrank 0.1% to $189.2 billion while imports remained constant at $228.0 billion. The nonpetroleum and service industries contributed to the slight rise in the trade deficit, while the petroleum deficit eased.

Notably, trade along the Pacific Rim was active in August, in comparison with July. Exports in August rose to $32.2 billion, while imports declined $67.4 billion.

The real goods deficit, which is important to calculate GDP, remained constant at $47.3 billion from the previous month.

Read the Census report.

Economy Added 148,000 Jobs as Unemployment Rate Dropped to 7.2%

The economy added just 148,000 jobs in September, below expectations. The unemployment rate dropped to 7.2%, and since the labor force participation rate remained constant at 63.2%, it means the job gains were real, instead of individuals leaving the labor force.

September’s report also includes revisions to the previous months. The change in total nonfarm payroll employment for July was revised from 104,000 to 89,000 jobs, and the change for August was revised from 169,000 to 193,000 jobs. With these revisions, employment gains in July and August combined were 9,000 more than previously reported.

The majority of the slowing seen in September was due to weaker growth in the services industries, specifically the education and health services and leisure and hospitality sectors.

Job creation in the construction sector increased 20,000 following a 2,000 increase the previous month.

Next month’s job report is likely to show less growth due to the government shutdown in October. The weaker than expected report may postpone when the FOMC decides to start tapering.

Read the BLS report.

Existing Home Sales Declined 1.9% in September

According to the National Association of Realtors, existing home sales declined 1.9% in September to an annual pace of 5.29 million units. August’s pace was revised down to 5.39, the same pace as July. However, September’s pace is coming off of the highest level in almost four years in July and August.

The details of the report were mixed. All regions declined, but the West, which increased 1.6% from the previous month. The Midwest reported the largest decline at 5.3%. All regions posted gains from year ago levels.

NAR chief economist Lawrence Yun attributed the decline to, “Expected rising mortgage interest rates [which] will further lower affordability in upcoming months. Next month we may see some delays associated with the government shutdown.”

Housing inventory rose slightly from 4.9 months in August to 5.0 months in September.

The national median existing –home price was $199,200, below the average vales the previous two months, but still 11.7% above year ago levels.

Read the NAR release.

Fed’s Beige Book Reports Modest to Moderate Expansion

The Federal Reserve’s beige book indicated that economic activity expanded at a modest to moderate pace in most districts. Growth slowed in the Philadelphia, Richmond, Chicago and Kansas City districts. The report, which covered most of September and early October, included the beginning of the federal government shutdown and debt ceiling debate. As a result, there was an unsurprising increase in uncertainty. The districts remained cautiously optimistic in their future outlook.

Eight out of the twelve districts reported similar growth rates to the previous report. Consumer spending and travel activity expanded in most districts. The report also said, “Business spending and payrolls grew in many Districts. Demand for nonfinancial services rose, and manufacturing activity also expanded modestly.”

Due to the shutdown, price and wage pressures, “were limited.” Moreover, “Financial conditions were little changed on balance, with lending activity remaining modest in most Districts,” which means the markets in early October anticipated a last minute debt ceiling deal.

Housing and auto continued to recover and support the economy. While nonresidential construction expanded at a slower rate, residential and commercial real estate largely continued to improve.

There were mixed reports on agriculture, with excess precipitation and drought both impacting the sector. Energy and mining activity expanded or maintained high levels, with the exception of the coal industry in the eastern half of the nation.

Read the report.

Government Uncertainty Caused Fitch Ratings to Put U.S. on “Rating Watch Negative”

Fitch Ratings put the U.S. on “rating watch negative,” a result of the political uncertainty and turmoil surrounding the debt ceiling increase. According to Fitch’s press release, it is still confident the debt ceiling will eventually be raised.

"This action by Fitch is not about ability to pay,'' said Cumberland Advisors chief investment officer David Kotok. "It is about governance and our willingness to pay. In that category the United States has reached the brink of political failure.''

Read the Fitch Rating's press release.

Homebuilder Sentiment Declines Amidst Political Turmoil

Building confidence fell two points in October to 55, according to the NAHB. While optimism remains above 50, pent-up demand still exists across the country. The increased mortgage rates along with the economic uncertainty stemming from Washington caused builders and buyers to become more hesitant. The decrease in homebuilder sentiment is a concrete example of the economic toll the shutdown and possible debt ceiling breach causes.

The details of the report were not promising either, as all three components dropped 2 points. The component gauging current sales conditions, sales expectations in the next six months and traffic of prospective buyers declined to 58, 62 and 44 respectively.

Due to the lack of government data released during the shutdown, NAHB offered their own housing starts estimates. NAHB reports that housing starts will be between 875,000 and 900,000 units in September, on par with gains from the previous month. Furthermore, the seasonally adjusted annual rate of construction for single-family homes was between 620,000 and 630,000 units in September. The pace of construction of multifamily units was an additional 255,000 to 270,000. The Fed meeting in September also offered additional relief that interest rates would remain low in the near future.

Read the NAHB release.

Unemployment Initial Claims Jumped Last Week

In the week ending October 5, the advance figure for seasonally adjusted initial claims jumped to 374,000, a 21% increase from the previous week. However, it’s still low compared to 2013 trends, which has a year to date average of 344,231claims.

The unemployment initial claims, conducted by the Bureau of Labor Statistics (BLS), measures the number of initial unemployment claims under state programs. These are fairly volatile numbers, which is why more attention is paid to the 4-week moving average. Generally a four-week moving average below 400,000 represents an improving labor market. Despite the large jump in claims, they are still well below the 400,000 mark.

Due to the sharp increase, the 4-week moving average increased by 20,000 to 325,000. Since the government shutdown prevented a jobs report release last Friday, the increased claims shed light on what could be weaker job growth in the fall.

According to the Labor Department, the jump reflects roughly 15,000 private-sector layoffs related to the partial government shutdown. Federal furloughed workers are not eligible for benefits if they receive back pay, which was approved.

The Federal Reserve is likely looking at the report too as it decides when to begin tapering.

Read the BLS release.

ABA to Congress: U.S. Must Meet Its Financial Obligations

With the U.S. economy and our nation’s honor at stake, our leaders must do what it takes to raise the debt ceiling, American Bankers Association President and CEO Frank Keating testified today before the Senate Committee on Banking, Housing and Urban Affairs.

In his testimony, Keating emphasized the importance of our country meeting its obligations and not creating any uncertainty about whether we will do so “on time, every time.”

Keating testified that ordinary Americans would bear the brunt of the damage if the United State defaults for the first time in history. The Bipartisan Policy Center, of which Keating is a board member, estimated that the mere prospect of approaching the debt limit in 2011 cost taxpayers nearly $20 billion as nervous investors demanded higher interest on U.S. Treasury Bonds to account for the risk of default. But an actual default would have much more dire consequences, Keating testified.

“If our nation defaults on its nearly $17 trillion in debt, the harm is likely to be measured in hundreds of billions of dollars,” Keating said. “Even the slightest uptick in Treasury rates would cascade through the economy. It would raise the cost for taxpayers to service our country’s debt and would raise the cost of borrowing for businesses, meaning job losses and price increases.”

Read the full press release. Read a full copy of Keating's testimony.

Small Business Optimism Dipped in September

The NFIB’s Small Business Optimism Index shrank by 0.2 points in September to 93.9. September’s drop was largely due to a significant increase in future business condition pessimism. Given the subsequent government shutdown and uncertain fiscal climate, the trend should continue in October.

Financing continues to be the least cited factor holding back small business conditions, dropping to 2% of respondents citing it as the single most important problem. Government requirement and red tape took over the top spot as the most commonly cited problem, increasing to 22% of respondents, up 1% from the month prior. Taxes were the second most commonly cited problem, with 21% of respondents reporting it as their top concern.

The details of the report were mixed. Four Index components improved, four fell and two were unchanged from the previous month. Most components saw small changes, however expected business conditions in 6 months took a massive hit, losing 8 points. It’s too early to tell if the drop was a result of the looming government shutdown.

Job creation plans dropped 1 point from August, settling at 9%. However, August’s levels were the highest seen since 2007, and the drop is modest. Moreover, job reduction plans for small businesses is lower in September, as 11% reported reducing employment, the third lowest reading since October 2007.

Read the NFIB report.

Consumer Delinquencies Rose Slightly in the Second Quarter

Consumer delinquencies rose slightly across most loan categories in the second quarter, but remain significantly below their 15-year average, according to results from the American Bankers Association’s Consumer Credit Delinquency Bulletin.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, rose 6 basis points to 1.76 percent of all accounts in the second quarter. Despite this increase, the ratio is still 25 percent below the 15-year average of 2.36 percent. The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

James Chessen, ABA’s chief economist, attributed the slight uptick in delinquencies to a sluggish economy and a limit to how much consumers can improve their financial positions.

“A leveling off in delinquency rates was inevitable after a four-year downward trend that saw consumers reduce debt and dramatically improve their personal balance sheets,” Chessen said. “The good news is that delinquency rates remain near historical lows and are unlikely to spike in the near future.”

Chessen believes that consumers may not be able to reduce leverage much beyond what they’ve already achieved.

“Consumers may find it difficult to further improve their financial positions after years of working to pay down debt,” Chessen said. “Stagnant incomes and a weak job market aren’t going to help change that trend.”

Chessen noted that delinquencies could face an uphill climb as the economy struggles to reach its full potential.

“Until the lackluster economy shifts into a higher gear, it is unlikely that delinquencies will move lower in the near term,” Chessen said. “It’s possible that delinquency rates will remain stuck in neutral for the foreseeable future.”

See the economic charts.

Consumer Credit Grew by $13.6 billion in August

Consumer credit grew by $13.6 billion in August, the fastest pace in three months and above expectations. August’s gain was solely due to non-revolving credit, as revolving credit shrank. Consumer credit is 5.4% above year ago levels.

Revolving credit shrank by $0.9 billion in August, the third month of decline. Credit card spending still remains at depressed levels as customers remain hesitant to take on large levels of credit card debt. With exceptionally low interest rates, customers are shying away from the higher interest fees associated with credit cards.

Non-revolving credit balances continued to grow, increasing $14.5 billion from the previous month, an 8.3% increase. Increasing vehicle sales and swelling student loan demand continues to drive the increases in non-revolving credit. The pace of non-revolving credit may start to slow in the coming months as the consumer digests the slower economic growth seen in the second half of the year.

Read the Federal Reserve release.

Treasury Warns of Debt Default Risks

In a published article released this week, the Department of Treasury warns of the risks associated with defaulting on its debt.

“The United States has never defaulted on its obligations, and the U. S. dollar and Treasury securities are at the center of the international financial system. A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

Copy of the Treasury report.

ISM Nonmanufacturing Index Dipped in September

The ISM nonmanufacturing index dipped in September to 54.4, from a post-recession high of 58.6 the previous month. The drop follows two months of large gains, and is still above second quarter levels. However, the drop is the largest since late 2008. Despite the decline, September’s reading remains strong, with any reading above 50 representing industry expansion.

The heightened policy uncertainty and forthcoming government shutdown could put more downward pressure in October. The economic cost of the government shutdown continues to grow each additional day of the shutdown, and may have already cost between 0.1 and 0.2 of a percentage point of fourth quarter GDP.

The details of September’s report were mostly weaker in comparison to the past month. The employment index shrank to 52.7, the lowest value in 4 months, and more than offset August’s gains. New orders declined 0.9 to 59.6, and backlogged orders remained constant at 50.5. Business output decreased to 55.1, from 62.2 the previous month.

On a positive note, exports increased by 7.0, which helps the trade deficit.

Read the ISM release.

ADP Employment Weaker than Expectations

The private sector added 166k jobs in September according to ADP’s National Employment Report. September’s growth was in line with gains from the previous two months, but fell short of estimates, which called for a 180k increase. September’s ADP report is particularly important, as we are unlikely to get the BLS’s employment data on time due to the government shutdown.

September’s growth is slightly higher than the previous two months, but only because of downward revisions. The 176k jobs initially reported in August translated to 169k jobs as reported by the BLS.

Due to the government shutdown the BLS will likely be delayed in releasing its monthly Employment Situation report. The Federal Reserve relies heavily on this report to gauge labor market health when formulating its policy. The weak ADP report supports the Federal Reserve’s recent decision not to taper off purchases from its QE3 program.



The service sector continues to drive private sector job growth, adding 147k jobs in September. The goods producing sector continued to make gains, adding 19k jobs.

Read ADP's full report.

Delay in Government Data

Due to the federal government shutdown, federal agencies will not publish data until the shutdown ends. Notably, the jobs report on Friday may be delayed.

ISM Manufacturing Rose in September

The ISM Manufacturing Index rose in September to 56.2, beating expectations. The index is at its highest level since 2011, and is the fourth consecutive month of improvement. With strong readings the past 3 months, the third quarter average is 55.8, 5.6 index points above the second quarter average.

The details of the report were mixed. Production rose to 62.6, although it doesn’t fully offset August’s drop. It’s notable that the production index has remained above 60 for 3 consecutive months, the longest streak since early 2011. Employment also rose to 55.4 from 53.3, signaling strong gains in the labor market. However, new orders declined by 2.7 points to 60.5. All indexes remain in expansionary territory.

Backlogged orders remained below the expansionary threshold of 50, with a recording of 49.5. The gap between new orders and inventories – a proxy for future production – declined to 10.5 points, from 15.7 the previous month.

Read the ISM release.