The markets dropped in October, but did not fall as much as is typical. October is generally a volatile month that produces the largest average monthly losses of the year. This year the markets also responded to a series of revelations that created further unease about the November presidential election, as well as data that suggested that an increase in interest rates could soon be a reality. The DOW shed 0.9% for the month to close at 18,142, the NASDAQ lost 2.3% to close at 5,189 and the S&P, the index most closely followed by economists, fell 1.9% to 2,126.
CONSUMER CONFIDENCE DROPS TO 98.6
The New-York based Conference Board’s Consumer Confidence Index dropped to 98.6 in October after rising to a downwardly revised 103.5 in September as consumers were generally less optimistic than they had been in September. The Present Situation Index dropped to 120.6 from a downwardly revised 127.9. The Expectations Index fell to 83.9 from a downwardly revised 87.2. The Conference Board said that consumers’ assessment of both current conditions and the short-term outlook softened, but expectations regarding income prospects in the coming months were relatively unchanged. Overall, the sentiment is that the economy will continue to expand in the near-term, but at a moderate pace. Economists say a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
CONSUMER SPENDING RISES 0.5%
Consumer spending rose a solid 0.5% in September after falling 0.1% in August, beating economists’ expectations. Core consumer spending, which is adjusted for inflation, rose 0.3% after falling 0.2% in August. Consumer spending was lifted by a 1.3% surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.3%. Personal income rose 0.3% in September after rising 0.2% in August. Wages and salaries advanced 0.3% after edging up 0.1% in August. Savings fell to $797.8 billion from $820.5 billion in August. The personal consumption expenditures price index (PCE), the inflation measure preferred by the Federal Reserve, rose 0.1% after rising 0.2% in August. The PCE index has risen 1.2% over the past year, the biggest gain since November 2014, but remains well below the Fed's 2% target. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES RISE 0.3%
The Consumer Price Index (CPI) rose 0.3% in September after rising 0.2% in August and was up 1.5% from September 2015. Core prices, which strip out volatile food and energy costs, rose 0.1% in September after rising 0.3% in August and were up 2.2% from September 2015. Core inflation has been in a range between 2.1% and 2.3% since December of last year. This stabilization in core inflation supports the Fed’s cautious approach to raising interest rates. Since 2014 inflation has been held down by cheap oil and gasoline and a strong dollar; this year oil prices have been creeping higher and the dollar has weakened. Much of the increase in prices came from a 5.8% rise in gasoline prices and a 0.4% increase in airline fares and car insurance.
UNEMPLOYMENT DROPS TO 4.9%
The unemployment rate fell to 4.9% in October after rising to 5.0% in September and the economy added 161,000 new jobs, below economists’ expectations. However, job gains for September and August were revised up by a total of 44,000. The average hourly earnings rate rose 0.4% for the month, and was up 2.8% over the past 12 months, the fastest growth since 2009. Construction added 11,000 jobs in October, and retail shed 1,100 jobs. Economists and policy makers generally agree that the economy is near to full employment. Higher wages are starting to encourage more Americans to quit their jobs with the confidence they’ll find other work that pays more. The number of people who quit as a share of the unemployed rose to 12.1%in October, the highest since February 2007. The job report contained nothing that would cause the Fed to delay a much-anticipated increase in interest rates in December.
DURABLE GOODS ORDERS DROP 0.1%
New orders for durable goods dropped 0.1% in September to $227.3 billion after rising an upwardly revised 0.3% in August and were down 0.4% from September 2015. Analysts had expected durable goods orders to increase 0.1%. Orders for non-defense capital goods excluding aircraft, a category that serves as a proxy for business investment spending, rose 1.5% in September after rising 0.6% in August. Core orders ex transportation were up 0.2% after falling 0.4% in August. Shipments of core capital goods, which factor into GDP calculations for business spending, rose 2.2% in September after three consecutive months of declines. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI FALLS TO 50.6
The Chicago PMI fell to 50.6 in October after rising to 54.2 in September. It was the lowest level for the index since May. The decline was led by a slowdown in production, which fell 5.4 points to 54.4. New Orders fell to the lowest level since May. Order Backlogs increased slightly but remained below 50, the level that indicates growth. Supplier Deliveries fell to the lowest level since June. Inventories were relatively stable, with the indicator rising just above 50. Prices Paid rose to the highest level since November 2014, following a recovery in oil prices, and panelists also reported higher prices for steel and plastic products.
WHOLESALE PRICES RISE 0.3%
The Producer Price Index (PPI) rose 0.3% in September after being essentially flat in August and was up 0.7% from September 2015. The core PPI, which excludes food, energy and trade services, rose 0.3% in September after rising 0.1% in August and was up 1.5% in the 12 months through September. Rising food and energy prices contributed to the increase. The PPI for inputs to construction was up 1.6% year-over-year for single-family and 1.4% for multifamily.
Q3 GDP GROWS 2.9%
GDP grew 2.9% in the third quarter, after rising 1.4% in the second quarter. It was the fastest pace since 2014. The economy grew 0.8% in the first quarter. The growth largely reflected a buildup of business inventories and what could be a one-time jump in net exports due to better soybean shipments, according to the Wall Street Journal. Morgan Stanley reported that the reality is not as encouraging as it appears, because there were slower gains in consumer spending, sluggish business investments and lackluster housing market growth. Consumer spending increased 2.1%, down from 4.3% in the second quarter, but still a driver of growth. Consumer spending accounts for 70% of economic activity. Q3 consumer prices remained subdued, with overall prices rising 1.4% and core PCE prices up 1.7%, still below the Fed’s target of a 2% increase. The personal savings rate remained at 5.7%. Analysts say the data suggests the economy is unlikely to beat 2015’s growth of 2.6%, which was the best annual growth since the economy began expanding. The economy has not grown more than 3% since 2005. The nonpartisan Congressional Budget Office projects GDP will grow about 2% annually through 2026.
JOB OPENINGS FALL
Job openings fell 6.9% in August, or by about 388,000 jobs, to 5.4 million from more than 5.8 million in July, according to the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS. It was the fewest number of jobs available in eight months, but still more openings than in August 2015. Job growth picked up over the summer but has moderated this fall as the labor market has tightened. Economists say that eventually that will lead to a shortage of workers. Hires reached 5.2 million in August, little changed from July. Separations were 5 million and quits remained mostly unchanged at nearly 3 million. Nearly two-thirds of job separations are people voluntarily quitting rather than getting laid off or fired. There were 1.6 million layoffs and discharges in August, little changed from July, and still near pre-recession lows. The number of job openings has consistently exceeded the number of hires. Quits are typically voluntary separations, and an increase in quits generally indicates that people are more confident about their ability to find another job. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
SUPPORT FOR RATE INCREASE GROWING
At the September policy meeting the majority of voting members voted for the sixth consecutive meeting to leave interest rates at near zero. Members felt that keeping rates where they are was in the best interests of the domestic economy. The decision was based on several factors, including sub-par inflation and a worse-than-expected August jobs report from the U.S. Department of Labor. Members cautioned that an increase may well come before the end of the year. A vast majority of policy watchers expect that increase to come after the November elections, most likely during the Fed's mid-December meeting. Minutes showed that the committee saw positive indicators as well, including improved labor market conditions and faster GDP growth in the third quarter than in the entire first half of 2016. Some analysts think that the Fed has already waited too long to raise rates. Unexpected events, including the United Kingdom's surprise departure from the European Union, derailed the original plan to raise rates earlier this year. Three of the FOMC's ten voting members voted for an increase at the last meeting; previously there has been only one consistent dissenter, Kansas City Federal Reserve President Esther George.
IMF CUTS U.S. GROWTH FORECAST
The International Monetary Fund cut its forecast for U.S. economic growth this year from 2.2% to 1.6%. Federal Reserve policymakers last month forecast the U.S. economy would grow 1.8% this year and 2% in 2017. The IMF says that stagnation threatens the global economy. Growth could decline further if an economic downturn triggers opposition to trade and immigration, the IMF says. The U.S. economy expanded at just a 1.1% annual rate from January through June. Economists expect growth to rebound in the second half of the year. The IMF predicted that global economic output would pick up slightly next year, expanding at a 3.4% pace, boosted by recoveries in Russia and Brazil. China’s economy, the world’s second-largest after the U.S, is expected to continue to slow following 6.9% growth last year. The IMF forecast a 6.6% expansion this year and 6.2% next year for China.
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