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Is It Too Early to Care About 2023?

The upcoming week’s key events are concentrated into the middle of the week, with Wednesday’s FOMC meeting the highlight.

While it is doubtful that the meeting will produce anything earth-shattering, it should confirm the shift in attention toward improving the employment situation and supporting the economic recovery rather than worrying about inflation bubbling up.

As usual, Federal Reserve Chairman Jerome Powell’s press conference after the meeting will get the most attention as he seeks to clarify the points of the post-meeting statement.

The FOMC’s quarterly Summary of Economic Projections will also be released with the statement. In their previous SEP release, the FOMC said it plans to keep rates near zero though 2022, the furthest out timeframe they offered at that time.

In September, the projections are usually extended out for an additional year, meaning the outlook for rates and economic conditions for 2023 will be introduced. The big question – will the FOMC see the need to keep rates near zero for another year, or will they signal that the year could see the start of retightening?

It will also be interesting to see if the members decide to ratchet up or down their expectations for economic growth, prices, and unemployment, particularly for 2020 and 2021, considering recent data and the resurgence of COVID-19 cases.

Northeast manufacturing due for a rebound

National manufacturing conditions improved further in August, preceded by faster growth in most of the regions. Yet the Empire State and Philadelphia Fed regions were not among those posting index gains last month despite seeing their COVID cases fall sharply.

The Empire State reading to be released on Tuesday and the Philadelphia Fed index to be released on Thursday are expected to rebound in September from their August dips, suggesting more widespread expansion.

Other September regional conditions data will be released the following week.

Industrial production for August will be published on Tuesday and should include a fourth straight increase in manufacturing production based on the national ISM data. Motor vehicle production will post another increase, though perhaps a smaller one due to a decline in sales in July.

Temperatures were again above average in August, boosting air conditioner usage across the country, particularly in areas when increased COVID cases have convinced more people to stay home.

While manufacturing and utilities production should add to the headline number, the mining sector remains the uncertain factor. A small July gain followed five straight declines and the weekly rig data, while showing some stabilisation, still points to a severe lack of capacity.

Back-to-school sales continue, but July took some of the steam

Retail sales have increased in each of the last three months, but at a declining rate. The July data showed a drop in motor vehicle sales, but sharp gains in several other sectors such as electronics and clothing stores. Those gains likely reflect early back-to-school shopping that would normally have peaked in August.

As a result, motor vehicle sales are expected to rebound in August based on the industry data, but the other components in the report will be more mixed than in July. Distance learning and telework have changed some of the dynamic, with the usual clothing and backpack sales joined by gains in furniture and laptops.

While it is likely that apparel spending will post another increase in Wednesday’s August data, the gain is likely to slow from the 5.7% rise in the previous month and June’s 98.8% surge. The same is likely true for electronics spending, which rose by 22.9% in July. Not only should demand for these two categories be diminished by the strong gains in July, but additionally back-to-school sales lowered the price per item.

However, furniture sales should follow up their flat July reading with a solid August gain, as parents look to add more workspace for themselves and their students.

Gasoline station sales surged in June and July, but should pull back in August. Seasonal factors expect demand for gasoline to rise in August, especially at the end of the month as drivers try to enjoy the last bits of summer.

However, this year school started early for several students and even those that had a delay until after Labor Day were unlikely to travel too far. A further negative for gasoline station sales is exceptionally low pump prices. Consumer gasoline prices rose by 2.0% in August, a much smaller increase than in the previous two months. Additionally, unadjusted gasoline prices, the ones experienced by consumers at the pump, were flat in the month.

Housing sector remains bullet proof thanks to low rates

Mortgage rates show no signs of rising substantially, based on the weekly MBA data. The impact on the housing sector of record low mortgage rates is like throwing gasoline on a fire.

Home building surged in July, with both housing starts and building permits posting double-digit gains. While it’s unlikely the magnitude of these increases will be repeated, and may even slow in Thursday’s data for August, the pace of home construction has more than recouped their losses during the COVID shutdown and even stands well ahead of their year-ago levels.

Ahead of the Thursday release, the NAHB’s September housing market index will be released on Wednesday. After rising to 78 in August from 72 in July and 58 in June, the index is now ahead of its pre-COVID level. Based on the MBA data, it’s likely the NAHB’s reading will rise further in September.

Unemployment claims slipping as benefits run out

The jobless claims data could become more complicated very soon. Initial claims should remain near their new adjusted level of around 800,000, as new layoffs continue to support filings.

The level for the September 12 week could post a small decline, but that would have more to do with the Labor Day holiday than a slowdown in dismissals. New claims are not processed on holidays. If it is just a holiday effect, the level of initial claims will rebound in the following week.

While initial claims should remain elevated, the future is not as clear for continuing claims. The number of people receiving benefits has been on a downward trend even as initial claims have been elevated.

The simplest explanation is that displaced workers are returning to their former jobs. The more complicated reason is that workers are running out of benefits. The CARES act extended benefits by 13 weeks, even allowing those that had exhausted benefits to reapply and get an extra three months of payments.

The result is that many former filers have run out of time, or soon will be. And those that lost their jobs at the very start of the shutdowns and live in states that normally provide only three months of benefits are coming to the end of their extended six-month period.

Unless Congress and the White House agree to a further extension soon, which appears unlikely, continuing claims should continue to decline.

Sentiment to slip further on increased uncertainty

Even as unemployment benefits were substantially reduced at the end of July, COVID cases started to rise, and the election season rhetoric began to simmer, consumer sentiment managed a small increase in August.

Based on the September IBD index released earlier this week, however, the situation deteriorated in early September. Confidence about government economic policies and leadership were at their lowest points in well over two years, while financial stress remains high.

The preliminary Michigan index for September to be released on Friday is likely to show a similar outcome after rising in the previous month. Low mortgage rates and gasoline prices are usually positives for sentiment, but the noise coming from the other issues of the day is even louder.

Business inventories steady in July as sales surge

Following this Thursday’s release of the July wholesale data, the stage is set for the business inventory and sales data on Wednesday. The pattern should be a familiar one by now – it’s the same one seen in the past two months.

July business inventories are on track to rise by only 0.1%, pending a revision to the 1.2% gain in the retail inventories number from the advance reading. Wholesale inventories fell by 0.3%, while factory inventories fell by 0.5%. This follows large declines in May and June.

Based on data already released, business sales are on track to rise by 3.3%. Retail sales were up 0.8% in July, but are subject to revision with the retail sales release. Wholesale sales and factory shipments both rose by 4.6% in July. The increase in overall sales would follow sharp gains in the previous two months.

US Inventories and Sales to Date
Source: US Commerce Department

Separately, from Extract Analytics, the stock market preview snapshot for the upcoming week shows the recent equity market rebound is morphing into a “bearish flag” consolidation across many major indices.

Kevin Kastner

Julie Ros

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