The fourth quarter of 2016 started with no big surprises from U.S. economic data. We expect to see a moderate uptick in U.S. real GDP growth in the third and fourth quarter, following weak gains through the first half of the year. The first estimate of third quarter GDP is due out on Friday, October 28.
Labor data at the start of October continues to look good. Initial claims for unemployment insurance remained unchanged at 246,000 for the week ending October 8. Continuing claims decreased by 16,000 to hit 2,046,000 for the week ending October 1. We expect October payroll gains to moderately surpass September’s net gain of 156,000, reaching around 190,000 to 200,000.
Retail sales for September increased by 0.6 percent, boosted by stronger-than-expected auto sales. Ex-autos, retail sales gained 0.5 percent for the month. We look for auto sales to ease in the fourth quarter, from September’s 17.8 million unit rate.
Producer prices for final demand gained 0.3 percent as energy prices increased. Over the previous 12 months, the PPI for final demand is up by just 0.7 percent. The core PPI for final demand (less food and energy) ticked up by 0.2 percent for the month and is up by 1.2 percent over the year.
The National Federation of Independent Business’s Index of Small Business Optimism dipped by 0.3 points to 94.1 in September. Fifty-eight percent of small businesses reported that they were hiring or trying to hire through the month. However, 48 percent reported few or no qualified applicants for their positions. Sales expectations improved for the month.
The minutes from the September 20/21 Federal Open Market Committee show a divergence of opinions within the Fed about labor market conditions. One group of FOMC participants held the view that labor markets could continue to absorb excess slack without stoking inflation. The other camp argued that labor market conditions could tighten well beyond normal levels, leading to inflationary wage gains and potentially requiring a more abrupt increase in the fed funds rate. The minutes reminded us that there were three dissenting voters against the policy announcement of keeping the fed funds rate range unchanged at the September meeting.
We continue to expect that the FOMC will once again vote to keep the fed funds rate steady at their upcoming November 1/2 meeting. There is no rule against raising rates then, but common sense argues for waiting until after the election.
By the December 13/14 FOMC meeting, the Fed will have the benefit of the October and November employment reports, plus two more months of inflation and other economic data.
We have two fed funds rate hikes built into our forecast for 2017, one occurring in June and the other in the following December. This is broadly consistent with the Fed’s “dot plot” of September 21.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 10-14-2016.