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The big economic news this week was Federal Reserve Chairman Jay Powell's semi-annual two-day testimony before Congress.

Comerica Economic Weekly, July 12, 2019

July 12, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

The big economic news this week was Federal Reserve Chairman Jay Powell’s semi-annual two-day testimony before Congress. On Wednesday Powell’s prepared remarks to the House Committee on Financial Services contained a series of justifications for easing monetary policy soon. Practically, this means that the Fed has all but guaranteed to cut the fed funds rate on July 31. There are two remaining questions.

The first question much of a cut? We expect the Fed to cut the fed funds rate by 25 basis points to a range of 2.00-2.25 percent. There is a reasonable chance that they may do more and cut by 50 basis points. We believe that a 25 basis point cut will allow the Fed to test market reaction to a rate cut without using up too much of its rate cutting ability. 

The second question is...will a July 31st rate cut be the start of a rate cutting cycle by the Fed? We believe that downside risk factors for the U.S. economy may intensify and potentially compound this fall and winter. Our forecast calls for another 25 basis point fed funds rate after the end of July and before the end of this year. So we will stop far short of calling this the start of a rate cutting cycle, but there is a chance that that pattern could eventually play out. 

Inflation data for June was benign, providing the Fed ample leeway for a late-July rate cut. The Producer Price Index for Final Demand increased by just 0.1 percent, for the second straight month in June. Over the 12 months ending in June, the PPI for Final Demand is up by 1.7 percent. Energy prices were a weight on the headline index in June, falling by 3.1 percent for the month. Core PPI (final demand less food, energy and trade) was unchanged in June and was up by 2.1 percent over the year.

The Consumer Price Index for June was also up by 0.1 percent. Over the previous 12 months headline CPI gained 1.6 percent. Excluding food and energy, core CPI was up by 0.3 percent, its strongest monthly gain since January 2018. Core prices were pushed by a jump in used car and truck prices, which were up by 1.6 percent for the month, reversing a four-month slide. Over the previous 12 months core CPI was up by 2.1 percent. 

Initial claims for unemployment insurance fell by 13,000 for the week ending July 6, to hit 209,000. Initial claims can be volatile in the summer due to the variability of the seasonal auto assembly plant closures. Continuing claims increased by 27,000 to hit 1,694,000 for the week ending June 29.

Total mortgage applications fell by 2.4 percent for the week ending July 5. Refi apps were down 6.5 percent while purchase apps gained 2.3 percent. On a four-week moving average basis Refi apps were up 88 percent from a year ago. Purchase apps were up 6.8 percent. According to the Mortgage Bankers Association the rate for a 30-year fixed-rate mortgage eased to 4.04 percent. 

The National Federation of Independent Business’s Small Business Optimism Index dipped 1.7 points to 103.3 in June. This is still a high level for the index but it is well below the peak of 108.8 from August 2018.

The Job Openings and Labor Turnover Survey for May showed a drop in the job openings rate to 4.6 percent. The hiring rate eased to 3.8 percent. These are still strong rates but the job openings rate is not quite as strong as the 4.8 percent peak from mid-2018 through early 2019. 

Railroad carloads for the week ending July 6 were 8.2 percent below their year-ago level. Iron and scrap steel carloads were down 16.5 percent from their year-ago level.

For a PDF version of this report, please click here:  Comerica Economic Weekly, July 12, 2019

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