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NAM: Monday Economic Report

The FOMC did suggest that “the labor market has continued to strengthen” and that “economic activity has been rising moderately so far this year,” even as it cited “severe hardship” from Hurricanes Harvey, Irma and Maria. Beyond policy actions, participants also outlined their economic projections for the next few years, which can always be enlightening and a window into what they might be thinking. On the positive side, the Federal Reserve now sees real GDP growth of 2.4 percent in 2017, up from a forecast of 2.2 percent three months ago, and it estimates that the unemployment rate will decline to 4.3 percent. Participants also see modest pricing pressures, with core inflation at 1.5 percent this year. One of the notable shifts occurred in the long-term view of possible rate increases. Participants now estimate one more rate hike in 2017, three federal funds rate increases in 2018 and two in 2019, whereas the prior releases had three in both 2018 and 2019. However, a lot can happen between now and then.

Meanwhile, the manufacturing data continue to be encouraging, especially in Europe. The IHS Markit Flash Eurozone Manufacturing PMI rose in September to a level not seen since February 2011. Likewise, the data for France and Germany also rose to 77-month highs in the latest survey. In the Eurozone report, there were healthy gains in both output (up from 58.3 to 59.5) and employment (up from 55.5 to 56.8). Closer to home, the IHS Markit Flash U.S. Manufacturing PMI edged up from 52.8 to 53.0, growing modestly in September. Nonetheless, the underlying data were mixed. Output, exports and employment all increased, with the hiring pace growing at its fastest pace since June 2015. Both reports suggested robust growth in output over the next six months, and we saw similarly promising manufacturing activity figures in the latest Philadelphia Federal Reserve Bank survey.

Beyond manufacturing, one of the other highlights last week was housing, which showed mixed results. On the one hand, new residential construction edged down from 1,190,000 units at the annual rate in July to 1,180,000 units in August. It is possible Hurricane Harvey negatively impacted the data, much as seen in the homebuilder confidence numbers. With that said, starts have risen 1.4 percent over the past 12 months. Much of the weakness—and month-to-month volatility—in the data have come from the multifamily segment. In contrast, single-family starts rose from 838,000 to 851,000, and on a year-over-year basis, single-family starts have jumped 17.1 percent, up from 727,000 units in August 2016. As such, the data are perhaps more encouraging than the headline number might suggest. Indeed, housing permits rose to 1,300,000 in August, its best reading since January.

There will be a number of releases this week that focus on the current health of the manufacturing sector. Manufacturers will be looking for a rebound in August durable goods orders after July’s decline, which was largely a function of swings in the nondefense aircraft segment. There will be new regional surveys showing manufacturing sentiment in the Dallas, Kansas City and Richmond Federal Reserve Bank districts. The Texas survey—and perhaps other indicators as well—will likely show some effects from Hurricane Harvey. In addition, there will be a new revision for second-quarter real GDP growth, with updates for consumer confidence, the international trade in goods, personal spending and income and new home sales.

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