Confusing data is the rule. This makes the Fed’s job especially difficult. Which data points do you believe? Better question, which data points does the Fed believe?
- New home sales unexpectedly rose 7.5% in October, befuddling economist who expected a decline of 5.5% for the month. While some analysts credited aggressive discounting by home builders as the reason for the rise, the median price of a new home hit $493,000, a new record. Despite the better-than-expected October data, new home sales are now waffling near the pandemic low.
- US existing home sales in October were better than expected, but still fell 5.9%. This is the ninth straight decline in monthly sales, which are now at levels last seen in 2008.
- US Services PMI (Purchasing Managers Index) comes in weak. US Services PMI fell to 46.1 from 47.8. This is below economist expectations of 48.0.
- US Manufacturing PMI also indicates contraction. Manufacturing PMI fell from 50.4 to 47.6 and below the 50 level expected by economists. Note that PMI below 50 is indicative of a contraction. PMI data is supplied by S&P Global.
- Durable Goods orders surprise on the upside. Durable goods orders rose 1.0% in October, far surpassing expectations of a 0.4% increase. Core durable goods orders (ex-transportation) also beat on the upside, gaining 0.5%. The data is certainly better than expected, but we note the data is not adjusted for inflation.
Despite some recent upside surprises, the preponderance of data appears to point to an approaching recession. We point to the comments from Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commenting on the PMI data:
“Business conditions across the US worsened in November, according to the preliminary PMI survey findings, with output and demand falling at increased rates, consistent with the economy contracting at an annualised rate of 1%.
“Companies are reporting increasing headwinds from the rising cost of living, tightening financial conditions – notably higher borrowing costs – and weakened demand across both home and export markets.”
“Skill shortages also remain a worrying constraint on expansion, but there is better news on supply chains, with supplier performance improving in November for the first time for over three years.
“While the reduced supply chain stress is partly a symptom of lower demand, the alleviation of supply delays removes a key driver of inflationary pressures and has helped moderate the overall rate of input cost inflation to a near two-year low. November even saw increasing numbers of suppliers, factories and service providers offering discounts to help boost flagging sales. Hiring has also slowed to a crawl so far in the fourth quarter as firms focus on reducing costs.
“In this environment, inflationary pressures should continue to cool in the months ahead, potentially markedly, but the economy meanwhile continues to head deeper into a likely recession.”
The Fed appears to be achieving its desired result, the critical question is whether they can time the economy such that they tame inflation without causing a recession. So far, they have done a fine job, but there is a long way to go.
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