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CNB Economic Comments October 13

October 16, 2017

To: Everyone
From: Gregory S. MacKay, Economist

The minutes of the September 19-20 Federal Open Market Committee (FOMC) meeting acknowledged that third quarter GDP and employment would be adversely affected by hurricanes Harvey, Irma, and Maria, but expectations were for a recovery beginning in the fourth quarter. Based on past hurricanes, the FOMC did not foresee the storms causing any material changes to the medium term outlook for the economy (2-2.1% real GDP growth, 2% inflation, 4.1-4.2% unemployment.) However, the FOMC did expect some temporary increases in gasoline prices and some other items, and some fluctuations in consumer spending. As we suggested at the end of last month, the FOMC sees some strength developing in the business sector, with inventory rebuilding, improving global economic conditions, and a weak dollar all helping business spending.

The FOMC discussion on inflation was, in a word, lively. The Committee remains split on whether the relatively low rate of inflation may become the norm due to technological innovations and global factors, or if the tight labor market and fading transitory factors will allow inflation to rise more rapidly. After considerable discussion, it appeared the members favoring one more rate hike in December seem to be in the majority. However, all agreed to monitor data closely for the next several weeks.

Information received since the FOMC meeting has supported many of their conclusions. While inflation as measured by the Personal Consumption Expenditure (PCE) Index in August showed inflation at a benign 1.4% (and “core” at 1.3%), the more recent Producer Price Index (PPI) for September showed wholesale final demand up a large .4%, primarily due to a 3.4% one month gain in energy costs. This energy bump contributed to a twelve month increase in wholesale inflation of 2.6%, the largest increase since March 2012. Similarly, the Consumer Price Index (CPI) rose .5% in September, the second largest increase this year. Gasoline was the primary driver, up 13.1% for the month and up 19.3% for the past year. “Core” CPI was better, up only .1% for the month and 1.7% for the past year, as food costs have risen just 1.2% for the past twelve months.

The labor situation was certainly “adversely” affected by the hurricanes. Non-farm payrolls actually fell by 33,000 jobs in September (first decline since September 2010) as virtually all categories of jobs (except transportation) gained fewer jobs, or actually lost jobs since August. Yet, there were a couple of good surprises in the report. The unemployment rate fell .2% to 4.2% as there was a healthy increase in the labor force. Also, the average weekly earnings figure of $913.32 has risen a reasonable 2.9% since last September, adding a little credence to the rising inflation position.

Recent business data also indicate some better times ahead. Factory orders rose 1.2% in August, and are up 5.6% year-to-date over the similar period in 2016. The recovery has been fairly strong across the board in both durables and non-durables, with aircraft and heavy machinery orders leading the surge. Major business surveys indicate growing strength in production, new orders, employment, backlogs, and exports, supporting the FOMC view of a better business climate.

Stock prices took a breather this week from their stellar 2017 performance. At the opening today, for the week and year:

Index 10/13/17 Weekly Change Year-to-Date Change
Dow Industrials 22841 +0.3% +15.6%
NASDAQ 6592 ----- +22.4%
S&P 500 2551 +0.1% +13.9% 

Bond yields moved slightly higher in anticipation of a December rate hike.


Return Period
U.S. Treasuries Municipal Bonds
10/13/17 09/29/17  10/13/17 09/29/17
2 year 1.51% 1.45% 1.04% 1.01%
5 year 1.94% 1.88% 1.39% 1.36%
10 year 2.32% 2.30% 2.00% 2.00%