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Economic Week in Review: Tapering awaits stronger recovery

September 20, 2013

Federal Reserve officials decided to continue the central bank’s bond-buying program of $85 billion a month, until they see more sustained signs of progress in the economy. This week’s reports showed slight improvements in manufacturing and strong sales of previously owned homes. Leading economic indicators were mostly positive and inflation remained in check.

For the week ended September 20, 2013, the S&P 500 Index was up 1.3% to about 1,710 (for a year-to-date total return—including price change plus dividends—of about 22%). The yield on the 10-year Treasury note was down 15 basis points to 2.75% (for a year-to-date increase of 97 basis points).

Fed keeps stimulus in place

Federal Reserve officials surprised investors by deciding to maintain the central bank's aggressive bond-buying program, known as quantitative easing or QE. The program is designed to stimulate the economy by keeping interest rates low, which can encourage businesses and individuals to invest and spend money. Fed Chairman Ben Bernanke had said the central bank might begin winding down the level of assets purchased under the program if economic conditions warranted. However, in its statement released Wednesday, the Federal Open Market Committee explained that it had "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases." The Fed did not specify when or how future tapering may occur.

Among the committee's key economic concerns were weak employment and labor force participation, as well as the recent tightening of financial markets. If these sustain, the Fed fears they could reverse improvements in the job market and the broader economy. Mr. Bernanke mentioned fiscal discord in Washington as another concern.

Fed officials also released updated projections for the economy and monetary policy. A vast majority of committee members don't expect the first increase in the funds rate until sometime in 2015. The Fed adjusted its forecast for real gross domestic product growth in 2013 to a range of 2.0% to 2.3%, down from 2.3% to 2.6%. Unemployment is expected to fall to between 6.4% and 6.8% by year-end 2014 from 7.3% last month.

"The Federal Reserve made clear on Wednesday that their focus on the economy remains broad-based and not pegged to any specific indicators," said Vanguard economist Andrew J. Patterson. "While their 6.5% unemployment and 2.5% thresholds remain, issues including labor force participation, the composition of employment gains, and fiscal policy play a role in their policy discussions and decisions."

A slight rebound in manufacturing

Industrial production rose 0.4% in August thanks to stronger manufacturing output. Automotive products (+5.2%) helped drive the gain in manufacturing production (+0.7%). Excluding autos, manufacturing production increased 0.4%. Industrial capacity utilization, a measure of how much of its resources a company is putting to use, increased from 77.6% in July to 77.8% in August.

A small rise in consumer prices

The Consumer Price Index increased 0.1% in August, slightly below analysts' expectations of 0.2% for the month. A 0.3% decline in the energy index dragged down the CPI, as gasoline, electricity, and natural gas prices simultaneously fell. Core CPI, which excludes food and energy, rose 0.1% in August, after rising 0.2% each of the past three months. Year-over-year core inflation notched up to 1.8%, remaining below the Federal Reserve's 2.5% threshold for pulling back its stimulus efforts. In general, inflation remains tame and less of a concern for the Federal Reserve.

Mixed results in housing starts

U.S. housing starts advanced 0.9% in August, or 891,000 annualized units, in contrast to a 5.7% jump a month earlier. Single-family home construction gained 7.0% in August. Multifamily home starts slipped 11.1% and accounted for much of the month-over-month weakness in new home construction. Housing permits declined 3.8% last month, though housing starts as a whole are up 19% from August a year ago. Single-family permits have reached their highest level since 2008. Every region except the South experienced a decline in new housing starts last month.

Sales of previously owned homes jump

In August, sales of existing homes increased 1.7% to 5.48 million units on an annualized basis—the highest level in more than six years. This advance bested analysts' expectations. Single-family and condo sales jumped year-over-year by 13% and 16% respectively. The median home price was $212,000, up by 14.7% from a year ago.

Lawrence Yun, chief economist at the National Association of Realtors, said the market may be experiencing a temporary peak. "Rising mortgage interest rates pushed more buyers to close deals, but monthly sales are likely to be uneven in the months ahead from several market frictions," Mr. Yun said.

Total housing inventory at the end of August stood at 4.9 months, down from 6.0% a year ago. Limited inventory in some areas has meant multiple bidding wars and limited choices for buyers. Mr. Yun expects restrictive mortgage lending standards and higher interest rates may keep otherwise qualified buyers from purchasing a home.

Existing-home sales

Leading indicators mostly positive

The Conference Board's index of leading indicators, which gauges the outlook of the economy for the next three to six months, rose 0.7% in August. The financial component drove the index higher. An increase in factory orders and lower jobless claims also helped. Six of the ten components rose; building permits were the sole component to show a decline. Stock prices and consumer expectations were flat.

The economic week ahead

The week of reports begins on Tuesday with consumer confidence, followed by durable goods and new-home sales on Wednesday. A revised second-quarter real gross domestic product report comes out Thursday. Personal income data concludes the week on Friday.

Summary of major economic reports
Date Report Actual
expected value
10-year note yield S&P 500 Index
September 16 Industrial Production (August)
Source: Federal Reserve Board
+0.4% +0.3% –2 bp +0.6%
September 17 Consumer Price Index (August)
Source: Labor Department
+0.1% +0.2% –2 bp +0.4%
  CPI, except food and energy (August)
Source: Labor Department
+0.1% +0.2%  
September 18 New Residential Construction (August. annualized)
Source: Commerce Department
891,000 920,000 –17 bp +1.2%
  FOMC Minutes
Source: Federal Reserve Board
September 19 Initial Jobless Claims (week ended September 14)
Source: Labor Department
309,000 330,000 +7 bp –0.2%
  Existing-Home Sales (August, annualized)
Source: National Association of Realtors
5.48 million 5.25 million  
  Leading Economic Indicators (August)
Source: The Conference Board
+0.7% +0.6%    
September 20       –1 bp –0.7%
      Weekly change –15 bp +1.3%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.


  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
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