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Economic Week in Review: No decision is the Fed's decision

November 01, 2013

Even when the Federal Reserve does nothing, it makes news. Investors have been focused on each meeting of the central bank's policy committee because of an expected scaling back of its massive bond-buying economic stimulus program. But the nation's central bank decided to stand pat for now until the strength of the economic recovery is "sustained" enough to warrant the beginnings of a pullback.

For the week ended November 1, 2013, the S&P 500 Index rose 0.1% to 1,762 (for a year-to-date total return—including price change plus dividends—of about 26%). The yield of the 10-year U.S. Treasury note rose 12 basis points to 2.65% (for a year-to-date increase of 87 basis points).

The Fed continues to wait and see

As widely expected, the members of the Federal Reserve's Federal Open Market Committee (FOMC) agreed not to tinker with the central bank's extraordinary easy monetary policy: buying $85 billion a month in bonds in order to lower long-term interest rates and, in a separate thrust, keeping short-term rates near zero. Included in the FOMC's assessment was the observation that the strong growth in the housing market earlier in the year had cooled somewhat and, as it's said before, federal government "fiscal policy is restraining economic growth." The federal government has faced forced budget cuts, unresolved battles over the budget, a threat of a debt default, and a 16-day shutdown in October. That shutdown has, among other things, delayed the release of good-quality economic data, which adds to the challenges that the Fed faces.

"The increasing policy uncertainty and resulting fiscal drag played a role in the decision to keep the Federal Reserve's bond-buying program intact," said Vanguard economic analyst Vytautas Maciulis. "While this 'uncertainty tax' will continue to be a drag in coming months, the Fed will continue to evaluate economic data for signs of sustained improvements before making changes to the current policy."

Washington ripple effect: gloomy consumers

Consumers have been really upset by the wrangling in Washington. The Conference Board's consumer confidence index tumbled to 71.2 in October, below expectations, from 80.2 in September. Gloomy views about the economic outlook drove the index lower: Analysts noted that more wrangling is likely (especially with the government being funded only until January), which may bode ill for confidence—and retailers—during the upcoming holiday shopping season. On the other hand, consumer confidence is highly volatile and could rally, analysts said.

Cool weather and auto sales drive industrial output

The nation's industrial output—from manufacturing, mining, and utility plants—rose 0.6% in September. Manufacturing grew slower than expected despite continuing strong automobile-sector gains. Reflecting atypically cool weather, utilities output gave overall production a lift by bouncing back strongly after five months of declines. Mining production moved higher for the sixth month in a row.

However you look at it, inflation remains low

Inflation continues to be tame. The producer price index, which tracks changes in the prices of "finished goods," fell 0.1% in September, counter to expectations of an increase, primarily because of lower food prices. Compared with a year ago, producer price growth decelerated to 0.3% in September from 1.4% in August. ("Core" producer inflation, which excludes energy and food prices, rose 0.1% for the month, 1.2% for the year.)

The consumer price index rose 0.2% in September, with higher energy prices contributing to half the increase. Compared with a year earlier, consumer inflation slowed to 1.2% in September from 1.5% in August. (Core consumer inflation rose 0.1% for the month, 1.7% for the year.) Separately, the Social Security Administration said that Social Security benefits, which are linked to inflation, would rise 1.5% in 2014—among the lowest increases in years.

Consumer Price Index

Retail sales decline as auto sales plunge, sort of

Retail sales declined 0.1% in September, which was below expectations. The decline was blamed on a 2.2% drop in sales of autos, but this was more of a technical reporting issue than reality. Excluding autos, sales grew 0.4%. Outside of the retail auto sector, growth varied. Department store sales were down, for example, while sales at electronics and appliance stores were up. Analysts noted that among the latter, there appeared to be little lift to sales from the introduction of Apple's iPhone® 5.

Manufacturing activity rose despite battles in Washington

The budget disputes in Washington seem not to have affected the manufacturing sector, according to the Institute for Supply Management's gauge of manufacturing activity in October. The ISM index rose to 56.4, a faster pace than expected, from 56.2 in the prior month. New orders, which are forward-looking, edged higher and stood at a robust level above 60 for the third straight month. New export orders also rose, suggesting that the economies in Europe and China are improving. Other constituents of the ISM index remain in expansionary mode.

The economic week ahead

Of particular interest will be Thursday's release of an initial estimate of third-quarter gross domestic product as well as the Friday release of the jobs report, which was delayed one week because of the partial federal government shutdown. Other reports include factory orders (Monday), the ISM Nonmanufacturing Index (Tuesday), consumer credit (Thursday), and personal income and spending (Friday).

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
October 28 Industrial Production (September)
Source: Federal Reserve Board
+0.6% +0.4% +1 bp +0.1%
October 29 Producer Price Index (September)
Source: Labor Department
–0.1% +0.2% –1 bp +0.6%
  PPI, except food and energy (September)
Source: Labor Department
+0.1% +0.1%    
  Retail Sales (September)
Source: Commerce Department
–0.1% +0.1%    
  Consumer Confidence (October)
Source: The Conference Board
71.2 75.3    
  Business Inventories (August)
Source: Commerce Department
+0.3% +0.3%    
October 30 Consumer Price Index (September)
Source: Labor Department
+0.2% +0.2% +2 bp –0.5%
  CPI, except food and energy (September)
Source: Labor Department
+0.1% +0.2%    
  FOMC Minutes (October)
Source: Federal Reserve Board
   
October 31 Initial Jobless Claims (week ended October 26)
Source: Labor Department
340,000 340,000 +2 bp –0.4%
November 1 ISM Index (October)
Source: Institute for Supply Management
56.4 55.0 +8 bp +0.3%
      Weekly change +12 bp +0.1%

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.

Notes

  • 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.
  • All investing is subject to risk, including possible loss of the money you invest.
  • Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
  • Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal alternative minimum tax. We recommend that you consult a tax or financial advisor about your individual situation.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
  • Apple and iPhone are registered trademarks of Apple Inc., registered in the U.S. and other countries.
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