The minutes of the Federal Open Market Committee’s July meeting confirmed members’ shift to a “data-dependent approach to policy.”
This keeps another quarter percentage point rate hike on the table before year-end, but does not commit the FOMC to it. The Fed will likely hold its policy rate steady at its next decision Sept. 20. But it’s easy to see how the Fed could raise rates another quarter percent at the following decision on Nov. 1 if the economic expansion stays resilient, wage growth stays solid and house prices continue to rise.
Consumer spending, which accounts for two thirds of the economy, is off to a strong start in the third quarter. Retail and food service sales rose 0.7% in July, above the 0.4% consensus forecast. Core retail sales, used to calculate nominal GDP, rose by a solid 1.0%, double the 0.5% consensus expectation.
Building permits were little changed in July at a seasonally-adjusted annualized rate (SAAR) of 1.442 million units, below the consensus forecast for an increase to 1.470 million. Housing starts rose by 3.9% to 1.452 million SAAR, slightly above the 1.448 million consensus.
In the first seven months of 2023, permits are down 19.2% from the same period in 2022, while starts are down 13.1%. Housing activity is likely to remain subdued due to high house prices and mortgage rates, which hit a new two-decade high last week according to surveys published by Freddie Mac and Bankrate.
Industrial production jumped 1.0% in July, but details were softer than the headline. July’s increase largely reflected higher utilities output amid soaring temperatures, with downward revisions to manufacturing offsetting an increase in July.
Manufacturing capacity utilization was lower in July than in the prior release for June, which was revised down in the latest data. A margin of slack is opening in manufacturing capacity, which will help slow inflation.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
