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Weekly Economic and Financial Commentary: A Great Deal to Like about this Outlook

U.S. Review

“There is a great deal to like about this outlook”

  • A speech by Federal Reserve Chairman Jerome Powell this week introduced some uncertainty into analysts’ estimates of just how many rate hikes could be left in the current expansion. But, with the PCE deflator unchanged at 2.0% in October, the Fed looks set to raise rates again at its December meeting.
  • Economic data out the gate this week point to a positive outlook. The second estimate of Q3 GDP kept growth at an annualized rate of 3.5%, underpinning strong growth in corporate profits. Fresh consumer confidence and personal income data point to strong consumer spending to end the year.

“There is a great deal to like about this outlook”

Federal Reserve Chairman Jerome Powell addressed the Economic Club of New York this week. While the main topic of discussion was financial stability, financial markets and analysts alike found particular interest in Powell’s comment regarding the neutral rate: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.” This language introduced some uncertainty into analysts’ estimates of just how many rate hikes could be left in the current expansion.

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While the probability of a December rate hike has come down recently, it remains quite elevated at 78.6%. Similarly, the PCE deflator remained unchanged at 2.0% in October, giving the Fed cover to raise rates at its December meeting. We still look for the Fed to raise rates four more times in this cycle–at its upcoming December meeting and three more times next year. Powell’s broader comments about the economic outlook leaned slightly upbeat. He said, “There is a great deal to like about this outlook,” and the economic data out the gate this week would agree.

The second estimate of Q3 GDP left headline growth unrevised at an annualized pace of 3.5%. Personal consumption was revised lower, but declines here were balanced by modest upward revisions to investment spending. The volatile trade environment also caused a larger than initially reported build in inventories, although this was offset by a greater drag from net exports.

Solid GDP growth underpinned strength in Q3 corporate profits, with before tax profits rising 10.3% on a year-ago basis, which is the fastest pace since 2012. But, while domestic profits continue to exhibit the strength of the U.S. economy, slow global growth and recent dollar strength caused foreign profits to slip $7.7B in Q3.

Consumers remained confident in November. After reaching an 18-year high in October, consumer confidence fell this month, but remained at a still elevated reading of 135.7. The three-month average remained at a cycle high, and suggests current optimism will sustain strong consumer spending to end the year. Consumers’ expectations regarding rate-sensitive purchases (autos, homes & major appliances) six-months ahead have remained elevated– suggesting little evidence of higher rates weighing on consumers. But, as we expect the Fed to continue to raise rates into next year, increased borrowing costs may begin to weigh on purchases.

While confidence suggests strong spending to end the year, the October personal income and spending data also affirm our forecast for consumer spending to grow nearly 3.0% in Q4. Personal income shot up 0.5% in October, with every category of income improving over the month. Personal spending rose a strong 0.6%, but the prior month’s increase was revised slightly lower. The gradual normalization of monetary policy through rate hikes has been a headwind to the housing market and raised some concern about the sustainability of consumer outlays on durable goods. Just as we didn’t see consumers shy away from such purchases in November’s confidence figures, there was little evidence of it in October’s durables spending, which rose 0.4%.

U.S. Outlook

ISM Manufacturing • Monday

The ISM manufacturing index has been flying high this year, although the series fell more than two points in October. The headline ISM still looks strong against “hard” data on production and new orders. Therefore, we don’t expect much of a rebound for November and anticipate the index to be remain near its current level. Respondents indicate