Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050831d.jpg" width="353">
The August Chicago Purchasing Managers Business Barometer reversed all of the prior month&#39;s sharp gain with a 14.3 point m/m drop to 49.2 that dropped the index to its lowest in over two years. Consensus expectations had been for just a slight decline 61.0.
During the last ten years there has been a 65% correlation between the level of Chicago PMI and the three month change in factory sector industrial production.
New orders cratered 23.1 points and the production index dropped 14.4 points. Employment fell a lesser 4.4 points to 51.7. During the last ten years there has been a 75% correlation between the level of the employment index and the three month change in factory sector employment.
The index of prices repeated the 1.6 rise in July and rose to its highest level since April. During the last ten years there has been an 86% correlation between the Chicago price index and the three month change in the &quot;core&quot; intermediate goods PPI.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF05/@EF05.HTM">Chicago Purchasing Managers Index, SA</a></th>
<th scope="col">Aug</th>
<th scope="col">July</th>
<th scope="col">&nbsp;Aug &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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<td class="firstcol">Business Barometer</td>
<td>49.2</td>
<td>63.5</td>
<td>56.8</td>
<td>62.9</td>
<td>54.6</td>
<td>52.8</td>
</tr>
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<td class="firstcol">&nbsp; New Orders</td>
<td>46.5</td>
<td>69.6</td>
<td>58.2</td>
<td>67.0</td>
<td>58.0</td>
<td>56.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid</td>
<td>62.9</td>
<td>61.3</td>
<td>86.6</td>
<td>80.1</td>
<td>55.8</td>
<td>56.9</td>
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The August Chicago Purchasing Managers Business Barometer reversed all of the prior month's sharp gain with a 14.3 point m/m drop to 49.2 that dropped the index to its lowest in over two years. Consensus expectations had been for just [...]

Chicago Purchasing Agents' Index Down Sharply

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Andrew Cates

**Stock markets and economic data**
In recent weeks, financial markets have been glued to political developments, with a particular focus on the policy implications of a new US administration. This political backdrop has buoyed US equity markets, which have responded positively to expectations of pro-growth policy shifts. However, beneath the surface, the economic data have told a more nuanced story. While inflation readings have consistently surprised to the upside, incoming growth data have fallen short of expectations (chart 1). Against this backdrop, the recent souring of sentiment in the US equity market seems less surprising, as investors reassess the balance between political optimism and the underlying economic reality.

Stagflation.jpg

**Services inflation and monetary policy**
An additional reason, however, for that souring of sentiment concerns monetary policy. Although the US Fed cut interest rates by 25 bps this week, the commentary and forecasts left investors much more concerned about the scope for looser policy in 2025. These concerns have been amplified as well by incoming inflation data suggesting that service sector inflation has remained elevated (chart 2).

Policy rates and inflation.jpg

**Broad money growth versus house price inflation**
There are, in addition, some forward-looking indicators that suggest inflation could pick up in the coming months. The recent lowering of policy rates across most major economies has been mirrored by an uptick in growth of broader measures of the money supply. As shown in chart 3, M2 growth in several major economies has gained momentum. This, in turn, has begun to translate—albeit with a lag—into stronger house price inflation. Against a backdrop where consumer price inflation has been above target and sticky this will potentially concern many policymakers. 

Stocks and M2.jpg

**Supply chain pressures and inflation surprises**
These inflation concerns could be further amplified in the coming months by a potential shift in US policy toward greater trade protectionism. As chart 4 illustrates, global supply chain pressures have played a pivotal role in shaping inflation dynamics—first by driving inflation higher during the pandemic and the war in Ukraine, and more recently by easing inflation as those pressures subsided. However, a resurgence of supply-side disruptions driven by renewed protectionist measures could trigger another inflationary spike. Such a scenario would likely force central banks to maintain a more restrictive monetary stance for longer, delaying anticipated interest rate cuts and adding to the challenges facing the global economy.

Supply chain.jpg

**The Bank of Japan**
Standing in contrast to these broad global concerns was the Bank of Japan’s decision this week to signal patience regarding further interest rate hikes. Policymakers specifically opted to keep the policy rate unchanged. This decision appears justified, as inflation in Japan is currently holding just above the 2% target, with no significant upward pressure on prices to warrant additional tightening. Moreover, Japan's economic growth remains relatively weak, although nominal wage growth continues to be positive. Looking ahead, market-based inflation expectations have steadily risen in recent years, specifically with the 5-year breakeven inflation rate recently surpassing the 2% threshold (see chart below). If these expectations materialize, a more stable inflationary environment could provide the BoJ with a stronger case for further increases in its policy interest rate next year.

Japan inflation and breakeven inflation.jpg

**China**
Turning to the situation in China, the week’s economic data releases were underwhelming, as the economy’s regular monthly data failed to meet expectations. This is reflected in the Citigroup Economic Surprise Index, which reversed from a period of positive surprises and took a downturn. Specifically, retail sales growth slowed to 3% y/y in November, down from the 4.8% seen in October. Furthermore, China’s property sector remained in a dire state, with existing house prices falling by an additional 8.4% y/y (chart 6). These disappointing figures have reinforced expectations of further monetary easing by Chinese authorities and continued weakness in demand-driven consumer inflation. Additionally, producer prices have continued to decline, partly driven by excess capacity issues. This outlook has also solidified expectations of a prolonged period of low interest rates in China, contributing to a rally in the country’s bond markets and pushing yields to record lows.

China 10Y yields vs house prices.jpg

Investors have shifted their attention back to the economic data and monetary policy over the past few days, marking a shift from recent weeks when political developments took centre stage in shaping financial market sentiment (chart 1). While this week’s decision by the US Fed to cut policy rates by 25 bps was widely anticipated, the accompanying commentary and forecasts have heightened concerns that US monetary policy will remain tighter for longer in the months ahead. Similarly, the BoE’s likely decision to leave rates unchanged this week has stoked comparable concerns about the UK’s policy trajectory. The key driver behind these concerns is inflation. Persistent inflation in the services sector (chart 2) and ongoing wage pressures are leaving policymakers in the US and UK reluctant to ease monetary policy further. This hesitancy has been amplified by financial conditions that have arguably been looser in recent months than central banks would prefer (chart 3). Additionally, a potential shift toward a more protectionist global trade environment next year could exacerbate price pressures in traded goods sectors, further complicating efforts to bring inflation back toward target levels (chart 4). Meanwhile, in Japan, the BoJ’s decision to maintain its accommodative monetary policy highlights a contrasting challenge: low inflation and a fragile economy. These dynamics stand in stark contrast to the issues confronting the US Fed (chart 5). Further complicating the global picture is China (chart 6), where recent data point to an economy weighed down by weak consumer demand, excess industrial capacity, and tepid inflation. This also underlines the increasingly divergent challenges faced by policymakers across the world’s major economies as they navigate a highly complex and uncertain macroeconomic landscape.

Charts of the Week: Inflated expectations

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At today’s meeting of the Federal Open Market Committee, the target range for the Fed funds rate was reduced by 25 basis points to 4.25% to 4.50%. It followed a 25 basis point reduction at the last meeting, and was the third consecutive meeting where rates were reduced from the high range of 5.25%-5.50% in place in mid-September. The decline matched expectations in the Action Economics Forecast Survey.

The statement following the meeting began as it did at the last meeting. “Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.”

It went on to state, as it did at the last meeting, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities.

Today’s FOMC statement can be found [here](https://www.federalreserve.gov/newsevents/pressreleases/monetary20241218a.htm).

**At today’s meeting the Fed updated its economic projections.**
The real GDP and Unemployment Rate estimates were little changed at roughly 2.0% (Q4/Q4) and 4.3%, respectively, through 2027. The 2025 PCE Inflation estimate was raised, however, to 2.5% (Q4/Q4) from 2.1%, with it then falling to an unchanged 2.0% estimate in 2027. The Core PCE price estimate was raised to 2.8% (Q4/Q4) from 2.6% for this year, to 2.5% from 2.2% for 2025, to 2.2% from 2.0% in 2026, settling at unchanged projections of 2.0% in 2027.  
Interest rate projections also were updated. The Projected appropriate Fed funds rate was left unchanged at 4.4% for the end of 2024, then raised to 3.9% at the end of next year from 3.4%, to 3.4% at the end of 2026 from 2.9%, and to 3.1% at the end of 2027 from 2.9%. 


241218h2.jpg

241218i2.jpg

FOMC Lowers Targeted Funds Rate Range by 25 Basis Points; Lifts Rate Projections

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241218g5.jpg

Total housing starts weakened 1.8% in November (-14.6% y/y) to 1.289 million (SAAR) after falling a minimally revised 3.2% during October to 1.312 million and 1.7% in September to 1.355 million, which also was minimally revised. Starts were 29.5% below the most recent peak of 1.828 million in April 2022. The Action Economics Forecast Survey expected 1.344 million starts in November.

Single-family starts rose 6.4% (-10.2% y/y) to 1.011 million last month after falling 9.1% to 950,000 in October, revised from 970,000. They rose 3.9% in September to 1.045 million. Multi-family starts declined 23.2% last month (-27.6% y/y) to 278,000 after rising 16.8% to 362,000 in October. They reached a high of 624,000 units in November 2022.

Starts in the Northeast rose 10.6% (-10.9% y/y) last month to 115,000 following a 37.0% October decline. Starts in the South improved 10.2% (-11.1% y/y) to 727,000 after falling 9.2% in October. Moving lower, starts in the Midwest slumped 28.2% (-22.2% y/y) to 158,000 after rising 24.3% in October. Starts in the West weakened 11.9% (-19.7% y/y) to 289,000 units after rising 14.7% in October.

Building permits increased 6.1% (-0.2% y/y) in November to 1.505 million after slipping 0.4% in October to 1.419 million units, revised from 1.416 million. Single-family permits edged 0.1% higher (-2.7% y/y) to 972,000 last month after improving 0.8% in October. Countering this weakness, multi-family permits rose 19.0% (4.7% y/y) to 533,000 last month, after a 3.0% October decline.

The housing starts and permits figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.


241218h5.jpg

241218i5.jpg

- Single-family starts recover after two hurricanes; multi-family starts continue downward.
- Regional movement is mixed.
- Building permits rise due to strength in multi-family sector.


U.S. Housing Starts Decline in November; Building Permits Rise

Sandy Batten

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The U.S. current account deficit widened markedly in the third quarter of 2024 to a record $310.9 billion from an upwardly revised $275.0 billion in Q2 (previously $266.8 billion). The series dates back to 1960. The Action Economics Forecast Survey had expected the deficit to widen to $284.0 billion in Q3. The Q3 deficit was 4.2% of GDP, up from 3.8% in Q2. 

While the burgeoning goods deficit continued to be the driving force behind the widening current account shortfall, the balance on primary income and the balance on secondary income played a larger role than usual in Q3. The primary income balance posted its second consecutive deficit, for only the fifth time in the series history. The deficit widened $11.7 billion to a record $15.5 billion in Q3. Primary income receipts plunged $15.5 billion while primary income payments declined $3.8 billion. Primary income includes investment income and compensation of employees. The secondary income deficit widened $15.9 billion (a record for the series) to $61.9 billion (also a record). Secondary income receipts edged up $0.2 billion while secondary income payments surged a record $16.1 billion, mostly reflecting an increase in general government transfers. 
Secondary income includes transfer payments by governments, tax withholdings and insurance payments, among other items.

The goods trade deficit widened $10.1 billion to $307.3 billion in Q3. Goods exports increased a solid 2.6% q/q, reflecting an increase in capital goods, mostly semiconductors; computer accessories, peripherals, and parts; and civilian aircraft. Goods imports rose 2.9% q/q, reflecting increases in capital goods, mostly computer accessories, peripherals, and parts; electric-generating machinery, electric apparatus, and parts; and computers, and in consumer goods, mainly medicinal, dental, and pharmaceutical products. 

The services surplus widened $1.8 billion to $73.7 billion in Q3. Exports of services increased 2.8% q/q, reflecting increases in government goods and services, mostly military units and agencies, and in telecommunications, computer, and information services, mostly computer services. Imports of services rose 3.0%, reflecting increases in charges for the use of intellectual property, mostly licenses to reproduce and/or distribute audiovisual products, and in insurance services, mostly reinsurance.

Among financial account transactions, the net acquisition of financial assets rebounded, rising $18.7 billion to $201.9 billion in Q3. The net incurrence of financial liabilities surged $385.7 billion to $716.7 billion in Q3, the highest reading since Q1 2020.

Balance of Payments data are in Haver’s **USINT** database, with summaries available in **USECON**. The expectations figure is in the **AS1REPNA** database.



241218p4.jpg

241218q4.jpg

- Goods deficit widened by $10 billion. Services surplus widened by nearly $2 billion.
- Balance on primary income posted a deficit for only the fifth quarter in the history of the series.
- Secondary income deficit widened by nearly $16 billion, the largest quarterly increase in the series history.


Chicago Purchasing Agents' Index Down Sharply

Summary

Tom Moeller

More Economy in Brief

Charts of the Week: Inflated expectations

FOMC Lowers Targeted Funds Rate Range by 25 Basis Points; Lifts Rate Projections

U.S. Housing Starts Decline in November; Building Permits Rise

U.S. Current Account Deficit Widened to a Record in Q3 2024

Chicago Purchasing Managers Index, SA	Aug	July	Aug '04	2004	2003	2002
Business Barometer	49.2	63.5	56.8	62.9	54.6	52.8
New Orders	46.5	69.6	58.2	67.0	58.0	56.2
Prices Paid	62.9	61.3	86.6	80.1	55.8	56.9