Economy in Brief

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.

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%.

UK industry turns a corner for the worse… The report on the United Kingdom industrial sector survey in December from the CBI is a crushing blow to anyone looking for recovery to take hold in the United Kingdom led by the industrial sector. The report shows significant, substantial, and even enormous deterioration in December in metrics involving total orders export orders and expected volume over the next three months. There is no silver lining here and, in fact, to make matters worse in the face of all of this weakness and expected weakness… average prices expected over the next three months move up sharply in December compared to what had been expected in November.

Total orders declined to reach a reading of -40 in December from -19 in November. Export orders in December slipped to -37 after logging -27 in November. The only thing close to a silver lining here is that the stocks of finished goods have a reading of 20 slightly lower than 21 in November indicating that inventories are not piling up at the moment and adding to and more horrific inventory cycle. Nonetheless diffusion readings on stocks of ‘20’ and ‘21’ are quite high.

Looking ahead In the looking ahead category, we have output volume for the next three-months fall to a reading of minus 31 from plus 9 in November. This is a really sharp slowdown that leaves the output volume series in the 2.3 percentile of its queue of data back to 1992, an extremely low reading. Average prices for the next three-months at the same time take on a diffusion value of 23, up from 11 in November after having got to zero in October. The reading of plus 23 in December has an 87-percentile standing, an extremely high level indicating that not only is growth in trouble but that inflation, or at least expected inflation, is back.

A drop in expected output of historic proportions The drop in expected output three-months ahead is a 40-point shift month-to-month (to -31 from +9) on data back to 1990. This is the second worst shift in the monthly reading in this survey, surpassed only during Covid in April of 2020. That is especially shocking since, at that time, there was a specific event to account for the shock-shift in expectations, unlike now. Now, the UK faces a period of domestic political stability, a world with global political shifts in progress in other countries – a changing of the geopolitical guard - and economic struggling as well as ongoing war in Ukraine and a worsening of instability in the Middle East. But this CPI reading is a horrific decline to impact one month’s reading. Meanwhile, most of those background events are not new and have been in progress. It appears that some watershed has been passed that businesses can no longer ignore.

Dilemma at the BOE Of course, the Bank of England has flipped the switch and has been cutting interest rates. And at its last meeting while it cut rates there was an accompanying message that it might be a while before the bank cut rates again. And now the bank is being put in a real dilemma because the state of the economy seems to call for rate reductions while the inflation background seems to call for rate increases. Welcome to the wild whacky world of central banking!

Weakness across the board The percentile standings of the various categories show total orders at a 6.5-percentile standing, extremely weak with export orders at a 14-percentile standing, stocks -while not changing much month-to-month - have an 89.6-percentile standing. As noted, the output volume for the next three-months has a 2.3-percentile standing with prices expected over the next three months at an 87-percentile standing. There's nothing here that's good news and nothing that is going to make policy making in the United Kingdom any easier. It's certainly going to make life for the new government much more difficult and policy at the Bank of England much more contentious. It's definitely not a good way to end the old year and to usher in a new one but reality is what it is and in the United Kingdom the reality has just turned quite sour.