Inflation persists, and today’s retail sales report for September shows real retail sales down sharply in both the latest month and the past quarter. If accurate, it is the first sign of an overall decline in business activity. However, retail sales numbers are historically unreliable. Additional confirmation will be necessary to determine if the economic downturn has begun.
The Week That Was
Today’s retail sales report for September appears to provide the first, tentative sign of a downturn in the economy. Sales were unchanged for the month and increased at only a 2.5 percent annual rate for the quarter.
Retail sales data are erratic and often unreliable. However, if the latest numbers are accurate, the quarterly decline in real retail sales could be the first sign of the beginning of the upcoming downturn in the economy.
September’s inflation reports confirm a slight easing in wholesale inflationary pressures. This confirms reports from business surveys. Even so, consumer and wholesale prices remained well above the Fed’s target of 2 percent.
September total and core CPI numbers increased at annual rates of 5 percent and 7 percent, respectively. The total CPI benefited from a 10 percent decline in oil prices to $84. With oil prices back close to $90, this benefit will no longer hold total inflation down.
Wholesale prices for finished goods rose at a 4 percent annual rate. The Fed is a long way from containing inflation.
Weekly initial unemployment claims continue to point to a tight labor market. The latest four weeks’ claims remain in the mid-range of 200,000 to 250,000, where they have been for the past four months.
Money, Money, Money
Inflation provided the only significant economic news this week. There was some progress at the wholesale level, but little relief at the consumer level.
Interest rates drifted higher as markets plugged in the near-certainty the Fed will raise its fed funds target to 3.75 percent to 4 percent at its meeting less than three weeks from now. We continue to believe interest rates will go still higher after the November increase.
There is still uncertainty about the likely extent of the Fed’s restraint. My measure of liquidity has slowed substantially, suggesting some restraint. However, it is slightly higher in mid-October than it was in June. That is due to banks offsetting the Fed’s sales by shifting balances held at the Fed into the economy.
Things to Come
The economic news next week will help clarify the extent of any overall weakness in the economy. Since the Fed only began to tighten the money supply in July, the economy in September still appears to be close to break-even.
One area that is sinking fast is housing. On Tuesday, the Homebuilders’ index is likely to show the market for new homes has continued to decline rapidly in October. September’s reading was 46; break-even is 50. We expect to find that the downturn in housing deepened in early October.
Also on Tuesday, the Fed’s report on industrial production in September should be close to its high in August. Business surveys show manufacturing has been essentially unchanged.
Market Forces
Stocks moved mostly lower this past week.
Yesterday’s sharp upturn enabled the Dow to eke out a 0.5 percent gain. The S&P500 and Nasdaq ended the week with losses of 2 percent to 4 percent.
There is one somewhat encouraging sign for stocks: yesterday’s turnaround came on very high volume despite bad news on inflation. These are the signs you would look for if you wanted to bottom-fish for stocks.
Based on a wide range of data, it appears likely the economy has remained essentially flat most of this year. We continue to believe the economy is still in early stages of what will become a serious downturn in the months immediately ahead.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 15 percent
Monetary Policy: restrictive
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