Fed Poised To Downplay Weak Data Real Personal Consumption Expenditures, 1-, 3-, and 12-Month Change

% Change, Annualized
10
Big data week ahead that ends with the em- 2017:08 values:
1 month change = -0.9
ployment report for September. Considering 8
3 month change = 1.0
12 month change = 2.5
the ongoing inflation weakness, one would 6

think the Fed would be looking for a series of

Percent

4
very strong job reports to justify a rate hike
in December. But with Fed officials largely 2

convinced that the soft inflation numbers are 0

transitory, a middling jobs report would likely
-2
be sufficient to keep them on track, and even a 2010 2011 2012 2013 2014 2015 2016 2017

weak report if they can attribute disappoint- 1-Month Change 3-Month Change 12-Month Change

ing data to the busy hurricane season. Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 09/29/2017 11:09

Consumer Condence and Spending

The personal income and outlays report for 6
Real Personal Consumption, yoy % change

August, released last Friday, came in on the 5

weak side, with a decline in real consumer 4

2017:08 values:
spending during the month. Hurricane re- 3 Real PCE = 2.5
Univ. Michigan Sentiment = 96.8
lated? Almost certainly in part, although the 2 Projected Real PCE = 3.7

Bureau of Economic Analysis is not able to 1

provide an estimate of the impact. Note that 0

despite the monthly gyrations, the underly- -1

ing trend of consumer spending has been -2 2000:1-2017:7

2017:8
consistently near 2.5% year-over-year since -3
50 60 70 80 90 100 110 120
the beginning of 2016. The post-election UMich Consumer Sentiment
confidence bump did not pump up spend- Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 10/01/2017 08:58

ing, which remains soft in comparison to con-

Core PCE Price Index, 1-, 3-, and 12-Month Change
sumer sentiment. Survey respondents simply % Change, Annualized
didnt put any money forward to support their 4

convictions. 3

2
Remember that August bounce in core-CPI
inflation? It didnt follow through to PCE
Percent

as expected (the housing component that

0
helped drove the CPI number has a smaller 2017:08 values:

weight in the PCE index). The Fed probably -1

1 month change = 1.2
3 month change = 1.3
12 month change = 1.3
already guessed this would be the case. Still, -2
it is another blow to their predictions that soft 2010 2011 2012 2013 2014 2015 2016 2017

1-Month Change 3-Month Change 12-Month Change Federal Reserve Target

inflation numbers this year are temporary. Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 09/29/2017 15:56
Core-PCE inflation stood at 1.3% over the past
Tim Duys FED WATCH October 2, 2017

year, equivalent to the annualized three month Dispersion of Initial Claims Deterioration Across US
change. 50
Number of states with 5% or greater 52-week % change in initial claims
700000

Total Initial Claims, 4-Week Average

All else equal, ongoing weak inflation numbers 40 600000

Number with rising claims

should cause Fed officials to lose their appe-
30 500000
tite for a December rate hike. For example, last
Friday Philadelphia President Patrick Harker said 20 400000

that while he retains a December rate hike in his

outlook, inflation is the one area that gives 10 300000

me pause.
0 200000
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

But not all else is equal. Nearly full employment Number Deteriorating (left) Total Initial Claims (right)

continues to weigh more heavily than weak in- Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED and author's calculations * Chart created: 09/29/2017 16:07

flation in the Feds deliberation. And the Fed ex-

Still, Bostic (Atlanta), Rosengren (Boston), Dudley (New
pects the labor markets will only continue to tighten over
York), Kaplan (Texas), and Bullard (St. Louis) all speak Friday
the next year. The Fed believes that employment gains of
after the employment report. Watch Dudley in particular.
around 100k per month will prove sufficient to put down-
ward pressure on the unemployment rate; the average
Bottom Line: In effect, the Fed is playing a game of
monthly gain for the past three months is 185k.
heads I win, tails you lose with the data. They appear
inclined to view middling data as a temporary inconve-
If this pace of job gains continues through the end of the
nience. My instinct at the moment is that soft inflation
year and does not look likely to slow to 100k in early 2018,
data, if sustained, is more likely to impact the 2018
the Fed will tend toward maintaining the current pace of
rate projections than take the December hike off the
rate hikes (three in each 2017 and 2018) despite weak
table.
inflation. This is especially true if the unemployment rate
does fall as expected. As long as the economy looks as
In other news, the White House is closing in on a can-
if it is poised to push past full employment, they will see
didate to replace Yellen when her term ends in February.
waiting for 2% inflation before raising rates further as the
President Trump held some interviews this week. Via
very definition of falling behind the curve.
Bloomberg:
To be sure, the hurricane season may induce some weak-
Trump and Treasury Secretary Steven Mnuchin met
ness in the employment report; initial unemployment
Thursday with former Federal Reserve governor Kevin
claims have, as expected, popped up. No wonder that
Warsh to discuss the job, two administration officials
the consensus estimate for September employment is a
said. Trump and Mnuchin also interviewed Federal Re-
gain of just 95k. But the Fed has already made clear they
serve governor Jerome Powell on Wednesday, a White
will look through any hurricane-induced weakness in the
House official said.
data. From the most recent FOMC statement:
If we cant keep Yellen, Powell is the next best candidate
Hurricanes Harvey, Irma, and Maria have devas-
among the names under consideration. On Powells odds
tated many communities, inflicting severe hardship.
and background:
Storm-related disruptions and rebuilding will affect
economic activity in the near term, but past experience
Powell had been regarded as a long-shot candidate,
suggests that the storms are unlikely to materially
but not out of the running for Fed chair. The only
alter the course of the national economy over the me-
Republican currently on the Board of Governors,
dium term.
Powell, 64, has a solid reputation among lawmakers
from both parties and has ably led the Feds regula-
Looking ahead to the week, we will get plenty of data
tory efforts, albeit on a temporary basis, since Daniel
to chew on. This morning we receive the Institute of Sup-
Tarullo retired in April. Before joining the Fed, Powell
ply Management manufacturing report; regional surveys
spent eight years at private equity firmCarlyle Group.
have tended to the strong side, suggesting that the nation-
He also served as a senior official at the U.S. Treasury
al numbers will be solid. Also on tap this week are vehicle
under President George H. W. Bush.
sales (Tuesday), the ADP employment and the ISM services
sector reports (Wednesday), and the international trade
For some thoughts on Warsh, see me here and Sam Bell
report (Thursday). There is also a bevy of Fed speakers, in-
here. Neither of us are fans.
cluding Chair Janet Yellen (Wednesday), but the topics and
venues do not look likely to generate market moving news.

2017 University of Oregon; Tim Duy. All rights reserved. 2

Tim Duys FED WATCH October 2, 2017

Timothy A. Duy
Professor of Practice
Oregon Economic Forum, Senior Director
Department of Economics
University of Oregon

Professor Duy received his B.A. in Economics in 1991

from the University of Puget Sound, and his M.S. and
Ph.D. in Economics in 1998 from the University of
Oregon. Following graduate school, Tim worked in
Washington, D.C. for the United States Department
of Treasury as an economist in the International Affairs
division and later with the G7 Group, a political and
economic consultancy for clients in the financial
industry. In the latter position, he was responsible
for monitoring the activities of the Federal Reserve
and currency markets. Tim returned to the University
of Oregon in 2002. He is the Senior Director of the
Oregon Economic Forum and the author of the
University of Oregon Statewide Economic Indicators,
Regional Economic Indicators, and the Central Oregon
Business Index. Tim has published in the Journal of
Economics and Business and is currently a member of
the Oregon Governors Council of Economic Advisors
and the State Debt Policy Advisory Commission. Tim
is a prominent commentator on the Federal Reserve.
MarketWatch describes his blog and influential,
the Huffington Post identified him has one of the top
26 economists to follow on Twitter, and he is listed
on StreetEye as one of the top 100 people to follow
to discover finance news on Twitter. Major national
and international news outlets frequently quote
him, including the New York Times, the Washington
Post, the Financial Times, the Wall Street Journal,
and Bloomberg. He also writes a regular column for
Bloomberg Prophets.

Notice: This newsletter is commentary, not investment

advice.

duy@uoregon.edu

541-346-4660

@TimDuy

oregon
economic
forum
2017 University of Oregon; Tim Duy. All rights reserved. 3