A Week of Economic Insights: September 18, 2023

The past week in the financial world has been marked by significant events that are shaping the economic landscape. From Federal Reserve decisions to housing market challenges and labor market signals, here's a comprehensive review of the week of September 18, 2023:

Will the Fed Keep Rates Higher for Longer?

The Federal Reserve's announcement to maintain the benchmark Federal Funds Rate, within a range of 5.25% to 5.5%, was a pivotal moment for the financial markets. Here are the key takeaways:

• Rate Stability: Despite numerous rate hikes since March of the previous year, the Fed's decision to keep rates steady suggests an inclination toward a "higher for longer" approach.

• Dot Plot Projections: The Fed's dot plot projections indicate a single rate hike this year, with a potential reduction in rate cuts for 2024, down from four anticipated cuts. This signals an intention to maintain a robust stance against inflation.

• Data Evaluation: Fed Chair Jerome Powell emphasized the importance of data assessment, particularly regarding inflation and labor market figures. However, recent job growth numbers have been revised lower, potentially clouding the accuracy of these indicators.

• Economic Discrepancies: The Fed's optimistic projection for 2023 GDP growth contrasts with the latest Leading Economic Indicators (LEI) report from the Conference Board, which experienced a 0.4% decline for the seventeenth consecutive month. This discrepancy, along with other factors, hints that a recession might still loom on the horizon.

• Interest Rates and Recession: While a recession is typically unfavorable for the economy, it often brings lower interest rates, which can benefit certain sectors and investors.

Inventory of Existing Homes Needs to "Double"

The housing market faces significant challenges, especially concerning existing homes. Key insights include:

• Sales Decline: Existing Home Sales dipped by 0.7% from July to August, recording a 4.04-million-unit annualized pace. Compared to August of the previous year, sales were 15.3% lower.

• Inventory Crisis: The real issue lies in record-low inventory and elevated mortgage rates, which are restraining home sales. August ended with only 1.1 million homes available for sale, a significant drop from the previous year.

• Supply Shortage: The supply-demand gap is even wider than it appears since many existing inventory homes are already under contract and not truly available. The current situation calls for a doubling of supply to curb home price increases.

Housing Starts Plunge to 2-year Lows

August witnessed a slowdown in home construction, primarily in multi-family units, indicating several points:

• Housing Starts: Construction initiation on homes fell by 11.3% from July, including a 4.3% decline in single-family home starts.

• Building Permits: While Housing Starts plunged, Building Permits, indicative of future supply, rose by 6.9% from July. This could reflect builders preparing for a potential shift in rates and increased buyer activity.

• Supply vs. Demand: Despite these fluctuations, the supply-demand imbalance persists, with completed homes, even factoring in future supply, falling short of the demand represented by household formations.

Higher Rates Dampen Home Builder Sentiment

The National Association of Home Builders (NAHB) Housing Market Index fell below the pivotal 50 level for the first time since April, indicating declining builder confidence:

• Reasons for Decline: Rising mortgage rates, labor and land shortages, and distribution transformer shortages contributed to the slump in builder sentiment.

• Price Adjustments: In response to these challenges, 32% of builders reported price reductions, the most substantial share since the previous December, offering potential opportunities for buyers.

Is a Rise in Unemployment Claims Ahead?

The labor market, often considered a critical economic indicator, showed signs of strength but with potential nuances:

• Jobless Claims: Initial Jobless Claims reached an eight-month low, with 201,000 new claims, suggesting a robust labor market.

• Continuing Claims: Continuing Claims also decreased, with 1.662 million individuals still receiving benefits. This ongoing decline reflects both job placements and expiring benefits.

• Cautionary Note: While Initial Jobless Claims appear positive, they typically lag behind broader labor market trends. Signs of a slowdown might first emerge in job postings, hirings, and reduced work hours. The Fed is closely monitoring these indicators as they consider further rate hikes in the coming months.

In conclusion, the week of September 18, 2023, revealed a complex economic landscape marked by Fed decisions, housing market struggles, and labor market dynamics. These events underscore the need for careful monitoring of data and market trends to make informed financial decisions.

Disclaimer: The information provided in this analysis is for informational purposes only and should not be considered as financial or investment advice. Economic conditions and forecasts can change rapidly, and it is advisable to consult with financial professionals for the most up-to-date information and personalized guidance.