Tim Duys

Fed Watch November 20, 2017

All Systems Go For A Decem- Dispersion of Industrial Production Declines Across Sectors

ber Rate Hike

Number of industrial groups contracting y-o-y (out of 23 total) and IP y-o-y % change
25 15
2017:10 values:

Industrial production y-o-y % change

12 month change = 2.9
# contracting = 7 10
20
Incoming data indicate the US economy 5
Number contracting

retains momentum as 2017 draws to a close, 15

0
clearing the way for the Fed to hike rates
in December. Inflation, however, remains 10
-5

on the soft side and continues to make -10

some FOMC members nervous. That said, 5

-15
the consensus looks set to downplay those
0 -20
concerns amid an environment of solid 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

economic growth and declining unemploy- Number contracting (left) Industrial Production (right)

ment rates. I think it will be a challenge for Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 11/17/2017 12:06

FOMC members to shift gears to steady

policy until growth moderates sufficiently Retail Sales Excluding Autos, Gas, and Building Materials
to stabilize unemployment rates. 20
One-,Three-, and Twelve-Month Percentage Changes, Annualized
12

2017:10 values:
10
Looking back at the past weeks data reveals 15 1 month change = 5.1
3 month change = 3.7
12 month change = 3.5
an economy that continues to march upward. 10
8

Industrial production grew 0.9% in October, 6

bolstered by a 1.3% gain in manufacturing. 5

4
The nations industrial activity stands 2.9% 0
2
higher than year ago levels and the disper-
-5
sion of weakness across sectors continues to 0

fall. The 2015 weakness that drove recession -10 -2

2010 2011 2012 2013 2014 2015 2016 2017
fears is rapidly fading into a distant memory.
One-Month (left) Three-Month (right) Twelve-Month (right)

Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Chart created: 11/17/2017 12:10

With the holiday season approaching, all
eyes will be on the consumer. October retail
bit more mixed. The gains were driven by a rebound
sales rose 0.2% while September was revised up from 1.6%
in multi-family housing starts. The overall trend in that
to 1.9%. Hurricane-related effects continue to be evident
market, however, I think remains negative (we are proba-
in the data. Solid gains in autos likely reflect replacement
bly past peak apartment building for this cycle); note that
purchases, while building supplies and gas sales both
multifamily starts are still below year ago levels despite the
retreated. The underlying pace of sales, however, has
gain. Consequently, I wouldnt read too much into the gain
remained fairly stable since mid-2015. With job growth
expect that it may help bolster the residential component
gradually slowing, an acceleration in spending might not
of GDP in the final quarter of this year. Importantly though,
be in the cards, but we shouldnt expect a broad-based
the slow, upward gains of single family starts continues and
deceleration in activity either.
should support homebuilders.
Housing starts gained in October, but the message is
Tim Duys FED WATCH November 20, 2017

Core-CPI inflation accelerated in October, Privately Owned Housing Starts

which will warm the hearts of central bankers. Thousands of Unit, SAAR
2500
That said, the shelter component support-
2016:10 values: 2017:10 values:
ed the move, specifically a gain in lodging 2000 1 unit = 871 1 unit = 877
away from home component. This may be an 2-4 units = 10 2-4 units = 20
5 or more units = 447 5 or more units = 393
artifact of the hurricanes and as such would 1500
fade in subsequent reports. Though inflation
remains weak, most FOMC members will 1000

take comfort in the partial rebound since the

dismal numbers of early-2017. They will see 500

this as evidence supporting their con-

tention that transitory factors drove this 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
years inflation weakness. Single Family Housing Multi Family Housing (2-4 per structure) Multi Family Housing (5 or more units per structure)

Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 11/17/2017 12:04

Not all central bankers, however, stand ready

to give the alls clear on inflation. Chicago Core CPI, 1-, 3-, and 12-Month Change
% Change, Annualized
Federal Reserve President Charles Evans 4

reiterated earlier warnings on the topic:

3

I am concerned that persistent factors 2

are holding down inflation, rather than
Percent

idiosyncratic transitory ones. Namely, the 1

publics inflation expectations appear to 0

me to have drifted down below the Fed- 2017:10 values:
eral Open Market Committees (FOMC) 2 -1
1 month change = 2.7
3 month change = 2.4
percent symmetric inflation target. 12 month change = 1.8
-2
2010 2011 2012 2013 2014 2015 2016 2017

Evans would like to see more explicit com- 1-Month Change 3-Month Change 12-Month Change Federal Reserve Target (PCE)

munication on the part of the Fed supportive Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 11/17/2017 11:58

of a symmetric inflation target that allows for

inflation as high as 2.5%. This was an intrigu- CPI: Shelter, 1-, 3-, and 12-Month Change
% Change, Annualized
ing addition to his argument: 6
2017:10 values:
1 month change = 4.1
5
I also worry that giving too much promi- 3 month change = 4.3
12 month change = 3.2
nence to financial stability considerations 4
in discussions of monetary policy could
erode the publics confidence in our com-
Percent

mitment to our 2 percent inflation objec-

2
tive. Financial stability is obviously very
important. But there are better tools 1

than monetary policy for promoting it. In

0
contrast, when it comes to meeting our 2012 2013 2014 2015 2016 2017
inflation objective, monetary policy is the 1-Month Change 3-Month Change 12-Month Change
only game in town. Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED * Chart created: 11/17/2017 11:58

In general, central bankers believe that
low interest rates can contribute to excessive risk-tak-
ing that leads to financial instability. These worries will
likely become more prominent if the Fed does not see ev-
idence that financial conditions tighten as they raise short-
rates. This in turn could prompt the Fed to tighten policy
beyond what would be indicated by their dual mandate.
Evans is warning that even discussion along this line of
thinking would lead the public to believe that the Fed
does not prioritize its inflation target.
meeting; this is his last chance to dissent if he wants to end
on a dovish note. As for participants rotating into voting
spots next year, two took hawkish positions. San Francisco
Federal Reserve President John Williams sticks with the
current script, via Reuters:
My view is that a perfectly reasonable path for pol-
icy would be one more increase this year, and three
next year, Williams told reporters on the sidelines of
a conference on Asian economic policies

Note that Evans is only a voting member for one more Reuters also reports that Cleveland Federal Reserve Presi-

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

Tim Duys FED WATCH November 20, 2017

dent Loretta Mester supports additional rate Dispersion of Initial Unemployment Claims Deterioration Across US
hikes, adding that: Number of states with 5% or greater 52-week % change in initial claims
50 700000

I am not as troubled by where inflation

Total Initial Claims, 4-Week Average

40 600000
is today. There is good reason to believe

Number with rising claims

it is going to come back up, Mester said
30 500000
at a monetary policy conference at the
Cato Institute. 20 400000

Williams and Mester look ready to climb 10 300000

aboard the Feds rate hike express train.
Nonvoter St. Louis Federal Reserve President 0 200000
James Bullard will not be joining them: 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Number Deteriorating (left) Total Initial Claims (right)

Web: economistsview.typepad.com/timduy/ * Twitter: @TimDuy * Data via FRED and author's calculations * Chart created: 11/17/2017 12:08
The main concern I would have is that
we raise rates in December and inflation
of the action will come on Wednesday with the durable
expectations fall... which would in my view be a vote
goods and consumer sentiment reports. Plus, we also
of no confidence from markets, Bullard told report-
get the minutes of the last Fed meeting that day as well.
ers.
Something to talk about around the turkey.
St. Louis doesnt rotate back onto the FOMC until 2019.
Bottom Line: Despite some nagging concerns about
The world will be completely different then.
inflation, the Fed looks poised to continue hiking rates
on the back of a generally solid economy.
The Thanksgiving Holiday makes for a slow week. Most

oregon
Timothy A. Duy

economic
Professor of Practice
Oregon Economic Forum, Senior Director
Department of Economics
University of Oregon forum

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 as
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
ECON
Economics

@TimDuy

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