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A surprising and disturbing force in sales of homes and durable goods

The economy is not going to make it easy for Federal Reserve Chairman Jerome Powell to bring inflation back to the central bank’s 2% target.

The Commerce Department on Wednesday released two data suggesting the economy actually accelerated in October, rather than slowing at the start of the fourth quarter as many had expected. Durable goods orders and new home sales both rose more than expected, which should push up growth estimates, push back estimates of the onset of the impending recession and boost the Federal Reserve’s terminal rate forecast. .

Durable goods orders rose 1% month-over-month, well beating consensus expectations for a 0.4% rise. This was partly due to volatility in the transportation category, particularly non-military aircraft orders, which rose 7.4%. But even excluding transportation, orders rose 0.5% after falling 0.9% the previous month. Economists expected no change in durable goods excluding transportation.

More importantly, orders for core capital goods rose 0.7%, more than offsetting the 0.8% decline the previous month. This should also be unchanged for the month. This type of growth suggests that the executive suites of American companies do not foresee a significant slowdown in the short term. While it’s always dangerous to dwell on monthly lags, the reversal between September and October suggests that business leaders have a slightly more optimistic outlook than at the end of the summer. The three-month moving average for core capital goods orders is 0.3%, which is consistent with decent gross domestic product growth.

Shipments of basic capital goods jumped 1.3%, indicating both GDP growth and perhaps a further easing of supply chain issues. The previous month’s decline has been revised to show a contraction of only 0.1%, an improvement from the 0.5% indicated in the preliminary estimate.

Few of these numbers can be said to simply reflect inflation. The producer price index for final demand goods less food and energy fell 0.1%. The private capital goods index rose, but only by 0.3%. As a result, this looks like real growth rather than the kind of inflationary illusion seen earlier this year.

Even more surprising is the surge in sales of new homes. Economists had penciled in new homes for sale at a seasonally adjusted annual rate of 575,000. This would have been consistent with the continued decline seen for most of this year and with expectations that sales would continue to fall as rates mortgages were climbing in a context of still very high prices. Mortgage rates were indeed high – above seven percent for most of October – and prices hit a new high. Still, sales soared. No one can really figure out why. One possible explanation is that buyers fear rates will be even higher next year and decide to buy before homes become even less affordable.

An optimistic view of these data is that they could make the so-called “soft landing” scenario more likely. If the economy experiences such robust growth despite the Fed’s series of massive interest rate hikes, it may be strong enough to withstand even more next year without tipping into a severe recession. This view, however, hinges on the expectation that inflation can be brought under control without economic collapse, which is at least an open question. Economist Claudia Sahm echoed that view in a tweet on Wednesday.

For those who think that getting inflation under control to the Fed’s target will require a recession, maintaining the economy’s strength is less promising. This means that inflation will likely remain persistently high, requiring even higher interest rates and an even deeper downturn to die out. While an economic recession in the first half of next year could be mild, one that is delayed into the second half is likely to be severe.

The Atlanta Fed’s GDP tracker now rose to 4.3% for the fourth quarter on Wednesday. While that’s almost certainly much higher than where we’ll end up, it does indicate how much stronger the economic data has been in recent weeks.

Even the University of Michigan consumer sentiment survey was better than expected, if not exactly great. The mid-month reading had consumer sentiment at 54.7, deeply depressed. Economists had predicted virtually no improvement. Instead, it soared to a still miserable 56.8. Even still, this remains below the October level and indicates that inflation continues to weigh on household sentiments towards the economy. Compared to last year, consumer sentiment on current economic conditions is down about 20%, which can’t be good news for retailers heading into the holiday shopping season. .


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