Data Watch

• Less dovish Powell opens the door to skipping a meeting, we think they hold in January

• The October CPI and PPI reports should make for a firm print on core PCE

• Retail sales cooled off last month, but the broader picture for consumer spending still looks fine

• Even after taking out strike and storm effects, manufacturing production has been flattish lately

After the fireworks of last week’s election news, economy watchers this week returned to a full slate of data. The incremental news regarding October wasn’t great: it was a month of firmer inflation and softer activity. The October core CPI increased 0.28%. While that was a touch on the high-side of what’s acceptable, the worse news came in the details of the PPI and import price reports, which implies that the core PCE for October was up 0.31% on the month and 2.8% over a year ago.

On the activity side, October retail sales in the important “control” category slipped a tenth and there were net downward revisions to prior months. While the marginal news on consumer spending this week was a little disappointing one shouldn’t lose sight of the fact that for the second half of the year real consumer spending still looks to be tracking around a solid 3% annualized pace of growth. Industrial production fell 0.3% last month. The number was weighed down by the Boeing strike and the hurricanes, and absent those factors IP was roughly flat over the last few months.

After showing who was boss last week, Fed chair Powell stayed in the spotlight this week. In remarks given Thursday, Powell indicated that the Fed’s current strategy remains to return rates over time to something closer to neutral. But then he added they’re not in a hurry to get there. In so doing, he basically signaled they will likely get off the 25bp cut per meeting treadmill at some point. We think they cut in December and then hold in January, but with those remarks in hand the November jobs report will be crucial for next month’s FOMC meeting.

There was also a lot of focus this week on President-elect Trump’s evolving first cabinet. For the economy, the appointments of Tom Homan and Stephen Miller to key posts indicate that immigration will likely be a Day One priority for the new administration. We think much lower immigration flows will lower the neutral or break-even level of job growth next year. More debated is the inflation effects; we don’t think changes in immigration policy will have a first-order effect on the inflation outlook.

Core inflation heats up in October

The combination of the CPI and PPI should make for a firm 0.3% increase in the October core PCE price index, the largest gain since this March. The headline CPI for October rose 0.24% to three decimals, while as mentioned earlier core CPI prices gained 0.280%. Year-ago headline CPI inflation firmed to 2.6% from 2.4% in September, while year-ago core CPI inflation remained at 3.3%. The non-core categories were on the light side last month, as energy prices were unchanged and food prices only rose 0.2%.

Once again, the rental inflation measures have been slow to return to the pre-pandemic trend, or to the rates implied by industry-based measures of new leases. Last month owners’ equivalent rent was up 0.4% while tenants’ rent rose 0.3% (Figure 2). Used vehicle prices rose 2.7% last month, while new vehicle prices were flat. Our industry analysts continue to expect a resumption of cooling vehicle prices next year.

The October PPI increased 0.2%, while core PPI was up 0.3%. Perhaps more important was the material upward effect this had on our estimate of the core PCE to a 0.31% increase. Categories that contributed to the firming of our PCE tracking estimate included medical care, airfares, and portfolio management fees. The latter is an inferred measure, and strong equity market performance likely translated into roughly a 4.6% rise on the month for this measure after seasonal adjustment.

Retail sales cool down in October

Retail sales rose 0.4%m/m in October, lifted by a 1.6% increase in sales at motor vehicle and parts dealers, while ex auto sales increased a milder 0.1%m/m and the control group (ex food services, autos, gas, and building materials) fell 0.1%m/m (Figure 3). What was already a strong September was revised up further (control went from 0.7% to 1.2%, the largest gain since early 2023), but there was an offsetting downward revision to August and 3Q real consumption should get revised down to 3.5%q/q saar from 3.7%.

Based on this report we are tracking a 0.1%m/m gain in real consumer spending for October. If that were followed by increases of 0.2% for the remainder of the quarter, similar to the pace over the past year, then 4Q real spending would be up 2.6%, which is close our to 2.5% forecast. While slower than the 3Q pace that is still solid growth. Also, looking past the monthly swings, control retail sales remain up a decent 4.6% on a 3m/3m annualized basis.

Factory output growth still in the doldrums

Industrial production for October was weak again, falling 0.3m/m after a 0.5% drop in September, and manufacturing declined 0.5% in the latest month. The Boeing strike and hurricanes contributed to the weak readings for the second month in a row: the Federal Reserve estimated those two factors took off 0.6% from IP in September and another 0.3%m/m in October, so absent those total IP has been roughly flat over the last couple months (Figure 4). That is a similar soft message to the year before, with IP unchanged in the year to August. The Boeing strike has since been resolved and there has been less hurricane activity, so IP should pop temporarily in November.

The first November regional manufacturing survey—the Empire State—surged 43.1 points (Figure 5). It’s hard to know whether this is an election sentiment effect or whether it signals a realized pickup in activity, although activity measures like new orders and shipments were also up sharply. In either case, next week’s rather light data calendar has some more November business surveys.

There was little news from the latest weekly jobless claims data. Initial claims came in at a low 217,000 for the week ending November 9. Continuing claims for the week ending November 2 were still elevated at 1.873 million, though some of that likely reflects the residual effects of the storms and strikes.

Finally, this week the Fed released the 4Q senior loan officer survey. For most categories of borrowers, lending standards were little changed, though standards for commercial real estate loans continue to tighten. Almost all categories of borrowers were reported to have weaker demand for loans.