Introduction

The week's data include surprising weakness in the services sector and continued weakness out of housing which is clearly proving to be 2018's biggest disappointment. But indications on manufacturing, this year's strong suit, remain very solid and news is especially positive for the labor market. Inflation indications were heavy in the week but were both up and down. Yet there definitely appears to be one development we can all count on and that's a scheduled rate hike by a Federal Reserve which is focused on one key issue – the increasing scarcity of labor.

The economy

A big surprise in the week was the PMI flash for September, a report that showed a sharp slowing in the service sector against a general backdrop of rising inflation pressures. Services, the dark green columns in the accompanying graph, fell to 52.9 which was sharply below expectations for 55.0 and which overshadowed a solid showing for manufacturing where the index, as tracked in the light green columns, rose to 55.6. This month's weakness in services is centered in the year-ahead outlook which fell to its lowest level of the year reflecting concerns over cost pressures as input prices rose sharply and selling prices surged to a record high in survey data going back 10 years. Companies in the services sample cited the need to pass through higher labor costs as well as higher input costs sourced from overseas. The cost concerns overshadow a rise in new orders, a build in backlogs, and a jump in hiring to a 3-1/2 year high that hints at another month of standout strength for the September employment report. The year-ahead outlook also weakened on the manufacturing side as this sample cited higher costs tied to metal tariffs and the related need for forward purchasing. Some of these respondents said strong order levels are allowing them to push up selling prices. Yet other details, much like the service side of the report, are positive including rising orders and production.

Though a fraction of the size of services, manufacturing is considered a leading barometer for overall future change in the economy and here the results in the PMI are echoed by both Empire State and especially the Philly Fed survey. But in contrast to the PMI, both of these reports are showing easing price pressures. The Philly Fed index surged 11.0 points to a 22.9 level that topped Econoday's forecast range. New orders highlight the data, jumping very sharply with unfilled orders rising strongly and with growth in shipments and employment both up. But the sample's available capacity may be getting tested as delivery times extended further and the workweek climbed. Inventories contracted very sharply in a draw, judging by the strength of orders and shipments, that's unwanted and may reflect delays in deliveries and also production limitations. Yet despite capacity issues, prices in the Philly sample are actually moderating this month with input costs down though still elevated and with selling prices losing traction. Growth in the Empire State survey slowed in the September report, down 6.6 points to a still very solid 19.0. New orders and unfilled orders are both moderating and inventories in this sample are on the rise. Both input costs and selling prices are steady to lower. For Fed policy makers, the conflicting inflation indications between the PMIs and the Philly Fed and Empire State reports, given the generally strong levels of growth, probably won't ease concerns that the risk for prices is more likely up than down.

But more down than up is the indication for the housing sector. Housing data are always volatile and the accompanying graphs use 3-month averages to help smooth out the numbers and make trends more visible. Also helping to smooth the results is our focus on single-family homes, excluding multi-units which are much fewer in number and where monthly change is often extreme. The 3-month average for single-family starts, the blue line in the graph, fell a sharp 1.9 percent in August to an annualized rate of 876,000. And not pointing to any acceleration ahead are single-family permits, the green line in the graph where the 3-month average fell 0.8 percent to an 849,000 rate. The decline in permits is a prominent negative that underscores this year's downtrend for housing which is tied, not only to soft demand, but also to capacity constraints in construction where lack of available labor and high material costs are blunting the ambitions of home builders.

Sales data for housing, that is for existing homes, were also out in the week and they missed Econoday's consensus for a fifth month in a row. The 3-month average, tracked in the red line, fell 0.3 percent to a 4.753 million rate in August. Compared with August last year, the 3-month average is down 1.5 percent. Resales have been unusually flat the last several years and reflect, to a degree, lack of traction in new homes where sales strength, if it should begin to pick up speed, would increase the need for buyers to sell their existing homes. Sellers were offering discounts in the month with the median price for a resale down 1.7 percent to $264,000. However strong the economy and stock market are, the nation's housing sector is not participating which is a major negative for household wealth. New home sales for August, to be released Wednesday, will be a highlight of the coming week's calendar.

Softness in housing definitely does not speak to the need for a rate hike but one area of the economy that definitely points to one is the labor market. In a milestone report, all four key readings in the jobless claims hit historic lows. Initial claims fell 3,000 in the September 15 week to 201,000 with the 4-week average down 2,250 to 205,750. Both of these readings are at new 50-year lows. Continuing claims in lagging data for the September 8 week fell a very sharp 55,000 to 1.645 million with this 4-week average down 20,000 to 1.692 million. Both of these readings are at new 46-year lows. Turning back to initial claims, the September 15 reporting week was also the reporting week for the September employment report. Comparisons with the reporting week for the August employment report show a 9,000 decline at the headline level and an 8,000 decline for the 4-week average. These results will build expectations for strong payroll growth and downward pressure on the unemployment rate for September. No states were estimated in the report which is rare, not even North Carolina which was hit late in the week by Hurricane Florence. Whether North Carolina will be able to issue its own data in the next report is in question.

Turning back to the previous week, let's take a look at a major force that's working against the Fed's efforts to slow the economy -- the sharp rise underway in government spending. With only one month left in fiscal year 2018, the government's deficit is running 33.3 percent deeper than fiscal year 2017. August's deeper-than-expected monthly deficit of $214.1 billion pulled the year-to-date shortfall to an awful looking $898.1 billion vs $673.7 billion in the prior fiscal year. The spending side shows an 8.3 percent increase in Medicare to a year-to-date $562.3 billion with defense up 6.8 percent to $610.3 billion. Net interest is also a factor in the spending rise, up 21.0 percent to $332.1 billion which reflects the rise underway in the nation's debt. Total spending, in contrast to only a small increase for receipts, is up 6.7 percent. Some of the strength of the 2018 economy can be attributed to old fashioned Keynesianism -- a deepening in deficit spending.

But the deepening deficit isn't due to individual tax receipts which, thanks to strong growth in the labor market and despite this year's tax cut, are up 7.0 percent from the prior fiscal year to a year-to-date $1.522 trillion. This gain helps to offset a striking 30.4 percent decline in corporate income taxes to only $162.6 billion, a drop that reflects this year's big tax cut on the corporate side. Total receipts, which include a 17.1 percent jump in custom duties to a year-to-date $36.7 billion, are up but not very much, only 0.6 percent higher from fiscal 2017.

Markets: Stocks show no fear of Fed

The week's rally in the stock market, that saw the Dow gain 2.3 percent, may seem out of place given not only the imposition of tariffs on $200 billion of Chinese goods and the risk of further actions by year end but also given the apparently certain prospect that the Fed is going to raise rates at the pending FOMC. But a look at the Fed's prior three rate hikes, all coming in 3-month intervals, shows little effect on the market. The Dow actually rallied 400 points going into the final sessions before December's hike, slipped a bit before March's move, and rallied another 400 points ahead of June's action. There's no reason to believe that stocks will be showing much hesitation in the coming week. This lack of apprehension speaks to the success of the Fed's transparency, that its moves are all carefully telegraphed with no misunderstandings.

Other data in the week come from the Treasury International Capital report which tracks cross-border investment flows in financial securities. However much the stock market has been rallying in recent months, foreign interest can't be cited as a plus. Foreign accounts sold a net $14.1 billion of U.S. equities in July in what was the third straight month of outflow and the fifth decline in six months. U.S. accounts were light sellers of foreign equities in July, at a net $1.3 billion, much of which may have been reallocated to domestic shares. This report also tracks Chinese holdings of U.S. Treasuries which have shown no break lower at all despite this year's breakdown in trade talks. Chinese accounts held $1.171 trillion in U.S. Treasuries in July, down only $7.7 billion in the month. The Chinese total in this report will be of increasing interest as a new round of trade deadlines approach at year end.

The bottom line

The lead up to Wednesday's FOMC announcement isn't likely to derail the markets though it may raise objections from President Trump and his administration. But of all the issues facing the markets, whether trade or government deficits or housing or manufacturng, the single greatest point of concern for Fed policy makers is the enormous demand for labor and the risk that labor will become increasingly scarce.

Week of September 24 to September 28

One of the very heaviest weeks of the year will be highlighted by what looks to be a certain rate hike at midweek as the Federal Reserve moves to head off the risk of overheating in the labor market. The week opens with a summation of August's strength in the national activity index on Monday followed by what has become the most robust of any report on the economic calendar -- manufacturing data from the Dallas Fed which have been boosted by high energy prices. A contrast to the general strength of economic data has been home prices which have been slowing noticeably and which will get key updates from both Case-Shiller and FHFA on Tuesday. Consumer confidence has been on fire the past two years and hit a peak in the August report and only very slight slowing is expected for September's report on Tuesday. New home sales will open Wednesday's session and are expected to offer another reminder that housing has not been contributing much at all to 2018's economy. FOMC activities follow that afternoon and will include updated economic forecasts and also Jerome Powell's press conference. A pop higher for durable goods orders are expected on Thursday along with data on August international trade which in July opened third-quarter net exports in disappointment as exports fell sharply. Third-quarter GDP will again be in focus on Friday as personal income and more urgently consumer spending will get updates, results that are expected to be solid to moderate. The week closes out with the always robust Chicago PMI and recently robust consumer sentiment report.

Monday

National Activity Index for August

Consensus Forecast: 0.20

Consensus Range: 0.10 to 0.20

Strength in employment will be an offset to softness in manufacturing production for the national activity index in August where moderate acceleration is the expectation, to a consensus 0.20 vs 0.13 in July.

Dallas Fed General Activity Index for September

Consensus Forecast: 31.2

Consensus Range: 28.0 to 31.7 

Steady and robust have been the results of the Dallas Fed's manufacturing survey and more of the same is expected. Econoday's consensus for the September's general activity index is 31.2 vs 30.9 in August.

Tuesday

Case-Shiller, 20-City Adjusted Index for July

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.1% to 0.4%

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.5% to 0.6%

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.3%

Consensus Range: 6.2% to 6.5%

Case-Shiller has missed the consensus the last four reports in a row as home prices have been slowing sharply. Another month of limited growth is the call for Case-Shiller data in July where the consensus gain for the 20-city adjusted index is only 0.1 percent vs 0.1 percent in June. The unadjusted year-on-year rate, at a consensus 6.3 percent, is seen holding at June's rate. The consensus for unadjusted monthly growth, reflecting the relative price strength of July compared with other months of the year, is 0.5 percent.

FHFA House Price Index for July

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%

The FHFA house price index, like Case-Shiller's 20-city index, has missed Econoday's consensus for the past four months as home-price appreciation has gone south this year. The FHFA house price index has managed only very small gains the past four reports with a bit better gain, at 0.3 percent, the consensus for July vs June's 0.2 percent.

Consumer Confidence Index for September

Consensus Forecast: 131.7

Consensus Range: 130.0 to 134.3

Forecasters see slight moderation to 131.7 for the September consumer confidence index which jumped very sharply to 133.4 in August which was the strongest reading since October 2000. Jobs-hard-to-get were very low in the August report and accurately predicted that month's strong employment report.

Richmond Fed Manufacturing Index for September

Consensus Forecast: 20

Consensus Range: 19 to 25 

The Richmond Fed's manufacturing index, which has beaten the consensus the last four reports in a row, is expected to come in at 20 in September vs 24 in August. Orders and backlog growth were unusually rapid in August and point to overall strength, and perhaps increasing capacity stress, for September.

Wednesday

New Home Sales for August

Consensus Forecast, Annualized Rate: 630,000

Consensus Range:  608,000 to 650,000

New home sales have missed Econoday's consensus the last two reports and by very large margins. A 630,000 rate is the consensus for August which would be little changed from 627,000 in July. A positive in the July report was a rise in supply though a jump in prices may prove a negative for sales in August.

Federal Funds Target for September 25 & 26 Meeting

Consensus Forecast, Midpoint: 2.125%

Consensus Range: 2.00% to 2.25%

A rate hike is the universal expectation among Econoday's panel for September's FOMC meeting, a hike that would be tied directly to the strength of the jobs market and risk that lack of available labor will begin to push inflation higher. The FOMC is expected to raise its federal funds target range by 25 basis points to a range between 2.00 and 2.25 percent with an implied target of 2.125 percent. Also released will be quarterly FOMC forecasts, which in the last set had penciled in an additional rate hike before year end. A press conference with Jerome Powell is also scheduled.

Thursday

Durable Goods Orders for August

Consensus Forecast, Month-to-Month Change: 2.0%

Consensus Range: 1.0% to 3.5%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 1.0%

Durable Goods Orders, Core Capital Goods (Nondefense Ex-Aircraft)

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.4%

At plus 2.0 percent, bounce-back strength is the consensus for August durable goods orders which fell back in July on a decline in commercial aircraft. The decline masked what, however, was powerful strength in core capital goods orders where only limited give back is the expectation for August, at a consensus gain of 0.4 percent vs a 1.6 percent jump in July (revised from an initial 1.4 percent). Ex-transportation orders are expected to rise 0.5 percent.

Real GDP: 2nd Quarter, 3rd Estimate, Annualized Rate

Consensus Forecast: 4.3%

Consensus Range: 4.0% to 4.5%

Real Consumer Spending, Annualized Rate

Consensus Forecast: 3.8%

Consensus Range: 3.7% to 4.0%

GDP Price Index

Consensus Forecast: 3.0%

Consensus Range: 3.0% to 3.0%

The third estimate for second-quarter GDP is expected to come in at a 4.3 percent annualized rate vs 4.2 percent in the second estimate. Consumer spending is expected to come in unchanged at a 3.8 percent rate. The GDP price index is also seen unchanged at 3.0 percent.

International Trade In Goods for August

Consensus Forecast, Month-to-Month Change: -$70.8 billion

Consensus Range: -$72.2 to -$69.0 billion

The goods deficit is expected to narrow to a consensus $70.8 billion in August vs $72.1 billion in July (revised from an initial $72.2 billion). The results will update progress on third-quarter net exports which were very favorable in the second quarter.

Advance Wholesale Inventories for August

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%

Wholesale inventories are expected to rise 0.2 percent in August following a 0.6 percent build in July (revised from 0.7 percent in the advance reading). Despite the spike in July, inventories relative to sales at the wholesale level have been lean.

Initial Jobless Claims for September 22 week

Consensus Forecast: 210,000

Consensus Range: 210,000 to 222,000

Initial jobless claims are expected to come in at 210,000 in the September 22 week with data out of hurricane-hit North Carolina a wild card. In the prior report, initial claims and the 4-week average were at 50-year lows and continuing claims and 4-week average were at 46-year lows.

Pending Home Sales Index for August

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.5% to 2.0%

Pending home sales are expected to increase 0.2 percent in August after falling 0.7 percent in July. Sales of existing homes have been very soft  and are perhaps the biggest disappointment of the 2018 economy.

Friday

Personal Income for August

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%

PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%

PCE Price Index

Consensus Forecast, Year-on-Year Change: 2.3%

Consensus Range: 2.2% to 2.3%

Core PCE Price Index

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.2%

Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 2.0%

Consensus Range: 1.9% to 2.1%

Personal income is seen rising a solid 0.4 percent in August while consumer spending is expected to increase a moderate 0.3 percent. The core PCE price index, which excludes both food and energy, is seen posting a 0.1 percent monthly rise for a year-on-year gain of 2.0 percent that would be right at the Federal Reserve's policy target. The core, which is the most closely watched of all inflation readings, first hit the Fed's 2 percent goal in March before edging to 1.9 percent in subsequent reports and then returning to 2.0 percent in July. The consensus for the overall PCE price index is 0.2 percent for a year-on-year rate of 2.3 percent.

Chicago PMI for September

Consensus Forecast: 62.0

Consensus Range: 59.0 to 64.5 

Steady strength at a very high level is the call for the Chicago PMI with the September consensus at 62.0 vs 63.6 in an August report that showed welcome easing in both delivery and employment pressures. Input costs, however, remained highly elevated with 60 percent of the sample reporting pass-through to customers.

Consumer Sentiment Index, Final September

Consensus Forecast: 100.8

Consensus Range: 96.0 to 101.0

Expected to hold at the preliminary score, Econoday's consensus for the final consumer sentiment index for September is expected to come in at 100.8. The preliminary report proved the strongest since March, reversing softening in prior months on rising assessments of both current conditions and expectations.