Hello, my friends!
Without question, the biggest news of this economic week was the long-awaited and highly anticipated decision by the Federal Open Market Committee (FOMC)…the policymaking arm of the Federal Reserve…to cut interest rates for the first time in nine months.
On Wednesday, the FOMC voted by a margin of 11-1 to reduce the benchmark federal funds rate by a quarter percentage point, which puts the rate’s target range at 4.00% to 4.25%.
The decision effectively serves as confirmation that policymakers as a whole have grown more concerned about the implications of a weakening labor market than a recent inflation spike believed to be induced by aggressive White House tariff policy.
“The Committee is attentive to the risks to both sides of its dual mandate,” the post-meeting statement read “and judges that downside risks to employment have risen.”
Notably, the lone dissenting vote was cast by newly installed Federal Reserve Governor Stephen Miran, who supported cutting rates by a half point.
In addition to making their rate-cut decision, policymakers updated their Summary of Economic Projections at this meeting. The formal outlook now reflects a consensus expectation of two additional quarter-point rate cuts by the end of the year, a projection that Goldman Sachs strategist Simon Dangoor serves as confirmation that “the doves on the committee are now in the driver’s seat.
On that note, traders now say they believe there’s a 92% chance the Fed will again cut rates at its next meeting in October.
Retail Sales Remain Silver Lining Amid Other Signs of Slowdown
Also this week, the government announced that retail sales were strong once again in August, a demonstration of exceptional resilience in the face of other key economic bellwethers which suggested a broad economic downturn may be looming.
Despite the emergence of an even cloudier employment picture last month as well as sinking consumer sentiment and an acceleration of price pressures, it turns out that consumers not only kept cash registers ringing in August, but did so at a pace well in excess of that expected by analysts.
According to the Census Bureau’s report released on Tuesday, retail sales climbed a robust 0.6% last month, much faster than the 0.2% pace projected by economists.
Even with automobiles and related costs stripped out, the data still pointed to a strong month of consumer activity, with sales rising 0.7%.
One especially notable feature of the upbeat results is just how broad the spending activity was in August. Of the 13 retailer categories tracked by the Census Bureau, sales increased in nine of them.
In her commentary on the numbers, Heather Long, chief economist at Navy Federal Credit Union, said, in part:
“Consumers say they are gloomy about the economic outlook, but they are still opening their wallets and spending, even on little splurges for themselves and their families.”
Still, it remains to be seen for how long consumers will keep spending if significant challenges to the economy arise from White House tariff policy and growing labor-market weakness.
Single-Family Housing Starts Tumble to Lowest Level in Nearly 2½ Years
The following day, Wednesday, the Commerce Department checked in with a less upbeat perspective on the economy, reporting that single-family housing starts fell to their lowest level in nearly 2½ years last month amid persistently high mortgage rates and consumer concerns about the underlying strength of the economy.
Overall, housing starts tanked 8.5% in August to a seasonally adjusted annual rate of 1.307 million units, which is 63,000 fewer than the number economists expected to see. A big contributing factor was the decline in starts of multifamily units, which tumbled 11% on the month to 403,000 units.
But the big news was the drop-off in single-family starts, a metric viewed as more representative of the housing sector’s true condition because it accounts for the vast majority of homebuilding in the U.S. Groundbreaking of single-family units fell 7.0% last month to a seasonally adjusted annual rate of 890,000 units, the lowest since April 2023.
The Commerce Department’s report on building permits…an indicator of future housing demand…was disappointing, as well. Permits fell by 3.7%, to a seasonally adjusted annual rate of 1.312 million, the lowest level in a little more than five years.
Analysts say that even with the resumption of rate cuts, they’re not expecting conditions to improve through the near term while Americans remain broadly pessimistic about the outlook for the economy. As Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, put it:
“Consumers’ low confidence and heightened concerns about job security represent ongoing headwinds to demand. We expect residential investment to remain a drag on GDP growth at least until mid-2026.”
New York Manufacturing Contracted in September
Finally, it was reported this week that manufacturing activity in New York state declined rather significantly in September…another timely piece of evidence suggesting the economy may indeed be in the throes of a slowdown.
On Monday – two days before the Federal Open Market Committee announced its decision to cut rates by another quarter point – the Federal Reserve Bank of New York announced that its Empire State Manufacturing Survey General Business Conditions Index plunged 20.6 points this month, falling to a reading of minus 8.7 from the 11.9 posted in August.
It’s the first time since June that the index landed below the neutral level of zero that distinguishes contraction from expansion in the context of the metric.
Among the key component measures that helped tank the overall gauge is the New Orders Index, which sank a whopping 35 points to come in at minus 19.6 for the month. Another is the Shipments Index, which fell 30 points to minus 17.3.
In his commentary on the fresh numbers, Richard Deitz, economic research adviser at the New York Fed, made clear he doesn’t see conditions improving markedly anytime soon, saying:
“Optimism about the outlook remained muted and employment levels are expected to be flat over the next six months.”
That’s all for now; have a wonderful weekend!
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