Economic Update for 9-23

We had a very interesting set of economic releases last week. On Tuesday, the August Retail Sales number showed an increase of 0.6% for the month. This matched the upwardly revised July release and was significantly above the forecasted level of 0.2%. The gains were primarily in clothing stores, sporting goods, and restaurants/bars. On a year-over-year basis, Retail Sales for August rose 5.0%. This was well above the July level of 4.1% and was the second highest month during the past year. We continue to see fairly strong spending patterns by consumers.

Industrial Production in the U.S. rose by 0.1% last month. This beat the decline of 0.4% during July and a forecasted decrease of 0.1%. Manufacturing, the primary contributor to this sector, rose by 0.2% during August. This was above the 0.1% decline the prior month. Manufacturing, on a trailing 12-month basis, was up by 0.9%. This matched the second highest level over the past year.

On Wednesday afternoon, the much-anticipated Federal Reserve decision was announced with a cut of 25 basis points to the Fed Funds Rate. This was their first move in nine months. While the reduction had been anticipated, there had been growing talk among many economists that a half-point cut to 4.0% was needed. I think the Fed missed an opportunity to get “out-front” of economic concerns by not initiating the 1/2-point move. During Chairman Powell’s comments, following the announcement, he did indicate two additional cuts before year-end were likely as well as increasing the speed of the future rate cut cycle.

One of the economic sectors obviously hurt by higher interest rates has been the housing market. Housing Starts in August declined by 8.5%. Annualized units were at 1.307 million compared to 1.429 million units in July. Single-family home starts are at their lowest level since July of last year. The hope among economists was that a half-point cut by the Fed would lower mortgage rates enough to see a more positive move in the housing sector for both existing and new home buyers. The next Fed Meeting is the end of October. We are already seeing discussions about what is needed and expected actions from the Fed.

We think interest rates, both short and longer term, will move lower from current levels.  We will continue to add fixed-income positions in our portfolios as seems appropriate.  On the equity side, we view the economy as relatively stable.  This allows us to maintain our current holdings and add to positions whenever the opportunity allows.  One area we are looking to increase holdings is in the healthcare industry.