Fed decision will top the week's business news
This week's economic news features a pivotal Federal Reserve meeting and a packed lineup of reports — on inflation, retail sales, factory output, and housing starts — that could help sway a Fed struggling to decide whether to hike interest rates for the first time in nine years.
Retail sales generally have been solid in recent months, with low gas prices and steady job and income growth finally prodding consumers to open their wallets. A positive report on the service sector last month suggests retailers continued to see brisk activity, though job growth in the industry slowed, says Lewis Alexander, chief U.S. economist of Nomura. Economists expect the Commerce Department to report Tuesday that a core measure of sales — that excludes autos, gasoline, food services and building materials — rose a moderate 0.4% in August.
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Industrial production has not fared as well as a strong dollar and low oil prices continue to hammer manufacturers' exports and their production of steel and other oil-drilling materials. Both the greenback and oil were expected to stabilize by the second half of the year, but weak global demand, particularly in China, has extended the troubles for U.S. factories. Further dampening output was a likely pullback in vehicle production after a seasonally adjusted surge in July. Economists expect the Fed to report that total industrial output fell 0.2% last month.
Wednesday's report on consumer prices will likely be the most critical evidence for the Fed's deliberations. Annual inflation has been virtually flat in recent months and stubbornly below the Fed's 2% target as the rising greenback curtails the price of imported goods and cheap oil pushes down pump prices. Gains in "core" prices, which the Fed scrutinizes more closely because they exclude volatile food and energy costs, also have been modest in recent months, partly because of declines in airline fares. Alexander reckons those trends persisted in August. Economists expect the Labor Department to report a 0.1% drop in total consumer prices and a slight 0.1% rise in the core measure.
Housing starts have been a bright spot, hitting an eight-year high in July and generally advancing smartly this year. But building permits, a gauge of future construction, fell sharply recently and economists expect some payback for the July's outsize gains. They project Commerce on Thursday will report a 3.8% drop in starts for August.
A two-day Fed meeting that ends Thursday is a cliffhanger, with economists almost evenly divided on whether the Fed will nudge up a benchmark rate that has been near zero since the 2008 financial crisis. Those expecting a hike cite a 5.1% unemployment rate that's already below the Fed's year-end forecast and at its long-run goal. Analysts are betting on a delay point to recently volatile financial markets and their potential effect on the economy.