The Fed downshifts, remains hawkish: Weekly Economic Review & Outlook

This will be our last weekly publication for 2022, and we wish all our readers a happy holiday season. The Fed raised the federal funds rate by 50 bps at the conclusion of its December meeting, breaking its streak of four straight 75 bps hikes. In his comments, Chairman Powell maintained a hawkish stance as the Fed continues to prioritize reducing inflation, even if it means some economic pain. On the data front, November retail sales fell by more than expected, but October’s strong gains and softer inflation readings over the last few months leave consumer spending in a relatively strong pace in the fourth quarter.

Key Takeaways:

What we learned last week: (pg. 1)

Amid pullback on goods, consumers continue to dine out

Although total retail sales were down in November, spending at restaurants remained strong – now up 14 percent over the past year.

Inflation cools further

The CPI fell for a fifth straight month in November. It remains far higher than the Fed’s two percent goal, but the trend is distinctly downward.

What we’re watching this week: (pg. 2)

December 20: Housing Starts MoM, Building Permits MoM

We look for November housing starts to decline 1.4 percent from October, falling to an annualized 1.41 million units. That level would represent a 22 percent decline from the peak 1.8 million in April 2022 — recorded just a month after the Fed started to lift rates from the effective zero lower bound. Building permits, a key leading indicator for the housing market and the overall economy, likely fell 1.7 percent in November to a 1.50 million annualized level.

December 23: Personal Income, Personal Spending, PCE Deflator

Personal income likely slowed to a 0.3 percent advance in November, following a strong 0.7 percent jump in October. However, income gains remain sturdy, underpinned by strong employment and wage growth. Consumer spending should also cool to a 0.2 percent increase in November as retail sales were weak. However, the strong rise in October places real consumer spending on a buoyant trajectory for the fourth quarter — around 3 percent annualized.  Headline and core PCE inflation should trend lower, with the headline year-on-year pace falling to 5.5 percent from 6 percent in October and core reading decelerating to 4.6 percent from 5 percent in October.

December 23: Durable Goods Orders

Durable goods orders likely fell 1.1 percent in November as a drop in aircraft orders depress the overall order count. Excluding transportation, orders likely were flat on the month. The core — nondefense capital goods ex aircraft — orders and shipment advances should be soft on the month, reflecting businesses’ caution given the uncertainty surrounding the economic outlook.