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  • Writer's pictureDimitri Petit-Frere

Economic Update October 11

ISM Non-Manufacturing Index

The ISM Non-Manufacturing Index has shown great promise. We go into detail in the following areas:

  1. Lower rates are here to stay for the foreseeable future

  2. More stimulus is likely needed to keep the recovery on track

  3. ISM Manufacturing data shows that things are getting better

  4. Jobless claims are improving, but slower than anticipated

Fed Meeting Minutes

The Federal Open Market Committee consists of members of the Federal Reserve System overseeing open market operations, the buying and selling of U.S. Treasury securities, and establishing short-term interest rates. The Committee consists of 12 members of the Federal Reserve and the Fed Chairman (Jerome Powell). The Committee meets eight times a year (every six weeks) and their 2-day meetings are held behind closed doors.

The Committee issues a formal statement immediately after and several weeks later the minutes of the meetings are released to the public. One of the best ways to understand where the economy could go is to listen to people who study it the most. The minutes for September 15-16, 2020 released last week, where they vowed to keep interest rates near zero until inflation moderately exceeds the central bank’s 2% target.

Fed officials also released projections showing they expect rates would stay near zero until the end of 2023 at least. However, Chairman Powell faced skepticism and opposition in trying to guide markets about the future path of interest rates, the minutes reveal. There were two dissents on the new policy guidance from the voting members of the Committee.

More troubling, it wasn’t known until the minutes were published last week that unease about the new policy was fairly broad among the remaining seven officials who didn’t vote. According to the minutes, “several” Fed officials balked at the strategy, in part because the guidance could limit the central bank’s flexibility.

They also argued that influencing the market’s view about the future path of short-term interest rates will make it more difficult for the Committee to achieve its objectives in the future. In stark contrast, a couple of Fed officials argued against the strategy for different reasons. They want the Fed’s commitment to keep interest rates near zero to be even stronger and less qualified.

They want the Fed to say that interest rates would remain near zero until inflation has moved above 2% for an extended period of time. Below are some of the notes from the meeting:

  1. Low Rates Are Here to Stay. …

  2. More Stimulus, Please. …

  3. Economy Rebounding. …

  4. The Fed’s New Game for Inflation and Employment. …

  5. The Fed Needs Congress to Act on Stimulus. …

  6. Inflation: 2% …

  7. Unemployment: 8.4% …

  8. 10-Year Treasury Yield: 0.66%

ISM Non-Manufacturing Index

The ISM Non-Manufacturing Index rose to 57.8 in September (levels above 50 signal expansion; levels below signal contraction.) Service sector activity accelerated in September, as companies continue the battle back from the COVID impacts that shut down supply chains and decimated the employment market.

In total, sixteen of eighteen indexes reported growth in September, while just one (professional, scientific & technical services) reported contraction. The two most forward-looking indices – business activity and new orders – both moved higher in September, following a slowing in the pace of growth in August.

New orders activity had the largest positive move in September, as businesses continue to re-open and retail activity picks up pace. Business activity, meanwhile, benefitted from the resumption of projects placed on hold as COVID hit, while companies are also putting an end of fiscal year spending to work. Both orders and activity look likely to remain elevated in the months ahead, though it will come with fits and starts.

The one main sub-index that declined in September was supplier deliveries, which rises when companies report longer delivery delays (typically a sign of more demand than companies can fill in a timely manner) and declines as delivery delays ease.

While the index declined in September, it remains above 50 signalings that supply chain pressures continue to be a concern for many businesses. The report further confirms what the preponderance of the economic reports have been telling us over recent months; the recovery is underway, and the trend is higher.

ISM Services Index from

New Jobless Claims

Initial jobless claims filed through state programs slid to 840,000 last week from a revised 849,000 in the prior week, the Labor Department reports. An unadjusted 464,437 people also filed new claims under the Pandemic Unemployment Assistance Act, the federal law that temporarily made self-employed workers eligible for benefits for the first time.

So although the number of Americans who applied for jobless benefits fell slightly to a new pandemic low, they are declining more slowly, a sign the labor market could be experiencing a setback amid another wave of corporate layoffs.

New applications for unemployment benefits have gradually receded from a pandemic peak of 6.9 million in late March, but the weekly total has fallen by less than 100,000 in the past month. New jobless claims are still quadruple the pre-crisis average and are higher than any point during the severe 2007-2009 recession.

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