This Week's State Of The Economy - What Is Ahead? - 23 September 2022

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Sep 27, 2022

This Week's State Of The Economy - What Is Ahead? - 23 September 2022

Wednesday's FOMC rate decision was the headline economic news this week. As widely expected, the Committee raised the target range for the fed funds rate by 75 bps for the third consecutive time. Updated forecasts were released as well, with inflation expected to remain well above the Fed's 2% target for longer than previously published in June. As such, the median projection for the year-end fed funds rate rose a full percentage point (pp) for 2022 and increased 0.8pp for 2023. Real GDP growth projections were also slashed for this year and next, while unemployment is expected to be higher. On balance, the meeting underpinned the FOMC's firm commitment to do whatever it takes to bring inflation back down to earth. See Interest Rate Watch for more detail.

The rapid rise in the fed funds rate (the upper bound sits at 3.25%) has put pressure on interest-rate sensitive sectors. Housing, in particular, has faltered as mortgage rates have climbed. The NAHB/Wells Fargo Housing Market Index (HMI), a measurement of home builder sentiment, slid three points to 46 in September—the ninth straight monthly decline. Notably, an HMI reading below 50 indicates that more builders report conditions as "poor" than those who see conditions as "good."

The skid in builder sentiment mirrors the trend decline in home construction. Total housing starts surprised to the upside in August, increasing 12.2% over the month. Single-family starts rose 3.4% and multifamily starts increased 28%. Improving supply chain conditions likely increased building material availability during the month, allowing builders to move forward with projects already in the pipeline. Meanwhile, building permits, a forward-looking indicator that leads housing starts by a couple of months, plummeted 10% in August. The drop in permits reflects the ongoing trend of builders tapping the brakes on construction in response to weaker demand and rising financing costs.

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