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Quarterly Economic Update: Q3 2018

U.S. Economy: Data Show Jobs Market, Service, Manufacturing Sectors Remain Strong

After growing at an annualized rate of 4.2% in the second quarter, the U.S. economy’s performance in the third quarter will likely show some signs of deceleration.

The last time the U.S. economy grew above 4.0% was in the third quarter of 2014. While the upcoming third quarter report on gross domestic product (GDP) is unlikely to match that of the second quarter, economists still expect growth to be near 3.0% or more, though they’ve recently trimmed their forecasts.

That followed data in late September pointing to a widening trade gap – partly due to a rise in exports in the second quarter ahead of U.S. tariffs on Chinese goods and China’s expected retaliatory tariffs on U.S. exports. As of late September, the average third quarter forecast in the CNBC/Moody’s Analytics Rapid Update survey of economists was 3.2%, 0.2 percentage point lower from the previous forecast, CNBC reported.1

Trade figures released in late September by the Census Bureau2 showed that the U.S. trade deficit in goods widened for the third month in a row. Exports of goods fell 1.6%, partly due to a 9.5% decline in exports of foods, feeds and beverages. Exports of industrial supplies and autos also fell in August.  Wholesale and retail inventories rose, however, indicating some stockpiling ahead of tariffs and could partly offset the impact of a widening trade deficit on economic growth in the third quarter.

NAFTA Reboot

While the brewing trade war between the U.S. and China remains unresolved, U.S. negotiators did solidify a trade deal with Canada just as the third quarter came to an end. The reworking of the North American Free Trade Agreement (NAFTA) which includes Mexico (negotiators from those two countries had worked out a deal in August) is now known as the United States-Mexico-Canada Agreement, or USMCA.

The agreement between the three countries lifts the threat of a 25% tariff on imported autos from Canada and Mexico which the Trump administration had proposed – a threat that could have impacted roughly $360 billion in autos and auto parts the U.S. imports each year. The U.S. and Canada also agreed to changes in the dairy industry, with Canada set to open up its market further to U.S. dairy products.

For the auto industry, certain conditions still apply under USMCA, according to this CBC report. Under the new deal, for example, 75% of a vehicle’s parts have to originate in North America, up from 62.5% under NAFTA. New labor rules also apply – 40% of the auto’s content must come from plants that pay workers at least $16.00 an hour. Also 70% of the steel and aluminum must originate on the continent.3

Jobs, Services, Manufacturing Strong

Released in early October, reports on the health of the nation’s job market and services and manufacturing sectors revealed that the economy remains robust. The flurry of data led to a surge in U.S. Treasury yields on October 3, which continued the following day. The yield on the 10-year Treasury note settled at 3.159% on October 3, representing its highest yield since July 2011.

The ADP National Employment report showed that private sector employment rose by 230,000 jobs in September compared to the previous month. The report, produced by the ADP Research Institute and Moody’s Analytics, noted that the professional and business services industry and construction were the key growth areas, adding almost half of all new jobs in September. “At the current pace of job creation, unemployment will fall into the low 3%’s by this time next year,” Mark Zandi, chief economist of Moody’s Analytics, said in the news release.4

Two releases from the Institute for Supply Management (ISM) showed that the services and manufacturing sectors continue to expand. The ISM non-manufacturing index rose to 61.6 in September, up from 58.5 in August. The most recent index reading was the highest since it was created in 2008 and above the 58.0 that economists surveyed by Refinitiv (the former Thomson Reuters unit) expected.5

The ISM’s purchasing managers index fell 1.5 percentage points from the previous month, posting a reading of 59.8 for September, reflecting declines in new orders and supplier deliveries. Readings above 50 still generally indicates expansion.

“Demand remains robust, but employment resources and supply chains continue to struggle, but to a lesser degree,” Timothy Fiore, chairman of ISM’s manufacturing survey, said in the press release. “Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations.”6

With the strong economic data, the Federal Reserve may likely stick to its pattern of raising short-term interest rates gradually as it has done in the current rate tightening cycle. On September 26, the Federal Open Market Committee raised short-term interest rates by 25 basis points to a target range of 2.00% to 2.25%. It was the third rate hike of 2018 and the eighth in the current cycle since the FOMC began raising rates back in December 2015. The Fed penciled in the possibility of another rate hike this year. For 2019, it forecast the possibility of as much as 1 percentage point rise in the federal funds rate during the course of the year in its projections released in late September.7

Housing Market: Pricing, Inventory Levels Beginning to Loosen

Yet mortgage rates continue to rise, pressuring affordability

Higher mortgage rates, slowing home price appreciation and more sellers lowering their prices point to a potential shift in the housing market over the next several months.

While real estate agents say that current renters want to become homeowners, there aren’t enough properties available in their price range, according to Lawrence Yun, the National Association of Realtors’ chief economist. Yun’s organization reported in late September that the pace of existing home sales in August was unchanged compared to July at a seasonally-adjusted annual rate of 5.34 million.8

Compared to a year ago, existing home sales were down 1.5%, but the unchanged August figures represented the first month in which sales remained steady after four straight months of declines. Total housing inventory was unchanged in August from the previous month at 1.92 million available existing homes for sale. Unsold inventory is at a 4.3-month supply at the current sales pace, up from 4.1 months a year ago.

“While inventory continues to show modest year over year gains, it is still far from a healthy level and new home construction is not keeping up to satisfy demand,” Yun said. With a majority of properties selling within a month, more inventory – especially moderately-priced, entry-level homes – would propel sales, he said.

There are signs, though, that some market conditions may be loosening up. On the pricing front, data from firms tracking the housing market do show that appreciation is easing. Sellers, too, are lowering prices.

Real-estate brokerage firm Redfin reported that home-sale prices increased 4.7% in August to a median of $300,900, compared to a year ago.9  The price growth rate has been declining for six consecutive months and hasn’t been this low since August 2014. CoreLogic, which maintains among the largest and most comprehensive property and financial databases in the U.S., reported that national home prices increased 5.5% in August compared to a year ago, the slowest year-over-year gain since October 2016.10

Figures from Redfin also show that nearly 23.0% of homes sold in the four weeks through September 23 sold above the asking price, across the metro areas that Redfin tracks. That represented a 2.6 percentage point decline compared to the same period a year ago. It also marked the lowest point for homes selling above their asking price since 2016.

In addition, a record-high percentage of sellers dropped their prices in the previous four-week period through September 16. “Inventory pressures are easing in the hottest markets, which is welcome news for homebuyers who are increasingly able to submit an offer without competition and get bids accepted without offering above list price,” Redfin senior economist Taylor Marr said, in this online post.11

Other market indicators point toward a slowdown in the housing market. In late September, the Census Bureau12 reported that single-family housing starts rose by 1.9% in August, compared to the previous month – a figure that was lower than it was during the spring. New permits, which show how much construction is in the pipeline, fell to their lowest for the year.

For their part, 30-year mortgage rates hit their highest level in more than seven years in the final week of the third quarter, according to Freddie Mac. Expectations of more interest rate increases from the Federal Reserve and a backup in 10-year Treasury note yields (which highly influence mortgage rates) have led to mortgage rates moving higher.

Since the end of August, 30-year, fixed-rate mortgages have jumped by about 20 basis points and were at 4.71% as of October 4. High consumer confidence, the strong economy and growth in the job market haven’t resulted in gains in the housing market. “With mortgage rates expected to track higher, it’s going to be a challenge for the housing market to regain momentum,” Freddie Mac said, in its weekly Primary Mortgage Market Survey.13



Global Stocks: S&P 500 Had Best Quarterly Performance Since 2013; Japan’s Nikkei Rises

Treasury yields surge to start the fourth quarter

Higher corporate profits and more good news about the strength of the U.S. economy helped dispel concerns about how the tariff battle between the U.S. and China will play out, leading to U.S. stocks performing well against most other benchmarks across the globe. An exception to the outperformance that U.S. stocks have enjoyed for much of the year was the Japanese market, where the Nikkei 225 hit an intraday high on the final day of the third quarter, a level not reached since November 1991.

While small capitalization stocks in the U.S. fell in September, they remained strong performers during the quarter and their year-to-date price returns continue to be near or beyond those of large caps.

The S&P 500 gained 7.20% in the third quarter, its best quarterly performance since the end of 2013. The Dow Jones Industrial Average rose 9.01% as investors seemed to shrug off the trade dispute’s potential effects on the large multinational companies that make up the Dow. The Nasdaq composite increased by 7.14%. During September, the final month of the third quarter, the S&P 500 posted one new closing high, while the Dow hit two new record highs.

The health care industry sector performed the best during the quarter, registering a 14.04% gain. That was followed by the industrials sector, up by 9.46%, the information technology sector, which rose by 8.49%, and the communication services sector (formerly telecommunication services), which increased by 8.39%, according to S&P Dow Jones Indices14.

(Changes to the S&P’s industry sectors were made in September. You can find out more in this BCJ Insights Market News post from September 7.)

On the small cap front, the S&P SmallCap 600 also declined in September. It fell by 3.32%, its worst monthly performance since February. Still, for the year through the third quarter, the SmallCap 600 is up by 13.42%, according to S&P Dow Jones Indices.

With the SmallCap 600’s monthly decline, the outperformance of the large cap S&P 500 at 3.75% was that index’s largest since September 2014. The divergence between the performance of the two indexes doesn’t often happen historically, according to Jodie Gunzberg, managing director, head of equities, S&P Dow Jones Indices.

In only 24 months out of 297 months when the S&P 500 hits a new high has the S&P SmallCap 600 declined. There may currently be a bearish signal from the inability of small caps to keep up with the large cap momentum, though other factors in the upcoming quarter may still be favorable for small caps.

“Going into Q4, there may be politics and turmoil, but if there is growth, rising interest rates, inflation or a rising dollar, those conditions are historically supportive of small caps,” she said in this Indexology blog post15.



Strong Data Contributes to Higher Treasury Yields

After a rather rangebound period for U.S. government debt, Treasury yields have risen substantially in recent weeks following the news of strong economic data. The yield on the 10-year Treasury note ended the third quarter at 3.06%, up from 2.86% in August.

During the first week of October, the 10-year note’s yield hit its highest level in seven years. As of the close of October 4, the 10-year note’s yield stood at about 3.19%

The recent rise in government yields may present some challenges for stocks going into the fourth quarter. While higher yields mean lower bond prices, they may also entice institutional investors to move some funds out of richly-priced U.S. stocks into safer government debt if their risk reward and return targets become compelling.

Other factors that may play a role in the performance of domestic stocks during the fourth quarter are the prospects of a turbulent mid-term election, rising interest rates and potential inflation woes (oil prices, for example, are once again on the rise).

Overseas, the declining Japanese yen, (which makes exports more competitive), rising corporate profits and attractively low valuations on Japanese stocks compared to other markets like the U.S. have helped lift performance of the Nikkei 225. For the third quarter, the Nikkei 225 rose by 8.14%. It has gained 5.95% since the start of this year through the end of the third quarter.

Commodities: Disruptions Could Add to Oil’s Price Volatility in the Fourth Quarter

Crude oil rallied to surpass $80 a barrel in September as the oil market braces for the impact of the implementation in November of U.S. sanctions on Iran. Supply disruptions from Libya, Nigeria and Venezuela have added to the uncertainty.

Since the year began, Brent crude, the global benchmark for oil prices, is up 23.7% and posted a 4.13% gain in the third quarter at $82.72 a barrel. Though declining 1.2% during the quarter, West Texas Intermediate (WTI) crude has been on a similar run – up 21.23% this year through the end of September. WTI ended the third quarter at $73.25 a barrel.

During the first week of October prices have fluctuated, hitting four-year highs but then retracing some ground. More volatility may likely be on the horizon in the coming weeks and months.

With the sanctions on Iran looming, prices may come down to how oil producers impact supply and demand. On the one hand oil producers may not be able to keep up with global demand, while, on the other, is the prospect that countries within the Organization of the Petroleum Exporting Countries (OPEC) and other producers could will lift production to replace any shortfalls. The latter scenario would keep a lid on prices.

Estimates vary widely of the potential disruption to global daily supply from Iran’s ability to produce and export oil, with forecasts ranging from 500,000 barrels per day up to 2 million barrels per day. The uncertainty is setting up the fourth quarter to be a potentially volatile period for the oil market.

Daniel Jaeggi, president of commodity merchant Mercuria Energy Trading, told Reuters that supply disruptions make a crude price spike to $100 a barrel possible. “We’re on the verge of some significant volatility in Q4 2018 because depending on the severity and duration of the Iranian sanctions, the market simply does not have an adequate supply response for a 2 million barrel a day disappearance of oil from the markets,” he said.16



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1Domm, P. (2018, September 27) Tariff wars taking some of the steam out of still strong US economic growth. CNBC Market Insider with Patti Domm. Retrieved from:

2U.S. Census Bureau (2018, September 19) Monthly Advance Economic Indicators Report, August 2018 [Press release.] Retrieved from:

3McGregor, J. (2018, October 4) Auto industry relieved by NAFTA 2.0, but results may be mixed. CBC News Analysis. Retrieved from:

4ADP. (2018, October 3). ADP National Employment Report: Private Sector Employment Increased by 230,000 Jobs in September. ADP National Employment Report [Press release.] Retrieved from:

5Imbert, F (2018, October 3) ISM non-manufacturing index hits 61.6 in September, vs. 58 estimate. CNBC. Retrieved from:

6Institute for Supply Management (2018, October 1) September 2018 Manufacturing ISM Report On Business [Press release.] Retrieved from:

7The Federal Reserve. (2018, September 26) Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, September 2018. Retrieved from:

8National Association of Realtors. (2018, September 20) Existing-Home Sales Remain Flat Nationally, Mixed Results Regionally [Press release.] Retrieved from:

9Ptaszynski, A. (2018, September 24) Home Prices Up 4.7% in August, Lowest Price Growth in Four Years. Redfin: Real Estate News & Analysis. Retrieved from:

10CoreLogic Insights Blog. (2018, October 2) National Appreciation Slowest in Nearly Two Years. Home Price Index Highlights: August 2018. Retrieved from:

11Ptaszynski, A. (2018, September 28) The Share of Homes Selling Above List Price Just Dropped Below 2016 Levels. Redfin: Housing Market News. Retrieved from:

12U.S. Census Bureau (2018, September 19) Monthly New Residential Construction, August 2018 [Press release.] Retrieved from:

13Freddie Mac (2018, October 4). Mortgage Rates Largely Hold Steady. Primary Mortgage Market Survey: U.S. weekly averages as of 10/04/2018. Retrieved from:

14Silverblatt, H. (2018, October 2). U.S. Equities Market Attributes September 2018. S&P Dow Jones Indices. Retrieved from:

15Gunzberg, J. (2018, October 1). Bearish Divergence May Signal Stock Market Warning. Indexology Blog, S&P Dow Jones Indices. Retrieved from:

16Glostein, H. (2018, September 23). Oil could rise to $100 by 2019 as global markets tighten, merchants warn. Reuters. Retrieved from:

Sources for Financial Data:

Dow Jones Industrial Average:                                                                                                                                                                 

S&P 500:                                                                                                                                                                                                                                                                                                               


10-Year TIPS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

10-Year Note Yields:     

Nikkei 225:                                                                                                  

Brent Crude:             

West Texas Intermediate:

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