Manufacturing activity expanded in September, amid ongoing recovery from supply-chain woes and generally healthy demand.

During September, manufacturing industrial production (IP) rose 0.4% relative to August and at a 5.7% annual rate over three months. For the first time since the start of the pandemic, the quarterly average of manufacturing IP exceeded its pre-pandemic peak.

Vehicle production, which has improved, is still below pre-pandemic norms. Other sectors, such as chemicals and plastics, have fared much better. Mining output, which is separate from manufacturing IP, has recovered briskly, benefiting from higher energy prices.

Continued growth in manufacturing IP is one indicator suggesting that the economy was not in recession as of September. We expect both overall and manufacturing IP to contract in the coming quarters as the economy suffers through a mild recession beginning in the fourth quarter.

Housing sector contraction sharpens

The picture is much worse in the housing sector, where the contraction has intensified, especially in the single-family segment. Permits and starts of single-family homes declined by more than one-fourth between February and September.

Homebuilder sentiment has nose-dived almost as low as it was during the sharp contraction at the beginning of the pandemic, reflecting falling home sales and diminished traffic from prospective buyers who are, naturally, responding to much higher mortgage rates. This week the average conventional 30-year mortgage rate rose to 6.94%, nearly four percentage points higher than at this time last year (3.09%). Mortgage applications for home purchases are below their lowest levels in April 2020.

We estimate that real residential investment, the measure of housing-related investment within GDP, fell at a 28% annual rate in the third quarter, and we project another decline of 24% in the fourth quarter. These declines would bring the cumulative decline in real residential investment, which began in the second quarter of 2021, to 21%. High interest rates will keep residential investment on a declining trend into 2023.

Weakness in single-family construction activity was the primary driver of a modest downward revision this week to our projection of fourth-quarter GDP growth of 0.1 percentage point to ‑1.1%. We continue to estimate that GDP rose at a 2.4% annual rate in the third quarter when it benefited from a sharp increase in net exports that we estimate accounted for three percentage points of GDP growth. We expect a much smaller contribution to GDP growth from net exports in the fourth quarter.

Interest rate expectations

Futures reflect investor expectations that the Fed will raise interest rates by about 1¾ percentage points from its current setting, with the upper end of the target range for the federal funds rate rising to a peak of 5% next year, slightly higher than our assumption of 4¾%.

We expect another super-sized Fed rate hike of 75 basis points at the upcoming policy meeting on Nov. 2. After November, we expect the pace of Fed rate hikes to slow, depending on incoming data with respect to inflation and other developments bearing on the outlook for inflation.

This week's US economic releases:

• Nominal goods deficit (Oct. 26): We are assuming a widening of the trade deficit to $91.1 billion in September from $87.3 billion in August.
• Wholesale and retail inventories (Oct. 26): We expect slower growth of both wholesale and retail inventories in September. We estimate wholesale inventories will rise 0.4% compared with 1.3% growth in August, while retail inventories will be up 0.6% compared with 1.3% in August.
• New home sales (Oct. 26): Sinking affordability (elevated prices and rising mortgage rates) is undermining the residential housing market. We estimate 582 thousand units for September, down from 685 thousand units in August.
• Conference Board's Consumer Confidence Index (Oct. 26): We await the level for October. In September, the level rose to 108.0 from 103.6 in August.
• New orders for manufactured durable goods (Oct. 27): We await the change from August when new orders fell 0.2%.
• GDP (Oct. 27): We estimate that GDP advanced at a 2.4% annualized rate in the third quarter.
• Nominal personal income (Oct. 28): We estimate a 0.3% increase in September. We also estimate that, in September, nominal personal consumption expenditures (PCE) rose 0.4%, real PCE rose 0.1%, and the core PCE price index rose 0.4%.
• Employment cost index (Oct. 28): We await the three-month change from the three months ending in June when the index rose 1.3%.

All estimates are as of Oct. 21.

Posted 25 October 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and

Ben Herzon, US Economist, Insights and Analysis, S&P Global Market Intelligence and

Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence and

Lawrence Nelson, Senior US Economist, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.