Here are 6 key economic signals for markets to follow as the Fed gets ready to make its next policy move

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Here are 6 key economic signals for markets to follow as the Fed gets ready to make its next policy move
Spencer Platt/Getty Images
  • The Fed's September policy meeting is underway, with another rate decision due on Wednesday.
  • There are six key economic indicators for markets to gauge the health of the US economy.
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As the Federal Reserve kicks off its two-day policy meeting, there are a slew of economic indicators that could signal what the central bank may do next.

Central bankers convened for the September Federal Open Markets Committee Meeting Tuesday, and officials are expected to announce their next interest rate decision Wednesday afternoon. Markets are currently pricing in a 99% chance the Fed will choose to keep interest rates unchanged, according to the CME FedWatch tool.

Still, the Fed has warned it could keep interest rates elevated over the long haul, which could spell bad news for the stocks and the economy. High rates help the Fed accomplish its goal of lowering inflation, but raise the risk of overtightening the economy into a recession, economists warn.

"We see little in the latest numbers to alter our view that the Fed will be unwilling to declare 'mission accomplished' in its fight against inflation until the labor market softens and wage pressures move to a range of 3.5 percent or lower for a sustained period," Brent Schutte, the chief investment officer of Northwestern Mutual Wealth Management, said in a note on Monday.

"Unfortunately, leaving rates at the current restrictive level is likely to lead to a shallow and short-lived recession, in our view," he later added, though he noted that the Fed had plenty of room to reverse monetary policy should a recession start.

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Schutte pointed to six economic indicators for investors to watch, some of which signal storm clouds on the horizon for the US economy.

1. Disinflation is slowing

Inflation has cooled significantly from highs last summer, but prices remain well-above the Fed's 2% target. Prices re-accelerated 3.7% year-per-year in August, up from the last month's 3.2% price growth.

The 16 Percent Trimmed Mean CPI, a inflation gauge from the Cleveland Fed that excludes components with extreme price changes, also shows a slowing pace of disinflation. Prices grew 0.29% in August, higher from July's 0.22% price growth.

"While one month does not make trend, the latest inflation readings suggest that achieving further progress in reducing price pressures may be difficult until wages begin to soften which is unlikely to occur without a corresponding recession," Schutte warned.

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2. Small business optimism is waning

Small business optimism slumped over the past month to 91.3, down 0.6 points from July's reading. Additionally, August marked the 20th straight month where small business optimism fell below the 49-year average of 98, reflecting small businesses' growing concern over inflation.

3. Retail sales are rising while wages are falling

Retail sales have surged 2.5% over the last year, according to the latest Census Bureau data. But real wages of Americans have actually fallen 0.5% over the past month, according to the Bureau of Labor Statistics, which could spell trouble for the US consumer.

Some economists have already sounded the alarm on Americans' dwindling savings and seemingly unsustainable spending patterns. The San Francisco Fed forecasted Americans' excess savings from the pandemic will run out by the end of this quarter, which will remove a critical buffer to the economy.

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4. Manufacturing production is weak

Manufacturing production, the largest component of industrial production, rose just 0.1% in August, down from 0.4% increase recorded last month. On year-per-year terms, manufacturing is down 0.6%, while industrial production is up a measly 0.25%.

5. Consumer sentiment is falling

Consumer sentiment eased to 67.7 in September, according to the University of Michigan's latest survey. That reading is about a 3% decline from the 69.5 recorded in August, though it's up 15.5% from September of last year, when consumer sentiment clocked in at 58.6.

Meanwhile, consumer inflation expectations also eased slightly, though they remain above the Fed's 2% long-run inflation target, with Americans expecting inflation to accelerate 3.1% over the next year and 2.7% over the long-term.

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6. Unemployment is rising

Jobless claims rose to 220,000 over the past week, up 3,000 from the week prior. That could be a sign of a weakening labor market, though employment conditions are still strong overall, with the 4-week rolling average of new jobless claims clocking in at 224,500, the lowest since February.

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