The advance estimate on real GDP growth for the third quarter released at the end of the preceding week sends a pretty clear signal. The economy is still struggling to crank out growth in excess of 2.0%, while core inflation rates continue to unwind downwards and further away from the Fed's target of just below 2%.

Indicators next week are expected to be consistent with these underlying trends, with modest real consumption growth in September in conjunction with weak construction spending. More recent signals from October will point in the direction of "steady as she goes," which is a slow chug forward, with not much change in the ISM indicators from their September levels, while motor vehicle sales are expected to track sideways.

At the end of the week we will get similar news from employment market, with private sector employment expected to advance by about 80,000 jobs, close to the average in private sector job gains that we saw in the prior three months.

The pregnant moment of the week will arrive on November 3, when the Federal Open Market Committee will issue its press release and updated policy guidance. Markets have been trying to guess the likely moves from the FOMC on a second round of quantitative easing now for weeks, based on pretty clear signals from the chairman and other key Federal Reserve officials that the FOMC is leaning in that direction

Estimates of the size of the expected program have ranged from $500 billion to over $1 trillion. Our best guess is that the FOMC will launch a program of at least $500 billion, and possibly with some flex of up to $800 billion. The Fed will launch a set of incremental purchases and adjust its end target based on the performance of the economy.

Markets have already discounted at least $500 billion, so the Fed is somewhat boxed in if it wants to move long-term rates down further. Indeed, there has been some scaling back of expectations in the past week or so, and bond yields have cycled back up. The bottom line is that this will be a large program, and a significant chunk of the new Treasury funding for fiscal 2011 (which will average just over $100 billion per month) will be taken off the table from November 2010 through about March 2011. From a portfolio balance perspective, this should do the trick of keeping long-term rates down and flattening out the yield curve.

KEY U.S. DATA RELEASES THIS WEEK

Monday, November 1 – Personal Income, Consumption, and Prices (Sep.)

Personal Consumption, Nominal

• IHS Global Insight: 0.3%
• Consensus: 0.4%
• Last Actual: 0.4% (Aug.)

Personal Consumption, Real

• IHS Global Insight: 0.2%
• Last Actual: 0.2% (Aug.)

Core PCE Price Index

• IHS Global Insight: 0.0%
• Consensus: 0.1%
• Last Actual: 0.1% (Aug.)

Personal Income

• IHS Global Insight: 0.1%
• Consensus: 0.3%
• Last Actual: 0.5% (Aug.)

What to Look For

• Personal income growth will be only 0.1%.
• Real consumption will advance by 0.2%.
• The core PCE index will be flat.

Implications

We expect September personal income growth to be only 0.1%, much slower than August's 0.5%, which overstated the underlying trend due to the reinstatement of the unemployment insurance extended benefits program. Private wages and salaries are expected to edge up just 0.1%, while government wages and salaries should drop due to heavy job cuts at the state and local level.

Consumer spending is expected to rise 0.3% in nominal dollars and 0.2% adjusted for inflation in September; driven by increased durable consumption due to pent-up demand and falling prices. Spending on services is expected to rise at roughly the same pace as in August, but nondurable spending should grow at a slower pace. The advanced third-quarter GDP release reported real consumer spending at 2.6%; close to our expectation once we factored in the retail sales revisions for July and August. Spending growth has picked up, but needs income growth to accelerate as well if the faster pace is to be maintained.

The core PCE price index for September is expected to be flat month-on-month, and up just 1.2% year-on-year, underscoring the Fed's fears of deflation.

Monday, November 1 – Construction Spending (Sep.)

Construction Put in Place

• IHS Global Insight: -0.1%
• Consensus: -0.5%
• Last Actual: 0.4% (Aug.)

Construction Excl. Residential Improvements

• IHS Global Insight:-0.2%
• Last Actual: 0.4% (Aug.)

What to Look For

• Overall construction spending will ease slightly after a strong bounce in the previous month.
• Public infrastructure spending will be the main driver.

Implications

August was a good month for public construction. Total spending jumped 2.5%, and spending levels for June and July were revised up. Infrastructure spending accounted for the strong gains. We are expecting another strong month for this category in September—with the gains, again, coming from infrastructure spending. But this will be offset by declines in both private nonresidential and residential construction, with total spending inching down slightly, by 0.1%.

Monday, November 1 – ISM Manufacturing Index (Oct.)

• IHS Global Insight: 54.4
• Consensus: 54.0
• Last Actual: 54.4 (Sep.)

What to Look For

• The ISM index for manufacturing should be little changed at 54.4 in October.

Implications

This widely watched measure of the manufacturing sector has held up well in recent months despite being buffeted by headwinds from a slowdown in orders momentum and erratic production growth. Little has changed to move the goods portion of the economy to faster growth, but a reading of 54.4 still shows forward progress.

Wednesday, November 3 – ISM Non-Manufacturing Index (Oct.)

• IHS Global Insight: 53.0
• Consensus: 53.5
• Last Actual: 53.2 (Sep.)

What to Look For

• The ISM index for non-manufacturing is expected to remain about unchanged at 53.0 in October.

Implications

Employment conditions improved marginally in October, and freight volumes picked up, reversing a slight decline in the preceding month, but new orders momentum probably eased downwards. Financial market conditions also generally improved.

Wednesday, November 3 – FOMC Announcement (Sep.)

• IHS Global Insight: 0.00-0.25
• Consensus: 0.00-0.25
• Last Actual: 0.00-0.25 (Aug.)

What to Look For

• The FOMC is expected to embark on a second round of quantitative easing.
• The overall program is expected to be in the range of $500–800 billion, with incremental purchases calibrated to the performance of the economy.
• Interest rate guidance will remain unchanged, and the usual dissenter will play the same card.

Implications

We are expecting the FOMC to announce an overall program of up to $500 billion (the upper bound could be as high as $800 billion), mainly focused on 2- to 10-year Treasuries, with a plan for incremental purchases at a rate of about $100 billion per month over the next five months. The purchases would be calibrated to the performance of the economy, so if growth and inflation revive fairly quickly, the Fed could adjust its end target downwards, and vice versa. Market expectations have been all over the map, but at this point at least $500 billion is already discounted in rates and equities, so if the Fed announces less than this amount the market reaction would be mildly negative. Otherwise we expect the FOMC to retain a carbon copy of other key language, and the usual dissenter will register his vote. Fed central tendency forecasts will be revised down at this meeting, but they will not be published until the minutes are released three weeks later.

Wednesday, November 3 – Motor Vehicle Sales (Oct.)

• IHS Global Insight: 11.68 Mil.
• Consensus: 11.80 Mil.
• Last Actual: 11.73 Mil. (Sep.)

What to Look For

• Sales will track near 11.7 million, about unchanged from the previous month.

Implications

We expect October sales to match last month’s performance of 11.7 million, which was the highest SAAR level so far this year. Although far from a recovery, automakers hope that this will signal a thawing out of consumer confidence.

Thursday, November 4 – Productivity, Final (percent change, Q3)

Nonfarm Business Productivity

• IHS Global Insight: 2.5%
• Consensus: 0.8%
• Last Actual: -1.8% (Q3, preliminary)

Unit Labor Costs

• IHS Global Insight: 0.3%
• Consensus: 0.9%
• Last Actual: 1.1% (Q3, preliminary)

What to Look For

• Productivity is expected to accelerate on solid business sector output.

Implications

Third-quarter labor productivity should come in at a robust 2.5% growth rate on a 3.0% increase in output and a 0.5% increase in hours. Unit labor costs will be tame, up a mild 0.3%, a result of a 3.0% increase in output and a 3.3% increase in hourly compensation.

Friday, November 5 – Employment Report (Oct.)

Nonfarm Payrolls

• IHS Global Insight: 80k
• Consensus: 60k
• Last Actual: -95k (Sep.)

Unemployment Rate

• IHS Global Insight: 9.7%
• Consensus: 9.6%
• Last Actual: 9.6% (Sep.)

Average Hourly Earnings (All Employees)

• IHS Global Insight: 0.1%
• Consensus: 0.2%
• Last Actual: 0.0% (Sep.)

What to Look For

• We expect payrolls to increase by 80,000 in October, continuing the very gradual improvement in the labor market.
• The unemployment rate will tick up slightly to 9.7%.

Implications

There should be very little distortion to headline employment from departing Census workers this month, since almost all of the temporary Census workers had left the government payroll by September. The private payroll increase should be very similar to the headline, at around 80,000, and would compare with a 64,000 increase in private payrolls in September. The unemployment rate is expected to edge up slightly to 9.7% from 9.6%, since the economy is not generating enough jobs to keep pace with the underlying growth in the labor force.