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December Consumer Prices, Real Income and Industrial Production

KEY DATA: CPI: -0.4%; Excluding Energy: 0%; Food: +0.3%/ Real Earnings: +0.1%/ IP: -0.1%; Manufacturing: +0.3%

IN A NUTSHELL:   “Falling prices may worry some but households are ecstatic and manufacturers are gearing up to meet the growing demand.”

WHAT IT MEANS:  Horrors of horrors, energy prices are falling.  If you watch the business news, that is what you would think.  With another sharp drop in gasoline, the Consumer Price Index posted its largest decline in six years.  So, should we worry?  Not really.  Excluding energy, prices were flat and over the year, non-energy costs were up nearly 2%.  That is not deflation.  The December report was really odd.  There were a large number of components that posted outsized changes.  Apparel and used vehicle prices fell by over 1% while medical goods and energy services rose 1%.  Just about every major category was either up or down by 0.2% or more and that is not a normal pattern.   As for deflation, don’t tell that to people who have to spend a lot of their money on food and utilities.  Those costs were up solidly.  My suggestion: Stop looking at the headline number because when oil turns around, and it just might be starting to do that, the sign will simply change even if the magnitude doesn’t.

Real earnings rose modestly in December and that is distressing.  When prices fall sharply, if all you can get is a small rise in spending power, there are real problems out there.  This economy would be a lot better off with a little more money going to workers.

It will take additional quarters of strong growth to get to the point in the labor market where businesses will have to start raising wages faster and that growth is likely to occur.  Industrial production fell in December but a warm December (hoorah!) caused utility output to tank.  Meanwhile, manufacturing production rose solidly once again, despite a small pull back in vehicle assembly ratesThe University of Michigan’s mid-month reading of consumer sentiment rose to its highest level in eleven years.  It’s almost as if happy days are here again. The lower gas prices are going to wind up in the economy and better wage gains could trigger robust consumption.

MARKETS AND FED POLICY IMPLICATIONS: The economy is growing solidly and households are a happy bunch of campers once again, so it looks like 2015 should be a really good year.  Strong growth, coupled with oil price stability or even increases, will make people forget the idea of deflation and turn to the more important issue: When will the dam that is holding back wage gains break?  Normally, labor shortages lead to rising wages, which begin slowly once the inability to find workers starts appearing.  That is not happening this time.  Instead, we are creating the next “bubble”, which is the pent-up demand for higher wages.  The longer we go without slowly raising wages, the greater the surge will be.  The Fed may think it has time because labor compensation growth is largely non-existent.  But if my view is correct, when the capitulation occurs, wages will jump, catching the Fed with its rates down.

December Retail Sales and Import Prices

KEY DATA: Sales: -0.9%; Gasoline: -6.5%; Internet: -0.3%/Import Prices: -2.5%; Nonfuel: -0.1%; Exports: -1.2%; Farm: -0.7%

IN A NUTSHELL:  “It doesn’t look like consumers shopped ‘till they were tired, let alone ‘till they dropped in December.”

WHAT IT MEANS:  In the critical holiday shopping season, it doesn’t look like the urge to splurge took hold.  Retail sales fell in December, but that was not a shock.  We knew that vehicle purchases had come down from unsustainable heights to more reasonable levels and gasoline prices had crashed.  These data are not adjusted for prices, so the decline in gasoline purchases was likely a price issue.  But there were weaknesses in other categories.  Electronics and appliance demand, which had been largely going nowhere, turned negative.  You mean everyone didn’t go out and buy a curved screen TV for a couple of grand?  Prices were low but there are no affordable new products that have caught peoples’ attention.  Phone sales seemed to be solid, but I guess not good enough.  The milder winter, at least compared to last year, probably helped create the sharp drop in Home Depot/Lowes type stores.  Households bought less clothing, sporting goods and general merchandise as well.  But we did spend more money on food – both at home and away – as well as on furniture.  That was it.  Not a lot of shopping went on.

On the inflation front, there is none.  Import prices fell sharply as energy drove the decline.  Excluding fuel, costs were off modestly.  Consumer and capital goods costs edged downward while vehicle prices were flat.  Unfortunately, food costs keep rising and that is not good news for the consumer.  On the export side, prices were down pretty much across the board, led by a huge drop in energy and a sharp decline in agricultural prices.

MARKETS AND FED POLICY IMPLICATIONS:  Rising consumer optimism, more jobs and lower energy costs were expected to create a really good holiday shopping season.  It doesn’t look like that happened.  I guess for all those workers who didn’t see any increase in incomes, buying a whole lot more was not in the cards.  We need better wage gains so the 147 million people employed have more money in their paychecks.  That still is not happening, so business people who are disappointed by the economy should keep in mind that if they don’t pay their workers more, their workers cannot spend more.  The other thing to remember is that the additional money left in peoples wallets when they leave the gas station is relatively small.  It takes time for the impact to build up.  Thus, while spending should rise, don’t expect it to surge. So, what do these reports mean for the markets and the Fed?  Investors will not like the retail sales report as it relates to earnings.  But a solid but not robust economy, coupled with no inflation means the Fed can be very patient.  That should assuage some of the angst.  Regardless, I have no idea what is driving investors at any given moment these days and given the volatility, I don’t think anyone does.

November Job Openings and December NFIB Small Business Survey and Employment Trends

KEY DATA: Openings: +142,000; Hires: -111,000/NFIB Optimism: +2.3 points/Employment Trends: +0.5%

IN A NUTSHELL:   “Though small businesses are becoming more optimistic and job openings are increasing, hiring has yet to hit its full stride.”

WHAT IT MEANS:  The December jobs number was a lot better than expected with firms of all types hiring people with all kinds of skills.  But we can and likely will do better.  The Bureau of Labor Statistics reported that in November, the number of job openings rose solidly.  The rate of openings has now reached the highest point in nearly 14 years.  Basically, there are an awfully lot of open recs for positions, despite the fact that hiring has ramped up.  But with the number of openings surging by over 20% over the past year, the 9% increase in hiring could not keep up.  Part of the problem may be the continued unwillingness of workers to leave their jobs.  While the number of people quitting was up nearly 7% over the year, the quit rate is not much different than where it was during the early part of the recession.

If job gains are to accelerate, the small business sector will have to play a major role and that is a real possibility.  Small Business optimism jumped in December to its highest point since October 2006.  The percentage of owners thinking it is a good time to expand soared and is finally approaching more typical expansion levels.  Similarly, hiring and compensation plans are nearly at normal levels as well.

Finally, the December Conference Board Employment Trends Index was released yesterday and it rose sharplyOver the year, the index increased a robust 7.5% and the gains accelerated in the fourth quarter.  That too points to better job growth ahead.   

MARKETS AND FED POLICY IMPLICATIONS: The likelihood is that the strong job gains we have been seeing will continue and may even ramp up.  Ultimately, those openings will have to be filled.  Right now, hiring, despite the solid payroll increases, is not as strong as it can be.  Small businesses are saying that they cannot find qualified workers, but they are at a point where they will have to either raise wages more and/or expand their employee search activities.  Meanwhile, if you talk to employment services firms, you discover that large companies are still dithering over their hiring decisions.  They haven’t figured out that the longer the wait the more candidates they lose.  Many companies still think they are living in a world of unlimited supply where they can pick and choose employees as they please.  That reality is disappearing, as witnessed by the huge number of openings, but clearly not enough to change behavior significantly.  It is only a matter of time.  And time is what the Fed seems to think it has.  I still believe that wage pressures are being artificially dampened and when they break out, the increases will be rapid.  But I have been saying that for a while now and it has not come about.  That only tells me that the pressures may be even greater than I thought and if they are, the Fed will once again find itself behind the curve.

December Employment Report

KEY DATA: Payrolls: +252,000; Revisions: +50,000; Private Sector: +240,000; Unemployment Rate: 5.6% (down 0.2 percentage point); Hourly Wages: -0.2%

IN A NUTSHELL:   “Firms may be hiring like crazy but they are not paying up for those workers, at least not yet.”

WHAT IT MEANS:  Today I get to be a true economist: There is both good news and bad news in the December employment report.  Let’s start with the positive.  The economic jobs machine has shifted into high gear.  Payrolls rose strongly in December and both the October and November gains were revised upward.  On average, employment increased by an average of nearly 290,000 per month over the past three months.  For all of 2014, almost 3 million new positions were added, the most since 1999, the peak of the Y2K/dot.com boom.  Job gains were across the board, with construction, manufacturing, finance, health care and especially restaurants adding workers solidly.  We are eating out again and that is a great sign.  Also, the public sector has finally started to help out with state and local governments hiring as their revenues continue to rise.  While the federal government, excluding the ever-shrinking postal service, is not hiring very much, at least it is no longer cutting workers.

There was also a very sharp drop in the unemployment rate.  We hit the lowest level since June 2008.  Okay, the labor force declined as did the participation rate, but by now, everyone should know what I think of those numbers.  The labor force growth in 2014 was disappointing but it did pick up quite sharply in the second half of the year.  As for the participation rate, it was down only 0.1 percentage point from December 2013.  It has stabilized recently.

The disappointing aspect of the report was the decline in the hourly wage and a downward revision to the November increase.  While the labor market continues to tighten, firms seem to be able to put off raising wages. 

MARKETS AND FED POLICY IMPLICATIONS:  This was a really good report but the wage numbers keep it from being a great one.  I am just not sure what to make of the hourly earnings data.  For example, there were hourly wage declines in manufacturing, education and health care, finance, information services and utilities.  These are not your typical low pay sectors where you would expect worker pay to fall, especially when demand is rising.  While retail wages were off, they were flat in hospitality and leisure.  Basically, I am not so sure we should make any judgments about worker compensation from these numbers.  That is important since the Fed is watching inflation closely, especially since some members are concerned that inflation is too low.  More rapidly rising wages would ease those concerns.  Still, with the job market firming, it is only a matter of time before we see consistently better wage increases.  The dam holding back the wage gains may be higher and stronger than expected, but it is not unbreachable and with the unemployment rate near full employment, we will likely see the cracks appearing very soon.  Until they do show up, though, Fed Chair Yellen can remain “patient”.   

December ADP Jobs, Conference Board Help Wanted Online and November Trade Deficit

KEY DATA: ADP: 241,000/Help Wanted Online: -79,200/Trade Deficit: $39 billion ($3.2 billion narrower)

IN A NUTSHELL:   “A solid labor market coupled with a narrowing trade deficit points to continued strong growth ahead.”

WHAT IT MEANS:  Employment Friday is this week and the first guess at the private sector number comes from ADP, which estimated that employers added workers solidly in December.  That said, the government’s data and the ADP numbers sometimes diverge widely.  For example, ADP estimated that private sector payrolls rose by 227,000 in November while the government put it at 314,000.  But the 3-month trend has tended to be fairly close and that raises a question about Friday’s jobs report.  For the fourth quarter, ADP puts total private sector job gains at 710,000.  After two months, the government has it at 550,000, a difference of 160,000.  Could December’s increase be below 200,000?  Possibly, though I think it will be between 225,000 and 250,000.  Companies of all sizes are adding jobs and that should mean continued solid payroll gains.  I remain optimistic about the job market.

Helping drive the economy forward, regardless what investors might think, is a rapidly narrowing trade deficit.  Exports are beginning to suffer from the weakness around the world, but that is being offset by declining petroleum imports.  The drop in exports is not a major concern as most of the decline came from Boeing shipping were planes.  That is likely just a timing issue.  Vehicle shipments were off as well and that may reflect slower world growth.  On the import side, the only category that posted a sharp gain was cell phones.  Thanks Apple.  Adjusting for prices, it looks like the trade deficit will be fairly stable.  There have been concerns that trade would slow growth in the fourth quarter but right now that is not the case. 

The Conference Board’s Help Wanted Online Index plunged in December after having soared in November.  Actually, this one month up and one month down pattern seems to be a routine that is odd given the consistently strong payroll increases.  These data are supposed to be seasonally adjusted, so I guess I will simply say that the decline in online want ads is a concern that should unwind in a month.

MARKETS AND FED POLICY IMPLICATIONS: The recent data have been disappointing but the ADP and trade numbers were better than expected.  Indeed, today’s reports raise more questions than they answer.  Friday is only two days away so we will have a better picture of the labor market soon enough.  What investors will make of these reports is anyone’s guess.  I don’t even think investors know what they are thinking.  The markets are reacting emotionally so it’s best to simply step back and not make too much of the doings there.  And don’t forget that Wall Street and Main Street have been delinked for a long time so making a judgment about the economy based on stock movements is silly.  As for the Fed, the focus is still on wages but the issues in Europe and the continued low inflation rate are complicating things.

January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

INDICATOR: January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

KEY DATA: ISM (Non-Manufacturing): -3.1 points/Employment: -0.7 point/Orders: -0.7%; Capital Spending: 0%/Home Prices (monthly): +0.1%; Over-the-Year: +5.5%

IN A NUTSHELL:   “The economy hardly ended the year with a bang, but only because the recent pace was not sustainable.”

WHAT IT MEANS:  It would be great if we could get a string of five percent growth rates, but the likelihood that the third quarter pace will be duplicated anytime soon is not great.  What would be good is if the economy eases only modestly and that looks to be the case.  The Institute for Supply Management’s December index of non-manufacturing activity fell solidly, but there is no reason to worry.  Yes, just about every component posted decent declines, but the levels also matter and they are still pointing to decent growth.  That is, the services sector is coming down from extremely high levels to more sustainable and solid levels.  Indeed, hiring continues to be strong and dropped the least of all components.  The one change that does cause a little concern is the sudden shrinkage in order books.  The thinning was modest, though.

As second indication that the summer’s breakneck pace is cooling was the drop in durable goods orders in November.  Interestingly, while these data are usually really volatile, there was no sector, except defense aircraft, that posted either a large change.  As for business spending, executives continue to be cautious, as capital goods orders were flat after having dropped the previous two months.  I guess a strong economy is not enough to get firms to invest in the future.

Housing prices look like they have finally stabilized.  The year-over-year increase had been slowing for quite some time but we the latest data are indicating the drop is largely over.  CoreLogic’s November index showed a rise in both the monthly change and the yearly increase.  Every state and 96 of the top 100 metro areas posted increases since November 2013.

MARKETS AND FED POLICY IMPLICATIONS: The quarterly GDP growth rates always bounce around even when conditions are great.  The summer’s 5% pace was way above expectations but we really are not sure what trend growth will look like.  I think we can expand at or above 3.5% this year.  Consensus is around 3%.  As long as energy prices don’t spike, consumers will have lots more income to spend and the likely gains in wages will only add to purchasing power.  Ultimately, businesses will recognize that the U.S. economy has turned the economy and investment will rise with that epiphany.  Think about it.  The Conference Board’s CEO Confidence Index declined in the third quarter even as the economy was soaring.  So who knows what drives thinking in the corner office?  Maybe executives are more worried about the rest of the world, which is clearly a concern.  But the U.S. is hardly a problem.  Regardless, we get the December employment numbers this Friday and that is what will likely drive investor and Fed thinking.  Don’t expect another job gain number anywhere near 300,000, but it should be decent and the unemployment rate could decline even if the participation rate rises.

December Supply Managers’ Manufacturing Index and November Construction

KEY DATA: ISM (Manufacturing): -3.2 points; Orders: -8.7 points; Employment: +1.9 points/Construction: -0.3%; Private Residential: +0.9%

IN A NUTSHELL:   “Manufacturing’s robust growth rate has slowed to only a strong pace.”

WHAT IT MEANS:  I hope everyone had a wonderful New Year.  The manufacturing sector surged in the fall and it was likely that the robust pace would moderate.  Well, it did in December.  The Institute for Supply Management’s Manufacturing index dropped fairly sharply, but that hardly signals the sector is in trouble.  First of all, the level is still consistent with solid growth.  Indeed, it is hard to believe that firms ramped up hiring if they were worried that conditions were weakening significantly.  Thus, the moderation in order growth, including imports and exports, as well as production doesn’t seem to be viewed with much alarm.

Construction activity eased in November, but here too the details are not pointing to a major slowdown.  Private sector construction rose, especially for residential projects.  That was really good news since this segment had been one of the weaker links.  Nonresidential construction was off.  The big drop was in public sector power projects.  That may be reflective of the falling energy costs, though given the long lead times on these activities, it is unclear exactly what is happening.

MARKETS AND FED POLICY IMPLICATIONS: The economy continued to expand nicely at the end of last year but we will have to wait until next Friday to see how many jobs were created and a few more weeks to find out fast GDP grew.  The early signs are that consumers spent money like crazy and manufacturing during the entire quarter was strong.  Most economists expect that we will come down sharply from the 5% mountain that we got to in the third quarter.  It is hard to think we will be anywhere near that number in the fourth quarter.  But I still believe that barring a huge reduction in inventories, growth could once again be near if not above the 3.5% pace we have seen for four of the last five quarters.  That is well above consensus.  Still, for investors to remain exuberant, we need the data to show that the economy is hitting on all cylinders.  Today’s numbers don’t show that, though they also don’t indicate a major slowdown.  As for the Fed, the next FOMC meeting is January 27, 28.  The members will know the December employment numbers but I am unsure how much they will know about fourth quarter growth, which is scheduled to be released on January 30th.  Regardless, the “considerable time” phrase is being replaced by patience and the members have to start indicating what that means.  I guess we will find out then, maybe.

December Consumer Confidence and August Home Prices

KEY DATA: Confidence: 92.6 (up 1.6 points)/National Home Prices (Year-over-Year): 4.6%

IN A NUTSHELL:   “The consumer is smiling and there is every reason to think the era of good feeling will continue next year.”

WHAT IT MEANS:  If 2015 is to be the year of that the consumer makes a comeback, it will have to start with people actually feeling good about things – and they do.  The Conference Board’s Consumer Index rose in December led by a surge in the current conditions measure.  People viewed the labor market more positively with jobs becoming more plentiful.  The perceptions of business conditions also improved.  As a consequence, the Present Conditions Index hit its highest level since February 2008, which was at the start of the Great Recession but well before the banks collapsed.  The only concern in the report was that the outlook for the future faded a touch.  It is hard to understand how the present economy is clearly improving but optimism is not when there have been few factors that have raised concerns about the future.  I guess record stock prices and soaring job gains are problems.  Or maybe it was the election results.  Or more than likely, it was just one month’s numbers.

As for housing, price gains continue to slow.  The latest S&P/Case-Shiller report showed that the deceleration in year-over-year price increases continued in October.  While the monthly change was negative, on a seasonally adjusted basis, the national index continued to post a solid rise.  That holds out hope that we are reaching a bottom on the price appreciation decline.  Nevertheless, it is not looking like we are in for a sharp rise in prices anytime soon.  Looking across the country, none of the twenty metro areas identified posted a double-digit rise from October 2013.  Similarly, none posted a decline over the month, when you look at the seasonally adjusted numbers, so that is something positive to work with.

MARKETS AND FED POLICY IMPLICATIONS: The year is coming to an end and the good news is that people are feeling positive about economic conditions.  All signs point to strong growth in 2015 and while optimism is great, households still need the wherewithal, i.e., income, to follow through on those thoughts.  That is the big unknown entering 2015 and how wage and salary gains play out will determine the strength of the economy.  I believe that job gains will be robust and by spring, labor shortages and with them, higher wage increases, will follow.  That is my wish for the New Year, but as the saying goes, “if wishes were horses, beggars would ride.”  In other words, we shall see.  On that note, let me say:

Have a Happy and Healthy New Year!

November Existing Home Sales

KEY DATA: Sales: -6.1%; Year-over-Year: +2.1%; Median Prices (Year-over-Year): +5.0%

IN A NUTSHELL:  “The housing market may still be improving, but it is doing so with two steps forward and one back.”

WHAT IT MEANS:  Is the housing market improving or softening?  If you look at the data, the answer is yes.  After two consecutive nice increases in existing home sales, the market went backward in November.  The sales pace fell to its lowest rate since May.  That is not to say the increase has been steady.  It was hardly that.  Sales rose in June and July, fell in August and then rose once again in September and October.  Hence, the two-steps forward, one-step backward comment.  In November, the declines were in every region.  The largest drops were in the Midwest and West and if anyone knows why sales were off in those areas by about 9%, which is really large, please tell me.  It was not as if the weather was terrible.  In other words, I just don’t get it.  As for prices, they have held in there quite nicely.  After bottoming in June, the year-over-year change in the median price has slowly increased.  That may be due to the sluggish increases in inventories.

MARKETS AND FED POLICY IMPLICATIONS:  It is hard to explain the sharp drop in home demand.  The weather in November was nothing exceptional and mortgage rates were not that far above the fifty year lows.  One explanation is that the supply of homes for sale is relatively limited – and it is – and so buyers are having a difficult time finding suitable options.  That makes sense and a limited supply may restrain home sales for a long time to come, especially when rates rise.  In the future, homeowners will have to decide that a different home at a higher mortgage rate is worth it.  Some may not feel that is the case, especially since the recent extraordinarily low rates will look awfully good compared to more normal mortgage levels.  That said, movers are not facing higher mortgage rates now, so the explanation for near-term supply weakness may be the lack of equity.  If people don’t have enough equity to pull out of their current homes, they may not have the ability to make a move.  That would limit the number of homes for sale and thus sales themselves.  The implication is that the pathway back to a more normal housing market, where what I call the churn or housing turnover helps drive sales, is a long and winding one.  What will investors make of this report?  Well, since any indicator that points to the Fed being “patient”, i.e., that only reinforce the view that the Fed will not tighten anytime soon, can only add to the strength in equity prices we have seen since the FOMC meeting.  Low rates are the markets drug of choice and as long as people believe the Fed will keep mainlining that drug, they will remain euphoric.

FOMC Commentary, November Leading Indicators, December Philadelphia Fed Survey, Jobless Claims

KEY DATA: Leading Indicators: +0.6%/Philadelphia Fed: 24.5 (-16.3 points)/Jobless Claims: 289,000 (down 6,000)

IN A NUTSHELL:   “The Fed may be shifting into “patience” mode, but the economy is continuing to accelerate.”

WHAT THE DATA MEAN: Today’s economic reports showed that the economy continues to improve.  The Conference Board’s Leading Economic Index jumped again in November and it looks like the increases are pointing to a very strong economy going forward.  Looking at a graph of the index, the rise seems to match the 2003-2004 housing bubble economic surge.  Supporting the view that the economy is picking up steam was another fall in weekly jobless claims.  The jump in claims near Thanksgiving seems to have been a one-week wonder and we are back to record lows, when adjusting for the size of the labor force.   As for the Philadelphia Fed’s Business Outlook Survey, a large decline was expected.  This index can be very volatile and the November number was one of the highest on record.  The December level also points to strong growth, especially since orders remain solid. 

FOMC Commentary: Yesterday, the Fed did and didn’t do what I thought they would and should do: Remove the “considerable time” phrase.  Maybe.  It didn’t do it because it repeated it.  But more importantly, the Committee substituted a new comment,that it can be patient (emphasis added) in beginning to normalize the stance of monetary policy”, and noted that patience and considerable time were similar if not equal.  Getting confused?  No kidding!  The statement seems to be the most tortured attempt at changing the psychology surrounding the timing of tightening I have seen.  I guess that is what happens when you worry more about market reaction than policy clarity.  We know little more now than we did before the meeting and press conference.  So much for better communications.

So, what does patience mean, when it comes to rate hikes?  Chair Yellen said we have a breather for the next two meetings. However, the chart of fed funds rate expectations points to a tightening in 2015, which will likely come at around mid-year.  What would make her lose her patience?  Stronger growth and that is where the data come in.  By the time we get to the April meeting, we will have three more employment reports and GDP numbers for the fourth quarter of 2014 and first quarter 2015.  If the Leading Indicators are pointing to anything it is the string of 3.5% growth rates could be sustained.  If that is the case and the job gains are above 250,000 and the unemployment rate continues to decline, it would be hard to see how wage increases don’t accelerate.  But I am guessing that patience will be tied to compensation and until we actually see large increases in wages, the Fed will continue to dawdle.