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July Job Openings and August Small Business Index

KEY DATA: Openings: +54,000; Hiring: +69,000/ NFIB: +0.1 point

IN A NUTSHELL: “Small businesses remain optimistic and are hiring, even as the labor market tightens.”

WHAT IT MEANS: The August below-expectations jobs report was a disappointment to some but a reality check to others. The simple fact is that firms are hiring but are having massive problems finding workers in an ever-expanding economy. The Job Openings and Labor Turnover report, commonly called JOLTS, is one of the more closely watched releases that the government produces, especially by Fed Chair Yellen. The July report highlighted all the issues in the labor market. Hiring was solid, as we saw with the July jobs report. But more importantly, job openings reached their highest level on record. Firms cannot add workers fast enough to close the needs gap. The job openings rate, which is the number of openings as a percent of employment and openings, was up sharply over the year in a wide variety of industries. One of the problems facing firms is that workers are still pretty much locked into their current positions. The quit rate, which you would expect to rise in a tight labor market, ticked up but remained in the range it has been for the entire year. With companies unwilling to bid for workers from other firms, there is little reason to leave and that is limiting the availability of qualified workers.

Job gains should remain decent going forward as small business optimism is still quite high. The National Federation of Independent Business’ index edged up in August, led by a jump in the percentage of those that felt now is a good time to expand. To do that, firms are looking to invest more, which for small businesses is a strong sign of confidence. Firms would like to hire but labor quality remains a huge problem. Interestingly, while businesses are raising wages, expectations of future increases are falling. Maybe they think they have done enough. I suspect they will be disappointed.

MARKETS AND FED POLICY IMPLICATIONS: Until we start getting September numbers, the data will basically be good only for knowing how the condition of the economy going into the hurricanes. But the numbers tell us nothing about what we will see in the next six months. Indeed, it really makes no sense to react to these data. Keep in mind, Texas and Florida have the second and fourth highest state GDPs. Together, they account for about 14% of total U.S. GDP and employment. In other words, when they have problems, it has an impact on national economic activity. And their economies have taken a lickin’, though they will start tickin’ again soon. All we know right now is that going into the hurricanes, the economy was growing at a moderate pace and the labor markets were tight. After the initial downdraft in growth, the rebuilding process will hype spending. Think of all the houses, appliances, furniture, household products, motor vehicles, commercial and industrial buildings and so on have to be replaced. But at the same time, many businesses will never come back and many jobs will be lost permanently. But that would also free up a lot of workers to take other jobs, possibly easing the labor shortage in some areas. So as you can see, how this all shakes out is unclear, but it is likely to add to growth by the end of this year and well into the first half of next.

August Employment Report, Manufacturing Activity, Consumer Sentiment and July Construction

KEY DATA: Payrolls: +156,000, Revisions: -41,000; Unemployment Rate: 4.4% (up from 4.3%); wages: +0.1%/ ISM (Manufacturing): +2.5 points; Orders: -0.1 points/ Confidence: up 3.4 points/ Construction: -0.6%

IN A NUTSHELL: “The jobs report was not disappointing as the increases are now closer to the moderate growth we are seeing in the economy.”

WHAT IT MEANS: Since the July employment numbers were released, I have been saying I cannot figure out where all those workers are coming from if businesses are complaining that they cannot find qualified employees and job openings are at record highs. Well, it turns out that the government got a little carried away when estimating payroll increases for June and July and revised those numbers downward. BLS may have gotten it right in August. Yes, the number of new positions added was well below expectations, but it is right in line where it should be given the labor shortage and moderate growth pace. Indeed, the August increase may have been a little high the second biggest increase was in manufacturing, the vehicle sector in particular. Given the slowdown in sales, don’t be surprised if vehicle companies cut back on hiring in September. There weren’t any other sectors that added above-average jobs. As for the rise in the unemployment rate, it was minor, though minimal labor force growth is not a good sign. The participation rate was stable. Finally, wage growth remains minimal and troubling.

The manufacturing sector picked up steam in August. The Institute for Supply Management’s index rose solidly, led by strong hiring. That confirms the jobs increase reported in the August employment report. However, while production is booming, orders grew less rapidly and inventories soared, so we could see a softening in this sector going forward.

The University of Michigan’s Consumer Sentiment Index rose in August, confirming the increase reported by the Conference Board. Interestingly, respondents indicated that current conditions are softening, even if they are still raising their hopes about the future.

Construction slowed in July. Weakness in nonresidential activity more than offset a solid rise in housing. This is important because business investment in structures added to growth in the spring. That could turn around this quarter.

MARKETS AND FED POLICY IMPLICATIONS: Today’s employment data gets us closer to economic reality. The job numbers didn’t fit with other data, so the downward revisions were not surprising. The August growth rate is what we should be seeing and closer to what I expect going forward. That doesn’t mean the economy is slowing: It isn’t. It’s just that job gains now better reflect economic growth and the tightness in the labor market. This report is also more in line where the Fed expected, so it shouldn’t change any views. The FOMC members are more worried about wages than jobs and right now, compensation remain moribund. The next meeting September 19-20 and I don’t expect any rate hike, though we might get some indication when balance sheet reductions will start.

July Spending, Income and Pending Home Sales, August Layoffs and Weekly Jobless Claims

KEY DATA: Consumption: +0.3%; Disposable Income: +0.3%; Prices: +0.1%/ Pending Sales: -0.8%/ Layoffs: 33,825/ Claims: +1,000

IN A NUTSHELL: “It looks like the economy is sustaining the momentum created in the spring as consumers are still spending decently.”

WHAT IT MEANS: Can the economy keep it up? GDP expanded quite solidly in the second quarter, led by strong consumer spending and robust business investment. While the investment numbers are not yet out, it looks like the consumer is still hitting the stores and websites, though not at the pace we saw in the spring. Consumption rose moderately in July. When adjusted for price gains it was good but not that great even though inflation remains contained. Still, spending on both durable and nondurable goods was robust. It was just that demand for services was mediocre. Consumers, though, can maintain that decent pace. Disposable income continues to grow as wage and salary gains were strong for the third time in four months. The concern, though, is that the savings rate continues to decline, so how long people will keep up the spending pace is uncertain.

The roller coaster that is the housing market continues its up and down ride. The National Association of Realtors reported that pending home sales fell slightly in July. Declines were in three of the four regions, with only a small gain in the West. Over the year, there was an increase only in the Northeast. It looks like home sales will not pick up much, if at all, in the next couple of months.

Businesses continue to hold on to their workers tightly. Challenger, Gray and Christmas reported that layoff announcement did rise in August, both over the month and the year. But so far this year, planned payroll reductions are down over 26% compared to the first eight months of 2016. Retailers have announced the largest number of layoffs this year, but that is slowing. The services sector is also running well ahead of 2016 numbers. In contrast, the energy sector has cut its layoff announcements by 87%.

Weekly jobless claims rose minimally last week and remain near record lows.

MARKETS AND FED POLICY IMPLICATIONS: The expansion continues unabated, but it is beginning to look like we may not see growth at or above the 3% pace posted in the second quarter. Houston is going to create some noise in the data for quite a while. The metro area is so large that reductions in some sectors or increases in others can affect the monthly, seasonably adjusted data. The numbers don’t account for major natural catastrophes. So, it is really hard to know what third and fourth quarter growth will come in at. That said, the overall impact might not be large, as much of the rebuilding will occur over many months if not years. I had flood insurance but it still took many weeks to get just the first check after Sandy flooded the first floor. Some homes took years to be rebuilt. Imagine the situation in Houston where most people don’t have insurance. It could take a long time to get things done, even if Congress acts quickly. Thus, investors will have to parse the data over the next few months really carefully to separate out the temporary factors from the underlying trend. As for tomorrow’s jobs report, the expectations are that it will be a good one with about 175,000 new positions added and the unemployment rate remaining at 4.3%. I think that forecast is high and it will be closer to 150,000.

 

July Industrial Production and Leading Indicators and Weekly Jobless Claims

KEY DATA: IP: +0.2%; Manufacturing: -0.1%/ LEI: +0.3%/ Claims: -12,000

IN A NUTSHELL: “Softening vehicle sales are weighing down the manufacturing sector.”

WHAT IT MEANS: The Federal Reserve released the “minutes” of the last FOMC meeting yesterday and it seems there is a lot of uncertainty about what to do next and when to do it. In particular, there was great debate about the slowdown in inflation, why it is happening and what that means for the pace of rate hikes and balance sheet reduction. It is no longer clear that in September, the Committee will announce when it will be starting the process of balance sheet normalization. It had been the consensus that we would get something next month.

If the Fed is to start the reducing its bond holdings and continue raising rates, the economy and inflation may have to pick up steam. If or when that will happen remains uncertain after today’s data. While industrial output rose moderately in July, it was largely due to improving utility and energy production. Weak vehicle sales, which led to a sharp reduction in assemblies, are holding back not only transportation but also those sectors, such as metals, that feed into vehicle production. Large increases in apparel output (likely an anomaly) and chemicals kept total output from tanking. Basically, the manufacturing sector may be expanding but it is hardly booming.

While the industrial production data didn’t point to any major improvement in growth, the Conference Board’s Leading Economic Index did indicate that activity should pick up. After posting a large rise in June, the index rose solidly in July, led by rising financial indicators. As the press release noted, “the U.S. economy may experience further improvements in economic activity in the second half of the year”.

As for the labor market, unemployment claims fell sharply last week, reaching record low levels when adjusted for the size of the labor force. The labor market is tight but wage gains are not rising, which is confusing to an economist – or at least me.  

MARKETS AND FED POLICY IMPLICATIONS: So, we have uncertainty in manufacturing, but strength in financial indicators pointing to stronger growth. However, yesterday’s report on July housing starts and permits was a real downer. Both fell, which was a surprise. This segment of the economy had been showing signs of strength. Well, maybe not. When you put it all together, it is hardly clear whether we can get to the administration’s goal of 3% growth for more than even one quarter. We might see something close to that in the current quarter, but unless incomes growth faster, that pace would not be sustainable. And if we continue on the 2.25% growth path, businesses may be able to hold the fortress against faster wage gains. The potential for greater labor cost pressures, in conjunction with the unwinding of some temporary factors that the Fed believes is currently restraining inflation, is what has driven the belief that the normalization process can continue unabated. But for some at the Fed, patience is running thin and they are saying that maybe the process should be slowed. The next meeting is September 19-20 and that one may take on even greater importance, as we need further guidance on what the Fed’s normalization schedule might look like. This might also be Janet Yellen’s last meeting before a new Fed Chair is nominated. If, as expected, it is not Yellen, that could introduce another dynamic into the discussions.

 

July Consumer Prices and Real Earnings

KEY DATA: CPI: +0.1%; Less Food and Energy: +0.1%/ Real Earnings: +0.2%; Over Year: +0.7%

IN A NUTSHELL: “The only thing saving consumers is low inflation as spending power is going largely nowhere.”

WHAT IT MEANS: Inflation remains well under control. Yesterday we saw that wholesale costs were soft and today’s consumer price report also pointed to minimal inflation pressures. The Consumer Price Index rose modestly in July. While energy prices edged down, food costs increased moderately. (The all-important bakery component surged, so my diet is safe.) Excluding food and energy, prices were up minimally. Looking at the details, several components stood out. Prices of medical commodities and services continue to surge. The deceleration in medical costs had been going on for quite some time but that is no longer the case. On the other hand, costs of both new and used vehicles keep falling. The slowdown in demand and the large number of vehicles coming off leases are pressuring the sector. Households are also being buffeted by large increases in vehicle insurance. Clothing prices were up in July but for the year, they are still down.

While they wait for wage gains to accelerate, workers can be thankful for the modest inflation. Hourly wages rose moderately and only part of that gain was lost to the low inflation. Still, the increase over the year of real, or inflation-adjusted earnings is pathetic. For all of 2017, real hourly earnings have expanded by less than 1%. Households are earning more, but some of the gains are coming from working longer. Even when you add the rising hours worked to the gain in wages, family spending-power has increased by just over one percent. That is why so many people are unhappy.

MARKETS AND FED POLICY IMPLICATIONS: The Fed may want inflation to pick up, but that would not be good news to households. Wages are growing modestly and the only way spending power has increased at all is that inflation has remained below the Fed’s target rate. As I have noted on countless occasions, it is hard for the economy to grow much more than 2% if earnings are largely flat and that is still the case. Real wages had accelerated during 2015, but the gains have slowed over the past eighteen months. Consumers have had to reduce their savings rate to maintain their lifestyles. That is not good news. So we are stuck in the same trap that we have been in for several years now: Wages are rising modestly so consumption is mediocre. That is keeping growth down, limiting business pricing power and causing inflation to decelerate. The slow growth is also enabling businesses to restrain wages and allow job openings to go unfilled. The Fed members really want inflation to rise above 2%. But if that happens without a concomitant increase in wages, consumer purchasing power will decline, slowing growth. Essentially, the driver of stronger growth appears to be, at least to me, better wage increases. That would expand demand and growth, induce workers to work harder not just longer, improve productivity, pricing power and profits and induce greater investment. That’s my theory and I am sticking to it.

July Private Sector Jobs and Help Wanted OnLine

KEY DATA: ADP: +178,000; Manufacturing: -4,000/ HWOL: -157,700

IN A NUTSHELL: “Job growth is really solid, even as firms give up advertising for workers they cannot find.”

WHAT IT MEANS: It’s Employment Friday week, which means we get the estimate of private sector job gains by ADP. The employment services firm is predicting that payroll increases were pretty solid in July. Strong hiring by mid-sized firms, those with 50 to 500 employees, led the way. But both the smallest and largest companies added workers at a decent pace. Looking at the sectors, it is nice that energy is adding to not subtracting from job growth. There were strong increases in professional and business services, education and health care. On the other hand, manufacturers cut workers while the construction boom may be slowing as builders added only a modest number of new employees.

While ADP is telling us that firms are hiring, the Conference Board is indicating they are cutting back sharply on their advertising. The number of help wanted ads posted online fell sharply in July. The level peaked at the end of 2015 and has been on a fairly steady downward trend since. Just in the past year, there was a nearly 10% drop. And the fall off was widespread. Declines were seen in nineteen of the twenty largest states and only five states showed increases. Similarly, nineteen of the twenty largest metro areas showed reductions in advertising activity and only four of the top fifty-two areas were up. Finally, every one of the ten occupational categories posted declines. In other words, this is a nation-wide, economy-wide slowdown.

MARKETS AND FED POLICY IMPLICATIONS: If the ADP numbers are anywhere close, something that doesn’t happen all the time, we should get a pretty good employment report on Friday. That raises the following questions: First, if firms are hiring so strongly, why are they complaining they cannot find qualified workers? Are they only hiring unqualified workers? Second, if they are having so much trouble finding qualified workers, why are they cutting back on the search process? The labor market is a real conundrum. Job gains are solid and no matter which measure of unemployment/underemployment you use, conditions are tight. Meanwhile, wage increases are tepid. Something has to give. I don’t think we will get the strong increase that is forecasted (consensus is 180,000). I think it will be less than 150,000. But even my number is more than the labor force growth and should lead to a decline in the unemployment rate. And it should put even more pressure on wages. Until that actually happens, though, I will join the Fed members in being confused about the true state of the labor market. As for investors, they want to see that wages are rising faster for an extended period, so even if we get a pop in labor costs on Friday, I don’t expect panic to set in.

June Spending, Income and Construction and July Manufacturing Activity

KEY DATA: Consumption: 0%; Disposable Income: -0.1%/ Construction: -1.3%; Private: -0.1%/ ISM (Man.): -1.5 points; Orders: -3.1 points; Employment: -2.0 points

IN A NUTSHELL: “The consumer may be slowing down but that has yet to have a major impact on manufacturing.”

WHAT IT MEANS: The economy rebounded nicely in the spring, but the first half of the year was the same as it has been for the last seven years. Now that we are in the second half, the question is: Will the second quarter rise in activity be sustained or will we fall back into the usual pattern? If the consumer has any say, don’t expect any major improvement in growth. Consumption, when adjusted for inflation, was flat in June. A modest rise in services demand was offset by declines in durable and nondurable spending. The broad based moderation in consumption is a concern, especially when you consider that incomes are just not improving. Real disposable income, which is the best measure of spending power since it adjusts for taxes and prices, fell slightly. That is not as much of a concern as it might appear since the drop was due to a major cut back in interest and dividend income. This is a wildly volatile component. Wage and salary gains were good but still nothing spectacular. Households are trying to maintain their lifestyles and they are doing that by cutting their savings rate.

Despite tepid consumer demand, the manufacturing sector is in good shape. Yes, the Institute for Supply Management reported that the activity index fell in July. Actually, just about every component was off. So why do I say conditions remain strong? The levels of the overall and component indices are still pretty high. New orders are increasing strongly, just not robustly. Firms are adding to payrolls at a solid pace, even if it is slightly less rapidly than in June. And order books continue to fill, providing hope that production will continue to increase. Indeed, the overall index seems to be pointing to GDP growth closer to 4% than the 2% we have seen so far this year.

The June construction report was released and it showed that building activity fell sharply. A major reduction in public sector activity made the numbers look really bad, though the lack of increase in the private sector was a real disappointment.

MARKETS AND FED POLICY IMPLICATIONS: Until I see differently, I am going with my headline from last week’s GDP report: Same as it ever was. The consumer is spending but is hardly exuberant. Income growth is just not strong enough to pull us out of this 2% economy. Yes, manufacturers are saying things are good, but with vehicles sales trending downward compared to last year, it is likely there is little room for further improvement. And construction is going nowhere. All this points to another quarter of maybe 2.50% growth, give or take a quarter percentage point. So, why are investors so buoyant? Earnings are holding up and as long as that continues, the party could keep going and going and going.

June Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Orders: +6.5%; Excluding Aircraft: +0.2%; Capital Spending: -0.1%/ Claims: +10,000

IN A NUTSHELL: “It still doesn’t appear as if the private sector is investing heavily, and that is troubling.”

WHAT IT MEANS: Another day, another indication that the economy continues on its less than stellar growth path. Durable goods orders soared in June, but don’t get too carried away by the headline number. Nondefense aircraft demand surged by 131%, making up just about all of the increase. Still, the details weren’t terrible. Orders for metals, both raw and fabricated rose and the demand for machinery and communications equipment was up. But the computer and electrical equipment and appliances sectors posted declines. The real concern in the report was the measure of private sector capital spending. This indicator was off slightly after having posted a sharp rise in May. Businesses just cannot seem to make up their minds if they want to go all in on the future economy or move ahead cautiously. With all the chaos in Washington, it should not be a surprise if firms take a wait and see attitude.

New claims for unemployment insurance jumped last week. The four-week moving average, which smooth’s out the volatile data, was flat and remains at a pretty low level. The labor market is tight and a week from tomorrow the July employment report is released. It should give us a better indication of how tight things really are. With the Fed hoping for inflation, the wage and hours worked numbers continue to be the real focus of attention.

MARKETS AND FED POLICY IMPLICATIONS: With Congress wrapped up in the theater of the absurd, businesses are now flying by the seat of their pants. How long will health care dominate the agenda? The quagmire that is health care, which sucked the life out of Democrats, seems to be trapping Republicans. The failure to actually come up with an alternative over the past seven years is causing chaos and there seems to be no simple way out of it. At least there is no simple political way out. When you claim you can quickly and easily replace the ACA with a plan that lowers costs, provides better health care and makes insurance more available, you have creating a challenge that is not likely to be met. The problem is, there is no second best when you start reducing the number of people insured, at least politically. How easily the Republicans can pivot to tax reform, and the impact of the health care debacle on their ability to actually reform the system rather than doing the usual, which is provide tax cuts, is just not clear. And that uncertainty has to weigh on corporate decision-making. As for investors, earnings look good so there appears to be little worry about the future.

July 25-26 2017 FOMC Meeting

In a Nutshell: “No funds rate hike but more hints that the balance sheet reductions are coming.”

Rate Decision: Fed funds rate range maintained at 1.00% and 1.25%

The FOMC members came to Washington with not much expected and they did pretty much what was expected: They kept the funds rate at 1.00% to 1.25% and signaled that it was the time to reduce the balance sheet was near. As for the details of the statement, the view of the economy was largely the same as it was in June. Everything is solid or expanding. Inflation is now ‘running below 2 percent” rather than “running somewhat below 2 percent”. In other words, not much of a change. There hasn’t been a lot of data since the June 14-15 meeting, so there was little reason to change the outlook.

What everyone was looking for was a signal on when the Fed might start shrinking its balance sheet. The Committee stated: “For the time being (emphasis added), the Committee is maintaining its existing policy of reinvesting principal payments from its holdings”. It then added: “The Committee expects to begin implementing its balance sheet normalization program relatively soon (emphasis added)”. In other words, the signal was sent to the markets that the there will be some reduction in the balance sheet sometime this year.

Okay, what should we make of this? First, expect the Fed to announce that the balance sheet adjustment will begin either at the September or November meeting. As for the funds rate, it is not likely to be increased at the September meeting unless the economy picks up steam and inflation, especially wage inflation, accelerates. If it is not hiked in September, expect the next move to come the meeting after the announcement of the balance sheet reduction. My guess: Nothing in September, November 2nd for the balance sheet move and December 13 for the next rate hike. That is also likely to be Fed Chair Yellen’s last meeting, so she will exit at the end of January with the interest rate and balance sheet normalization under way.

(The next FOMC meeting is September 19-20, 2017.)

June Consumer Confidence and April Home Prices

KEY DATA: Confidence: +1.3 points/ National Home Prices (Over-Year): 5.5%

IN A NUTSHELL: “Confidence is rising, but there is some uncertainty about the future setting in.”

WHAT IT MEANS: As the year grinds on and the economy continues to improve slowly, the euphoria about the future is beginning to wane. The Conference Board reported that consumer confidence rose in June, reversing a decline seen in May. The key to the increase was a jump in the impression about current conditions. Consumers felt that both business conditions and the labor market improved solidly over the month. Importantly, the percent of people saying jobs are plentiful kept rising while those feeling that jobs were harder to get declined. However, the outlook about the future, while still solid, is not as optimistic as it had been. Fewer respondents expected business conditions to improve and there was an increase in those who expect jobs to be harder to get in the future.

Home prices have been rising much faster than inflation and the question being raised is: How long can that continue? Well, one measure, the S&P CoreLogic Case Shiller national home price index did jump in April, but over-the-year, the gain was a little slower than in March. Indeed, the change from last year has been in a fairly tight range for the past five months, varying between about 5.4% and 5.6%. Other indices are still showing signs of accelerating housing price gains, so we need to wait before we conclude the situation is stabilizing.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter is coming to an end and there are few indications that growth was robust. The consumer didn’t buy motor vehicles at any great rate in April and May. Yesterday, it was reported that durable goods orders declined in May and most of the manufacturing reports coming from the regional Federal Reserve Banks have pointed to slowing manufacturing activity. The trade deficit doesn’t look like it will be shrinking much, if at all, so don’t look to the foreign sector for much help. Maybe inventories built, but if that was due to slower sales than expected, it isn’t a positive sign for the economy. And why would business invest heavily? Demand is not growing rapidly and it only makes sense to wait until the tax changes, if any, are known before making a decision. To change things around, the consumer will have to spend more and while it is nice that people think current conditions are improving, it would better if they were becoming more, not less confident about the future. So, investors will have to find something else, if they actually need something, to drive markets up further. But with two hikes under their belt, the Fed members may want to see better growth before they make the next move this year.