Category Archives: Economic Indicators

December Industrial Production, January Home Builders Index and 4th Quarter Workforce Vitality Index

KEY DATA: IP: +0.9%; Manufacturing: +0.1%/ NAHB: down 2 points/ Vitality Index (Over-Year): +4.0%

IN A NUTSHELL: “The energy-sector rebound is helping accelerate the economy.”

WHAT IT MEANS: In 2015, the economy expanded at a very strong 2.9%. But conditions faded in 2016, with growth coming in at a tepid 1.5%. What was one of the biggest reasons for the slowdown? The collapse of energy prices and the energy sector!   Well, conditions changed last year and the energy sector is now leading the way again. Industrial production surged in December, and for the year as a whole, but not because of manufacturing. Manufacturing activity ticked up minimally in the last month of the year. There was no consistency in the sector, with almost as many industries posting large declines as those showing solid gains. For the year, manufacturing was up a solid, but not spectacular 2.4%. On the other hand, the mining sector surged in December and was up double-digits over the year. The large rise was driven by a 40% rise in oil and gas drilling for the year. With energy prices continuing to increase, I expect that the energy industry will help lead the way again this year.  However, the vehicle sector, which was largely stagnant in 2017, may see both lower sales and output.

Homebuilders have been ecstatic about conditions lately and that really didn’t change despite a decline in the National Association of Home Builders’ Index in January.   The level is very high and has rarely been seen except at the peak of both the and housing bubbles. I am not saying that we are in another bubble, just that you have to have really good economic conditions for developers to feel this euphoric.

ADP’s Workforce Vitality Index was up again in the fourth quarter, which should surprise no one. This report is worth following because it is one of the more comprehensive reports on wage gains we have. It breaks down wage changes by region, industry, age of worker, tenure in job, company size, by full-time vs. part-time and whether workers switched jobs or held them. Obviously, it is too extensive to easily summarize, but it can be said that wage gains are accelerating, especially in the resource and mining and hospitality and leisure industries. Job switchers are doing better than job holders and that has led to a further rise in the turnover rate. It is now over 50% in leisure and hospitality. If firms want to hire stable workers, they should look to those over 55, not those under 35. Of course, that is not what they do, but that is a topic for another commentary.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports really don’t change much for anyone. We are in earnings season. Investors are either going to love a lot, or a love a lot more, the earnings report. It will likely take a lot of terrible reports to get the animal instincts under control. And the data are not so strong as to cause any of the Fed members to rethink their views on rate hikes. Sometime this month the Senate will confirm Jerome Powell as the next Fed Chair, but that is a formality. Right now, doing something that is largely noncontroversial is not something most Senators want to do. Instead, they will focus on how to keep the government running. The supposedly World’s Greatest Deliberative Body has devolved into a Tower of Partisan Babel, so what will happen is anyone’s guess.

November Consumer Spending and Income, Durable Goods Orders, New Home Sales and December Consumer Sentiment

KEY DATA: Consumption: +0.6%; Disposable Income: +0.4%; Prices: +0.2%/ Orders: +1.3%; Excluding Aircraft: +0.5%/ Home Sales: +17.5%/ Sentiment: -2.6 points

IN A NUTSHELL: “The economy may be booming along but households are just not so certain about the future.”

WHAT IT MEANS: It’s a data dump day and we sure got a lot of them – and almost everyone was really good. First, it looks like consumers hit the stores and websites really hard in November as consumption rose solidly. This was not a month where soaring vehicle sales drove things. Indeed, durable goods spending was flat. Demand for nondurables and services soared, though. Can households keep it up? I am not sure. Disposable income did increase solidly, driven by a good but not great rise in wages and salaries. But what troubles me, and it has for several months now, is the savings rate. It fell again, dropping to 2.9%. Except during the insane housing craze, this rate was never seen. That raises real questions about the sustainability of consumer spending, even with tax cuts coming next year. As for prices, they rose moderately, but excluding food and energy they were up just a touch. Over the year, the increase remains below the Fed’s 2% target.

After investing like crazy businesses took a wait and see attitude in November. Private sector capital spending fell slightly. Nevertheless, it was still 5.1% above the November 2016 level, which clearly indicates that the investment slump is over. The tax bill will only add to the spending, though it is hard to know when and by how much.

All week we have been getting really good housing numbers. Today we got a great one. New home sales, which had been floundering, skyrocketed in November to the highest level since July 2007. The increases were strong in every region but it was the West where the gain was really outsized: Sales rose by 31% there. The supply of homes is exceedingly low and that should trigger even more construction.

Despite all the great economic data, the passage of a tax bill and the exuberant spending, consumer sentiment fell in December. Though the University of Michigan’s index eased, it remained at a very high level. Respondents are very happy about current conditions. It is the future they are somewhat less confident about.

MARKETS AND FED POLICY IMPLICATIONS: The run of strong economic numbers clearly indicates the economy is in great shape. There are few major imbalances, save the issue with consumer spending. Keep in mind, the tax cuts are heavily loaded toward the top end of the income ladder, with lower income households getting little and middle income families seeing only moderate cuts. Yet that may work to the economy’s advantage. Without any major windfall, most of the tax breaks that go to the lower and middle-income groups should be spent. That could support spending even if wage gains don’t accelerate significantly. While some large firms have announced bonuses and/or wage increases, small and most mid-sized businesses don’t have the wherewithal to do that. Between seventy-five and eighty percent of all private sector jobs are in small to mid-sized businesses. That means the bonus/minimum wage announcements make for good PR but not necessarily strong income gains for workers. And it is wage increases that really matter. Let’s hope the added growth that should derive from the tax cuts will force companies of all sizes to increase worker incomes. If that happens, the economy could really boom.

Happy Holidays!

November Existing Home Sales

KEY DATA: Sales: +5.6%; Inventory (Over-Year): -9.7%; Median Prices (Over-Year): +5.8%

IN A NUTSHELL: “Strong sales and a scarcity of inventory are causing home prices to soar.”

WHAT IT MEANS: Yesterday we saw that new home sales were on the rise and today we got a similar result from the existing home data. The National Association of Realtors reported that home sales jumped in November after increasing solidly in October. The sales pace was the highest since December 2006. Sales were strong in three of the four regions with only the West posting a small decline. The robust sales pace is exceeding the number of homes being brought onto the market. As a result, inventories have fallen to levels that are almost half what they should be, given the sales pace. That has caused prices to surge. There is little doubt that prices will continue to increase sharply as there are no signs people are changing their minds about selling their homes.

MARKETS AND FED POLICY IMPLICATIONS: This was a really strong report that indicates the housing market has pretty much wiped out all the losses, in terms of both sales and prices, which occurred as a result of the housing bubble bursting. But that doesn’t mean there are no issues. The percent of homes bought by first time buyers is falling as the rising prices make it harder afford even an entry-level house. The tax bill, if it increases growth even a little bit, could lead to higher inflation and rising interest rates. This would also pressure the market. And the reduced deductibility of state and local taxes and mortgage interest could pressure prices in high cost states. Nevertheless, it is a good sign that the demand is strong and likely to support further sales gains as well as additional home construction. As for investors, now that the tax bill is done, they will have to actually see better growth or the valuations that may have been made on the basis of a stronger economy could prove to be questionable. Remember, once the corporate tax cuts are recognized, firms have to increase earnings from that higher level. And that will only happen if they actually expand their top line. Taxes hit the bottom line. That said, there is little doubt that firms will reward their investors by using lots of the newfound profits to increase dividends, buy back stock and expand merger and acquisition activity. Those should bolster stock prices, at least for a while.

November Housing Starts and Permits

KEY DATA: Starts: +3.3%; 1-Family: +5.3%; Multi-Family: -1.6%; Permits: -1.4%; 1-Family: +1.4%; Multi-Family: -6.4%

IN A NUTSHELL: “Home construction is picking up steam and should boost growth this quarter.”

WHAT IT MEANS: For the past two quarters, a softening in home construction has restrained overall economic growth. It looks like that is changing. Housing starts rose in November, led by a surge in single-family activity. Multi-family activity ebbed, but this is an extremely volatile segment of the market and it was up sharply in October. So far this quarter, starts are running nearly 9% above the third quarter average, with both single-family and multi-family construction doing quite well. Looking at the November report, there were the usual oddities. Construction soared by double-digits in the West and South but dropped sharply in the Midwest and fell apart in the Northeast (it was down almost 40%). That just shows how wildly the numbers can swing and why you cannot look at just one month of data. Looking forward, the single-family segment is in for even more increases as permits hit a level not seen since September 2007. Total permit requests over the past two months were still running hotter than starts, indicating construction could be strong in December.  

Yesterday, the National Association of Home Builders’ index was released and it indicated that developers are near giddy. The index is now above every reading we saw during the housing bubble. Indeed, the last time it was above the November level was in July 1999, 18.5 years ago! In other words, housing is in great shape, at least if you don’t live in high-tax, high-value areas. The tax bill doesn’t do any favors to homebuilders or homeowners in those areas.

MARKETS AND FED POLICY IMPLICATIONS: The data keep saying the economy is in good shape and soon, a potentially massive fiscal stimulus will hit the economy. How long it will take for the tax cuts to hit household wallets is unclear, but businesses will have the all-clear as soon as the bill is signed. But there are still lost of questions. For example, how much will actually be spent, how long will it take to see the additional spending, will labor shortages cause firms to raise wages to meet the growing demand and if so, will prices and therefore interest rates rise? Normally, expansionary fiscal policy is used when the economy is weak and needs to be kick started. This is not the case now. Alan Greenspan let the tech bubble build until it blew up and then he and his successor, Ben Bernanke watched the housing bubble burst and flatten the world economy. Will we see something similar from the next Fed Chair Jerome Powell? Stay tuned.

November Industrial Production and December New York Manufacturing Activity

KEY DATA: IP: +0.2%; Manufacturing: +0.2%/ NY Fed: -1.4 points; Orders: -1.2 points; Expectations: -3.3 points; Order Expectations: -12.6 points

IN A NUTSHELL: “The manufacturing sector is in pretty good shape, driven by consumers who are spending like crazy.”

WHAT IT MEANS: Yesterday, the November retail sales numbers were released and they showed that households really did like all those amazing Black Friday, Small Business Saturday and Cyber Monday deals. The only sector that posted a decline was vehicles, but that came after a huge October sales pace. Manufacturers are scurrying to keep up with the demand. Okay, output didn’t rise a whole lot in November, but once again, that came after a massive rise in October. When you average the two months together, and averaging does make sense since these data are volatile, output rose quite strongly. Indeed, so far this quarter, manufacturing production has increased at a 6.4% annualized pace, compared to the third quarter. In other words, the sector is on fire, though I need to point out that the rebound from the hurricanes did play a role. The details of the November report show that additional output gains could be forthcoming. Most of the increase in production was in durable goods manufacturing, and the gain was modest. Nondurables were flat. Given how strong retail demand was in November, there may have to be some catching up.

A less closely watched report, the New York Fed’s Empire State Manufacturing Index, posted a small decline in early December. Now let’s be real here, there is not a whole lot of manufacturing in the New York Fed’s district, so don’t jump to any conclusions. Still, the level is still high. If there was a red flag in the report it was the decline in expectations. Respondents were a little less certain about future business activity. Confidence is still high, but there was some concern that the rapid order growth could slow.  

MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape, which I seem to say in every report I write. A tax bill will add fuel to the fire. The question the new Fed Chair, Jerome Powell, will have to struggle with when he takes over in February, is how big a conflagration will the added demand create. Former Fed Chair Bernanke blew it badly in his first year by failing to understand the extent of the housing bubble and how it could impact the entire economy. He spent the rest of his tenure trying to clean up the mess he, at least in part, helped create. Will the new Fed Chair be willing to risk things based on a belief that the economy has enough slack to grow more rapidly without creating any threatening bubbles? We will find out soon enough. Since Fed policy acts with a lag, he may not have a lot of time to find out. But that is just conjecture and as long as a tax bill is passed, investors will keep singing, “happy days are here again”.

November Consumer Prices and Real Income

KEY DATA: CPI: +0.4%; Over-Year: 2.2%; Less Food and Energy: +0.1% Over-Year: +1.7%/ Real Hourly Earnings: -0.2%; Over-Year: +0.2%

IN A NUTSHELL: “The continuing erosion of consumer spending power raises serious questions about future economic growth.”

WHAT IT MEANS: For the economy to continue to accelerate, consumers must step up to the plate and that is in question. Household spending power can only increase if the gains in income are not offset by the rise in prices. That means we have to look at both wages and inflation. On the inflation front, a jump in energy costs helped power another sharp rise in consumer prices in November. The surge in sales led to a jump in both new and used vehicle prices, while the cost of medical commodities also rose sharply. Food costs, thankfully, are going nowhere, though there continues to be pricing pressure for cakes and cupcakes. I am actually thinking of switching to fresh fruits and vegetables, whose costs are falling. (Not really.) In addition, apparel prices are plummeting, which is helping offset the rise in energy costs as you can put on warm clothes instead of raising the thermostat. Housing prices continue to rise at a moderate pace.

The greater than expected increase in consumer prices took a toll on household spending power. Hourly wages rose half as fast as inflation resulting in a decline in real, or inflation-adjusted income. Over the year, real wages rose minimally. Even if you adjust for the increase in hours worked, weekly earnings increased by less than one percent. In other words, people don’t have a lot more spending power today than they did a year ago. The solid gains in consumption were funded, at least in part, by a decline in the savings rate. That can continue only so long.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC will release its statement soon and it will likely say that there was an increase in the funds rate. Given the direction and level of inflation, there is every reason for the Fed to hike rates. But the real threat to the economy is the continued, almost inexplicable lack of wage increases. As long as that continues, questions have to be raised about the capacity of the economy to grow. Yes, lower tax rates will incent some additional spending by businesses, but it is likely to be on labor-saving capital projects. Firms, if they can help it, are just not willing to pay their workers more. There are lots of anecdotal stories of firms bidding for key workers but the trend is not yet widespread enough to move the data. If we don’t get better wage gains, firms will have to be cautious in spending on capacity-increasing projects, regardless of their improved bottom lines. And companies who sell to the U.S. consumer have to question whether it makes sense to expand capacity in light of the lack of spending power growth. The tax cuts will help to some extent, but with most of the household tax cuts going to upper income households, the impact on overall spending may be disappointing. That, of course, will not derail investors as they know that the bigger companies who are listed on exchanges will, for the most part, make out like bandits.

November Supply Managers’ Manufacturing Index and October Construction

KEY DATA: ISM (Manufacturing): -0.5 percentage point; Orders: +0.6 percentage point/ Construction: +1.4%; Public: +3.9%

IN A NUTSHELL: “Manufacturing continues to surge and with government construction picking up, it looks like fourth quarter growth will be quite solid.”

WHAT IT MEANS: Can we get another quarter of 3% growth? The recent data point to that possibility. The Institute for Supply Management’s Manufacturing Index edged down in November, but that is hardly a concern. The index level remains high so a modest decline is not anything of consequence. Production soared and with new orders continuing to expand strongly and order books fattening, the output gains should continue. As a result, firms are hiring solidly.   Basically, there was little in this report that would point to a manufacturing slowdown.

Construction activity jumped in October, which really should not have surprised anyone. There is a lot of both public and private rebuilding that has to be done to repair the mess made by the hurricanes that hit Houston and Florida. Just about every component of the report was up strongly but the eye-opener was the surge in public sector activity. That points to a rise in government spending, if as expected, these gains will be sustained. On the private side, a pop in office construction points to growing confidence that the expansion will continue and that firms are willing to build for future employment needs.    

MARKETS AND FED POLICY IMPLICATIONS: Most of the data we have been getting indicate the economy is in really good shape. It looks like November vehicle sales may have been somewhat sluggish, but some issues with some data may delay the final reading. The vehicle numbers are important because they were artificially high in September and October due to hurricane replacements. A slowdown was expected, but given the robust October sales pace, we could still see vehicles add to growth this quarter. But for traders, it is all about the tax bill. Regardless of what is passed and its impact or lack thereof on long-term growth, it will create a 2018 sugar high. And since investors worry about the next quarter, the passage of a tax cut bill should be greeted joyously, even if the likelihood of that happening is already being priced in. The Fed is meeting on December 12,13 and at this point, it would be a shock if there weren’t a rate hike. That would occur even if the November jobs number, which is released next Friday, were weak. I expect that to be the case. If tax cuts hype the economy and inflation starts accelerating, more will be coming next year. Assuming a tax bill is passed, my belief is that new Fed Chair Powell will steer four more hikes through the FOMC if there is any rise in inflation. Without accelerating inflation, we should still expect three more increases next year.

October Income and Spending and Weekly Jobless Claims

KEY DATA: Real Consumption: +0.1%; Real Disposable Income: +0.3%; Inflation: +0.1%; Prices less Food and Energy: +0.2%/ Claims: -2,000

IN A NUTSHELL: “Consumers may have slowed their drive to empty their wallets in October, but if the Black Weekend is any indicator, they were just saving up for the real deals.”

WHAT IT MEANS: Having just gotten through what looks like a massive Black Friday, Small Business Saturday and Cyber Monday, news that consumers didn’t go out and shop ‘till they dropped in October was not necessarily something to worry about. Yes, households didn’t keep up the pace, but after the huge increase in spending in September, that was not a great surprise. After splurging on vehicles in September, sales ebbed, though not significantly. In contrast, consumption of services was up strongly and demand for nondurable goods rose at a decent pace. Without any additional increase, real, or inflation-adjusted consumption is already rising at a 1.7% pace so far this quarter. It looks like households will add to growth at a moderate, though not spectacular rate this quarter.

Going forward, there remain questions about the ability of households to lead the way. Disposable income was up solidly in October, but it didn’t come from wage gains, which rose only moderately, at best. Most of that increase was largely due to hiring, as hourly wage increases continue to be minimal. Still, after-tax income did increase faster than spending so the savings rate edged upward. At 3.2%, it is still too low.

As for the labor market, firms are not giving out lots of pink slips. Jobless claims declined a touch last week and the level, as usual, is quite low.

MARKETS AND FED POLICY IMPLICATIONS: Solid consumer confidence, massive job openings and little fear of layoffs is likely to translate into a very merry holiday season for retailers of all types. The early data point to a very big weekend of sales and that is good news for the economy. But with Cyber Monday lasting about six weeks and Black Friday starting in September, it is hard to know what the last few weeks of the shopping season will bring. We need the consumer to step up. Some of the good growth we have seen was driven by hurricane replacement and that is just not sustainable. With the savings rate at a level not seen except just before the start of the last two recessions, and with wage gains disappointing, there is only so much the consumer can do to drive growth forward. And if the Accounting Principals survey is any indicator, workers shouldn’t expect end of year bonuses, which firms seem to be doing away with. About the only thing saving consumers is that inflation is still low and it is not accelerating. As for the businesses taking up the slack, that too is open to debate. The tax bills making their way through Congress do little to incentivize productivity enhancing investment, so don’t expect capital spending to surge, no matter what the politicians tell us. So, let’s enjoy all the bargains we got this past week, but keep in mind that growth requires us to spend more and more and more and without the funds to do that, consumers are not likely do that.

November Consumer Confidence, September Home Prices

KEY DATA: Confidence: +3.3 points/ Case-Shiller Home Prices (Over-Year): +6.2%/ FHFA Home Prices (Over-Year): +6.5%

IN A NUTSHELL: “The sharp increases in home prices and high level of consumer confidence may be something to start worrying about.”

WHAT IT MEANS: The economy is moving ahead solidly in so many ways, but there could be problems forming. According to the Conference Board, Consumer confidence rose again in November. This was the fifth consecutive increase and the last time the index was higher was in November 2000. Both current conditions and expectations were up solidly. But the surge in confidence may not be backed by economic factors. Yes, the labor market is tight, but household spending-power is going nowhere. Maybe people are actually hoping to get the $4,000 to $9,000 income increase the administration has promised, but if so, they are going to be sorely disappointed. They can hope for major tax cuts, but for most, that is just not the case. So, one cloud on the horizon is consumer confidence. Household exuberance may be somewhat irrational.

A second concern comes from the housing market. Housing prices may be rising too rapidly. Both the September S&P/Case Shiller and the third quarter Federal Housing Finance Agency indices were up solidly. Price gains may not be quite as rapid as they were last decade, but they are strong and have persisted for quite some time. Worse, near double-digit increases are being posted in a number of metropolitan area.   We may not be in a new housing bubble just yet, but the jump in prices needs to be watched carefully.

MARKETS AND FED POLICY IMPLICATIONS: When I see economic data this strong, I ask once again, “Why the mad rush to cut taxes?” I keep hearing that we need more jobs, but the problem is workers not job openings. The only time over the past forty-give years the unemployment rate was below the current level was during 2000. I keep hearing that the middle class needs a break, but about 90% of the proposed tax cuts go to businesses and upper income households. Then I hear the economy is not growing fast enough. Fast enough for whom?   The growth rate has matched trend growth for the six years. And now we see that home prices are rising sharply and consumer confidence is at seventeen-year highs. Do we really need the massive tax cuts being debated in Congress? Shouldn’t we be concentrating on productivity-enhancing reform, something the bills don’t do much of? If growth does accelerate, even if for a limited period, don’t we run the risk of bubbles forming, especially in the labor market? When you do something is often as important as what you do and the tax bills contain the wrong things at the wrong time. But tax cuts do make for great political ads.

October Durable Goods Orders, November Consumer Sentiment and Weekly Jobless Claims

KEY DATA: Durables: -1.2%; Excluding Transportation: +0.4%; Capital Spending: -0.5%; Sentiment: -2.2 points; Claims: -13,000

IN A NUTSHELL: “Businesses may have paused in their capital spending in October, but they are still investing heavily.”

WHAT IT MEANS: With the passage of a corporate tax cut becoming more possible, the likelihood is that future business capital spending should be strong. While there was a drop in investment in October, the trend this year is still up solidly. A sharp drop in Boeing’s aircraft orders created the decline. In contrast, vehicle orders surged. This sector has been up and down, but with demand really strong the past couple of months, it should continue to help push the economy forward. There were also increases in demand for machinery, electrical equipment, computers and communications equipment. Given the breadth of the gains, I guess you can say that this is another number where the headline was misleading.

Consumer sentiment eased a little in November. The University of Michigan’s index fell as both the current conditions and expectations were down roughly the same amount. Still, consumer confidence is up 5% over the year, a pretty solid gain.

Jobless gains fell back to more normal levels last week after having increased the previous two weeks. That said, it is clear from the level that the labor market remains quite tight.

MARKETS AND FED POLICY IMPLICATIONS: As we go into the Thanksgiving Day weekend, it is clear that the economy is in good shape. Household confidence is up this year as is the stock market. Basically, if you are working and invested, you have a lot to be thankful for, no matter what your political preferences. And with the tax bill cutting taxes so significantly for many large companies, it is likely that after-tax earnings will be better next year and firms will probably be passing that on through increased dividends. However, it is doubtful they will want to lock themselves into higher labor costs by raising wages, as the administration seems to think. That said, there should be decent hiring as well. On that note, to everyone:


Have a happy and healthy Thanksgiving weekend!