3rd Quarter Employment Costs, October Confidence and Small Business Jobs and August Home Prices

KEY DATA: ECI (Over-Year): +2.5%/ Confidence: +5.3 points/ Jobs Index (Over-Year): -0.51%/ Home Prices (Over-Year): +6.1%

IN A NUTSHELL: “Everything seems to be going up, including wages, home prices and confidence.”

WHAT IT MEANS: Boy have the data looked good lately and today’s numbers are no different. Let’s start with the third quarter Employment Cost Index. This is a more global measure than the average hourly wage number that most people talk about. It considers wages and salaries as well as benefits. Business labor expenses accelerated in the summer, but the rise was nothing major. The pick up was largely due to improving wage and salary gains, especially in the private sector. Public sector costs actually moderated. The wage pressures built in almost all industries and most professions. There has been a slow but steady acceleration in private sector wage costs but they are just now getting to levels we saw in the 2000s. That is, they are rising, but not yet high.

Consumers are becoming ebullient, at least if you believe the Conference Board. The Consumer Confidence Index rose sharply in October as both current conditions and expectations jumped. The index now stands at its highest level since December 2000. People are very upbeat about the labor market, as a rising percentage said it was easier to get a job right now. If there was a cautionary note in the report, it was that respondents were a little less confident about future employment conditions.

Home prices continue to surge. The S&P CoreLogic Case-Shiller national home price index jumped again in August and the rise over the year broke 6%. Since slowing sharply in 2014, the increase in the index has rebounded, accelerating from a low of 4.1% in February 2015 to its August pace. Seattle is leading the way as home prices rose by a huge 13.2% since August 2016. The recovery in Las Vegas is accelerating and prices were up nearly 9% over the year. Over the month there were solid increases in most of the major metropolitan areas except Atlanta, which posted a modest decline.

The only negative number was the Paychex HIS Markit Small Business Index, which declined in October. This index has receded most of this year and is pointing to a job slowdown in the small business segment of the economy. That point was reinforced by the recent deceleration in wage growth.

MARKETS AND FED POLICY IMPLICATIONS: The economy looks like it has accelerated from the sluggish 2% pace it was stuck in for quite a while. But the lack of labor may be keeping firms from hiring and that will likely limit the growth rate, at least until wage gains accelerate. Employment costs may be increasing but they are hardly surging, which is good for business but not for consumers. Given the rate of inflation, income is not rising fast enough to allow consumers to increase their spending pace. Also, the savings rate has fallen to a level that raises questions about the ability of consumers to maintain their current spending growth rate. Something has to change. Either wages need to rise faster or tax cuts have to be provided to lower and middle class families. Those cuts would accelerate spending, but only in the short-term. Longer-term, either wage gains will have to accelerate or the economy will slow. Tax cuts are so enticing because they cover up the fundamental issues and kick the problems down the road. For politicians, that is nirvana.