KEY DATA: ISM (Manufacturing): -2.1 points; Orders: -1.2 points/ ADP Jobs: 235,000/ HWOL: +81,500/ Construction: +0.3%
IN A NUTSHELL: “The economy did well in September but it looks like it didn’t build on those gains in October.”
WHAT IT MEANS: The September numbers came in pretty strong and that translated into in solid third quarter GDP growth. But as is always the case, all eyes are turning toward the next quarter and so far it looks like growth is solid but not accelerating. The Institute for Supply Management reported that manufacturing activity was really good in October, though it did moderate a touch. Indeed, the index level is consistent with strong manufacturing growth. Orders remained high, even if they increased a little less rapidly, while hiring and production also remained near recent highs. Backlogs continue to build and that implies continued solid activity going forward.
On Friday we get the October employment report and that means on Wednesday, ADP releases its estimate of private sector job gains. The September payroll decline broke a seven-year streak of job gains and it is expected that the drop was an aberration that will be corrected with a strong increase in October. ADP indicated that is likely. Their estimates are that private sector job gains in September and October totaled nearly 350,000. (ADP had payrolls expanding in September.) That seems to make sense to me, though maybe a little high. I expect an upward an upward revision to the September number and an October gain in the 300,000 range.
Reinforcing the belief that the October jobs report will be strong was the sharp increase in the Conference Board’s Help Wanted OnLine Measure. Gains in October were seen in every region and in most occupations. Still, businesses have been cutting back on their advertising for two years now and the level of ads is well below its peak. I suspect that may be more a function of the inability to fill jobs than a lack of openings. Firms may simply be assuming they can fill only so many open positions and are concentrating on the most important ones.
Construction activity rose in September, but all the gain was from government activity. Private nonresidential construction declined while residential building was essentially flat.
MARKETS AND FED POLICY IMPLICATIONS: Today’s data indicated that the economy didn’t falter much, if at all, in October, but it didn’t speed up either. It looks like vehicle sales were solid in October and that should help, but it still isn’t clear to what extent hurricane replacement is driving the numbers, so be a bit cautious here. Friday’s jobs number should be really good, but don’t be fooled by the headline. To get a better picture of what is happening, average September and October together. I suspect that will look like something closer to about 150,000 per month. But before then, the new Fed Chair will be named and if it is Jerome Powell, as expected, investors will be able to assume that not much will change as far as Fed policy is concerned. They can go back to watching earnings and wondering – or dreaming – about tax cuts. As long as the Republicans embrace massive increases in the national debt, something they have decried for years, the tax bill will pass. But as the details keep dribbling out and the size of the shortfall keeps rising, questions grow about the Freedom Caucus’s willingness to go along with what is shaping up to be a very traditional tax cut bill. As for tax reform, it hardly looks like that is going to happen.