KEY DATA: IP: +0.3%; Manufacturing: +0.2%/ Openings: +59,000; Hires: +71,000
IN A NUTSHELL: “The manufacturing sector is holding its own. ”
WHAT IT MEANS: Let’s skip past the stock markets for a while and actually start focusing on the real economy and nothing is more real than industrial production. Output rose moderately in September, led by the sharply rebounding mining/energy sector and an oddly booming vehicle industry. I say oddly because while sales did jump in September, the expectations are for demand to resume moderating going forward. The rising assembly rates helped lift production in the metals industry. Another oddity was a surge in wood product output. Given the softening in the housing market, that was not really expected. A strong rise in business equipment production may signal improving capital spending. Overall, the manufacturing sector is expanding nicely and third quarter output increased at a solid 2.8% pace, which was up from the second quarter 2.3% gain.
The labor market remains tight and firms continue to have major problems finding suitable workers. In August, job openings rose to their highest level on record (the data began in December 2000). The increase in unfilled positions occurred despite a record level of hiring. Interestingly, the number of workers quitting their jobs eased a bit. While these data do bounce around, the rate of employees quitting positions has not surged, which would have been expected. Mobility should be improving, given the level of openings and the difficulty employers claim to be having finding qualified people. Workers don’t seem to be taking as much advantage of it as was projected.
MARKETS AND FED POLICY IMPLICATIONS: We are in the midst of earning season and not surprisingly, they are generally coming in quite good. If you cannot make lots of money right after taxes were slashed and growth was strong, I am not sure what you are doing in business. And investors are likely to love the number. But those numbers are for past performance and my concern is future earnings growth. It used to be that the markets were supposedly looking at least six months into the future. Well, most economists expect growth to moderate, albeit slowly, during 2019 and that hasn’t factored into thinking just yet. I guess the “I will believe it when I see it” approach continues to hold sway. It is hard to argue against it since it has worked quite well for nearly a decade. The data are still strong enough that the Fed will likely raise rates again in December and indicate that more will be coming in 2019. And don’t forget, for most of the past decade, the Fed was mainlining liquidity into the equity markets, almost single-handedly keeping things going. That is no longer happening as the reduction in the Fed’s balance is ongoing and if they continue to follow plans, it will be accelerating. The markets are facing headwinds of a likely moderation in economic growth, rising interest rates, reductions in liquidity, uncertain world growth and ultimately, comparisons with tax cut-hyped 2018 earnings numbers. So, if you are wondering why I keep issuing my warnings about next year, those are my concerns.