KEY DATA: LEI: +0.8%; Coincident Index: +0.4%/Jobless Claims: 283,000 (up 17,000)
IN A NUTSHELL: “Despite some issues with housing, signs are pointing to even better growth in the months ahead for the economy and the labor markets.”
WHAT IT MEANS: With turmoil all around, you would assume the economy is in danger of stalling. Wrong again. Investors have decided that maybe the world is not falling apart, even as more chaos occurs, and the equity markets have rebounded. Consumer confidence, at least through the first half of the month, has actually improved. And now we see that an indicator of future growth, The Conference Board’s Leading Economic Index, rose sharply for the second time in three months. The measure had stalled in August, but it bounced back with a vengeance and the three-month average increase is pointing to even better growth ahead. The Coincident Index, which measures current activity, has not been rising as quickly as the LEI might imply.
Jobless claims, one of the factors driving the indicators, rose last week. But the increase was from an historically low level when labor force size is considered. These numbers are volatile. Smoothing them, the four-week average was down to a new record low. Also, a new index about the labor market, ADP’s Workforce Vitality Index, posted a solid third quarter rise from the second quarter level. Conditions in the South and West have firmed sharply over the past year. This report, when coupled with the jobless numbers, point to an accelerating economy.
About the only concern in the Conference Board’s report was the housing market and the data are really all over the place. But we are seeing things improve, such as existing home sales. Also, the Federal Housing Finance Agency released its August Housing Price Index and prices rose solidly. The index is back to where it was in August, 2005 but is still nearly 6% below its April, 2007 peak. The year-over-year increase, however, is decelerating, though it was better in August than July.
MARKETS AND FED POLICY IMPLICATIONS: Today was a good day for the economic numbers. They should brighten an already rebounding investor mood as they point to stronger growth in the future. Issues such as Ebola and ISIS terrorism may cause concern, but they shouldn’t have a great impact on fundamental economic activity. And if the labor markets are tightening, as most data seem to imply, then the Fed has to take notice. We will see if the lights are on in the Eccles Building next week as the FOMC is meeting. Quantitative Easing should be ended but concerns about less than desired inflation and labor market slack may still be at the center of the discussion. Since some at the Fed want to see the whites of inflation’s eyes before shooting, there is no reason for them to indicate they are going to pull the trigger soon. But if the October and November employment reports are as good as I suspect, conditions may be a lot different when the Fed members meet again in the middle of December. That is when I expect them to start signaling that rates will be going higher and not after a considerable time.