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November Retail Sales and Wholesale Prices

KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.4%; Control: +0.6%/ PPI: +0.3%; Goods: -0.1%; Goods Less Food and Energy: -0.1%; Services: +0.5%

IN A NUTSHELL: “The consumer appears to be in a shopping mood and that is good news for the economy and the Fed.”

WHAT IT MEANS: We may not be shopping ‘till we drop, but we are out there spending money. Retail sales were up modestly in November if all you do is look at the headline number. But as usual, the top line is very misleading. First, declining gasoline prices led to weaker dollar sales numbers, not necessarily weaker unit sales – the average price fell by 5.3% but total sales were off only 0.8%. Once again, vehicle sales were off a little, but it is hard to make the case that people stopped going to dealerships. The November sales pace was exceeded only a handful of times over the past forty years. Meanwhile, households bought electronics and appliances, clothing, sporting goods and most merchandise in general. We shopped online and when we were out, we ate out. And if we stayed in, we ate a lot also. In other words, we spent money. Adjusting the retail sales data so they better match up with GDP personal consumption numbers, the so-called Control Group, demand increased sharply.

On the wholesale inflation front, the divide between goods and services continued in November. Goods producer prices eased a touch, but the drop was the smallest in five months. When you exclude food and energy, the decline was minimal as rising food prices offset falling energy costs. Finished consumer goods prices less energy were up not just in November, but over the year as well. That is a potential sign the downward pressure on consumer goods prices may be fading. But the real pressures remain in the services component, which is roughly two-thirds of consumption. Service producer price increases appear to be accelerating.

MARKETS AND FED POLICY IMPLICATIONS: These reports, as well as an early indication by the University of Michigan that consumer confidence may be improving, buttress the Fed’s stance that it is time to raise rates and the economy can handle it. The one major restraint to growth is lower energy prices, which is causing major adjustments in that sector. In the short-term, those cut backs are overwhelming the slow adjustment to the lower energy expenses by consumers. Households don’t seem to be spending a whole lot of the added cash flow. But really, are there many people who are not linked to the energy sector that really believe that in the long run, the economy is better off with $100/barrel for oil than $40? I suspect that most Fed members realize that the adjustments in the energy-patch may be harsh, but they will fade. Meanwhile, the added money in consumers’ pockets will eventually find its way into the economy in a very broad based manner. There is nothing in the way of a Fed rate hike on Wednesday. I suspect the statement will focus on the FOMC’s expectations that future hikes will be slow, but we already know that. Slow, by the way, seems to be every other meeting. So, the real question is, when will the economy become strong enough and inflation high enough that Fed goes every meeting? If low rates are causing economic dislocations, a slow rise doesn’t help very much. Just ask Alan Greenspan.

November Employment Report

KEY DATA: Payrolls: +211,000; Revisions: +35,000; Unemployment Rate: 5.0% (Unchanged); Hourly Wages: +0.2%

IN A NUTSHELL: “There ain’t no stopping (them) now.”

WHAT IT MEANS: My apologies to Luther Vandross, but there really is nothing except a major crisis that will stop the Fed from its appointed first round of rate hikes. All it would have taken is a mediocre employment report to provide the necessary cover to raise rates and the November data were more than that. Job gains were solid and there were also upward revisions to both September and October. The three month average now stands at 218,000, which is quite good given that the biggest complaint businesses have is the lack of supply of qualified workers. And the increase came despite further cut backs in energy-related firms, weakness in clothing stores, a weird crash in the motion picture industry and a very strange reduction in the vehicle sector, which continues to set new sales records. And, we actually saw a decline in temporary help services companies! In other words, this report was probably even stronger than the headline number implies. Hourly wages rose but there was a small reduction in hours worked, which also seemed a bit strange.

On the unemployment side of the report, almost every component was solid. While the rate remained at 5%, there were strong increases in the labor force and the number of people employed. This led to a rise in the participation rate. While I don’t think much of it, the infamous U-6 rate, which includes all reasons for not having a job, did raise a tick. However, it is still down 1.5 percentage points over the year. The stronger labor market is curing lots of ills.

In a different report, the trade deficit widened in October, but the three-month average is still declining. In any event, today is all about the employment numbers.

MARKETS AND FED POLICY IMPLICATIONS: This report all but green lights the Fed. And it should. There really is nothing more to say other than reprint the Luther Vandross lyrics from the song, “Ain’t No Stoppin’ Us Now”,

Now, are y’all ready?
Are y’all ready?
Here we go now
Do it with the fever
Yeah, come on

Ain’t no stoppin’ us now
We’re on the move
(Hey-yeah, hey-yeah)
Ain’t no stoppin’ us now
We’ve got the groove

There’ve been so many things that have held us down
But now it looks like things are finally comin’ around, yeah
I know we’ve got a long, long way to go, yeah
And were we’ll end up, I don’t know
But we won’t let nothin’ hold us back
(Writer(s): Gene Mcfadden, John Whitehead, Jerry Allen Cohen, Copyright: Mijac Music, Warner-tamerlane Publishing Corp.)

November Manufacturing Activity and October Construction

KEY DATA: ISM (Manufacturing): -1.5 points; Orders: -4 points; Hiring: +3.7 points/ Construction: +1%

IN A NUTSHELL: “The lull in manufacturing continues even as other segments of the economy heat up.”

WHAT IT MEANS: This is the fall of manufacturing’s discontent. The Institute for Supply Management reported that in November, the industrial sector declined for the first time in three years. New orders and production turned negative after having also grown about three years. I guess all good things must end, though it is not nice to see this trend turn downward. Both export and import orders continued to slow, though the import cut backs are moderating. On the other hand, the employment index, which did dip into the red earlier in the year and again in October, rebounded. Manufacturing has been restraining the job numbers so maybe we will see an uptick in Friday’s employment report.

While manufacturing may be having issues, the construction sector is doing just fine. Construction spending jumped in October and the rise was spread almost evenly between public and private, residential and nonresidential. For the first ten months of the year, private construction is up 11.2% compared to the same period in 2014. The October level of total private construction was nearly 16% higher than last year’s pace. Once again, the increases were spread evenly between residential and nonresidential activity. That is interesting since some of the housing reports have been less than stellar. For example, yesterday’s National Association of Realtors’ Pending Home Sales numbers were up less than expected. The problem facing the housing market seems to be supply, but despite the solid construction numbers, there are still not a lot of homes, new or existing, that are on the market. It looks like 2015 will be a great year for builders and the good times seem to be getting better.

MARKETS AND FED POLICY IMPLICATIONS: While everyone likes to focus their attention on manufacturing, it is the services component that generates most of the jobs. Manufacturers employed less than 9% of all employees and just a little over 10% of private sector workers. The manufacturing job slowdown probably reduced the total average monthly job gains by less than 10,000 per month. That is a concern, but not so great that it changes the perception that the job market is strong. The real problem, as we all know, is in the mining/oil production sector. Despite the free fall in oil patch activity, total construction in the rest of the economy is doing quite well. That is what should be the take away and what the Fed members will likely consider as they barrel toward the first rate hike in two weeks (most likely). With the November jobs report being released on Friday, investors will probably assume today’s numbers changed no minds at the Fed and react accordingly.

October Income and Spending, Durable Goods Orders, New Home Sales and Jobless Claims

KEY DATA: Consumption: 0%; Income: +0.4%/ Durables: +3%; Excluding Aircraft: 0%; Capital Spending: +1.3%; New Homes: +10.7%/ Jobless Claims: -12,000

IN A NUTSHELL: “The economy is hardly a turkey so the Fed, which is fed up with low rates, will likely tighten the economy’s belt a little next month.”

WHAT IT MEANS: The day before Thanksgiving is when everyone dumps their data so they can get out early and today was no exception. Most of the reports were decent. Let’s start with the consumer. Households’ balance sheets are better as income is rising solidly. Most encouraging was a sharp increase in wages and salaries. The tight labor market, which got even tighter in October as claims were about as low as they get, is finally causing firms to raise compensation more rapidly. However, people aren’t out shopping until they drop or even until they are tired. They are spending money, but not at a great pace. The weakest segment of was durable goods demand, which is really nothing to worry about. October vehicle sales were one of the highest on record so we know consumers are more than willing to buy big-ticket items. Indeed, the added burden of monthly vehicle loan payments may be a reason that retail sales have not taken off despite the rise in incomes. But households are not stretched as the savings rate continues to edge up. We are approaching the 1990s savings rate. On the inflation side, prices rose modestly and when food and energy were excluded, they were flat.

Manufacturing has been a soft spot in the economy, but that may be changing at least a little. Durable goods orders rose sharply, but most of that was for civilian and defense aircraft. Still, orders for computers, communications equipment and machinery were up. Again, there was one very positive component of the report: Business capital goods orders rose strongly and it looks like the cut backs in investment may have ended.

New home sales surged in October – not really. There was a sharp rise in signed contracts but that was only because the September number was revised down. The October level was okay but not particularly great. This report, though, was weird. Demand in the Northeast jumped by 135% but fell slightly in the West. But the strangest number was medium prices: They fell, yes fell, by 6% from the October 2014 level. That makes no sense at all.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data did nothing but provide the Fed with more cover to raise rates in December. The only potential speed left is the November jobs report, which will be released on Friday, December 4th.   But that number would have to be almost catastrophic – i.e., negative – for the Fed to get worried. The markets are expecting a rate hike so a move shouldn’t cause that great a reaction. With growth exceeding potential, with wages rising more solidly and with businesses starting to invest again, there is lot for the economy to be thankful for. So, on that note let me say:

Have a wonderful Thanksgiving!

August Trade Deficit and Home Prices

KEY DATA: Deficit: $48.3 billion ($6.5 bil. wider)/ Home Prices (Year-over-Year): 6.9%

IN A NUTSHELL: “The stronger dollar is beginning to bite into exports and the trade deficit is soaring as a result.”

WHAT IT MEANS: When you have the one solid economy in the world and your currency is rising, you start to price your goods out of the market that is precisely what is happening.   U.S. exports fell sharply in August, declining by over 3%. The only category that posted a gain was capital goods, as aircraft shipments surged. Otherwise, we saw declines in sales of food, consumer goods, vehicles and industrial supplies. Oil was down, but that was more a price issue than a demand slowdown. Meanwhile, we bought a lot of goods from the rest of the world. Indeed, demand for almost everything except vehicles and petroleum rose. Looking across the world, it is hard to find a country that bought more of our products. But, lots of countries ramped up their sales to us. Not surprisingly, Chinese exports to the U.S. rose sharply while their purchases of U.S. products continued to decline. This is not a new trend: It has been going on for about a year now. Actually, that is a pattern that has emerged with other major trading partners such as Mexico and Canada.

While the world may be having issues, the U.S. economy, especially the housing market, is not. CoreLogic reported that home prices surged 1.2% in August and were up by nearly 7% over the year. A growing number of metropolitan areas are now considered to be “overvalued”. The strong price increases are lifting a lot of boats from underwater to good condition. That should create increasing numbers of homes on the market and since inventory has been a restraining factor, sales should rise. But as more resales hit the market, housing starts increase and ultimately mortgages rise, the price increases should moderate.

MARKETS AND FED POLICY IMPLICATIONS: The U.S. is the market of last resort and foreign companies are shipping everything they can over here. At the same time, the dollar is creating pain for our exporters. Though trade should restrain third quarter growth, domestic economic conditions are still quite good. When you adjust for prices, exports may be slipping, but they are hardly crashing and burning. Firms are fighting hard to keep their share of the foreign markets. Also, housing remains quite strong. While others bemoan price increases, I keep arguing that people can sell their homes only if they have enough equity to allow them to sell. Nothing helps housing supply more than rising prices, so I am happy to see the increases and see that they are spreading across the nation. As for the markets, isn’t it great that the investors think bad news is good news? Who cares what that really means: All that matters is the Fed may put off raising rates and the liquidity will keep on rolling into the financial markets. Yes, I am being sarcastic. Do these data have any implication for Fed policy? Probably not. Former Fed Chair Ben Bernanke comments this week were taken to imply the Fed is on hold for a long time, or at least until the 2% inflation target is clearly in sight. Mr. Bernanke was a great crisis manager, but clueless about the economy when it was not in trouble. Remember, he claimed the housing bubble was slowly deflating. Enough said.

September ADP Jobs Estimate and Help Wanted Online

KEY DATA: ADP: 200,000; Manufacturing: -15,000; Construction: +35,000/ Help Wanted: -138,500

IN A NUTSHELL: “Job growth looks like it is still strong so the softening in want ads is somewhat puzzling.”

WHAT IT MEANS: Friday we get the September employment report and unless there is an outsized number of positions added and the unemployment rate falls below 5%, it will not likely cause anyone to think the Fed members would consider raising rates at the next meeting. That said, it could be solid enough to bolster the belief that the FOMC will actually do something, other than creating confusion, at the December meeting. ADP estimated that the private sector added new positions at a solid but not spectacular pace in September. While the manufacturing sector is being buffeted by the fall in energy prices and the rise in the dollar, construction seems to be taking off. There was an oddity that bears watching: The largest firms are the ones hiring. That had not been the case for quite some time. On the other hand, small business job gains were modest. This segment had been critical to sustaining the solid payroll increases we have been seeing. Why this pattern, which is opposite to the norm, occurred in September is anyone’s guess.

While hiring continues unabated, firms seem to be more cautious in advertising their open positions. The Conference Board reported that online help wanted ads fell in September. The level is still really high, so don’t take the decline as indicating the labor market is weakening. But we seem to have hit a lull in the growth of new ads. Firms may be realizing that if they cannot fill the openings they have already posted, there is no reason to advertise lots of new ones. Where are the new jobs? Not surprisingly, in computers, health care and management.

MARKETS AND FED POLICY IMPLICATIONS: The labor market continues to be strong and we are likely to see that on Friday. The consensus is for about 200,000 new positions being added and the unemployment rate staying at 5.1%. That would signal that conditions are solid, even if payrolls gains are not quite as strong as they were last year. Basically, the report would be the equivalent of “more of the same” which for the Fed means they don’t have to make a decision right away. As for investors, they are probably just glad to see the quarter end and hope that the final quarter will be better. Since the expectations are for a non-market moving report on Friday, other factors, such as oil, commodities and international issues should dominate, at least until 8:30 AM on Friday. The one warning I have is that the jobs data tend to have periodic surprises. We haven’t had an outsized move, be it on the upside or the downside, for a while. If I had to guess, a surprise would be on the upside, but I have been too optimistic for several months so I am not putting my estimate where my fears are.

September Consumer Confidence and July Home Prices

KEY DATA: Confidence: +1.7 points; Current Conditions: +5.3 points/ Home Prices: +0.4%; Year-over-Year: +4.7%

IN A NUTSHELL: “Despite the volatility in the markets, households are still confident, which means they should keep spending heavily.”

WHAT IT MEANS: When the University of Michigan’s mid-September reading on consumer sentiment was released, we saw a sharp decline. But that may have only been due to the shock of the wildly fluctuating stock markets. The final reading for the month was u from that initial level and that trend was reinforced as the Conference Board’s Consumer Confidence Index rose in September. People tend to spend money when they are comfortable about their current situation, especially their jobs, and they expect their incomes to grow. That is pretty much what the report indicated. The Present Situation Index jumped and the percentage of people saying they expect their incomes to rise in the next few months also was up solidly. There is some concern about the future, though. Whether that is due to the stock market declines or some issues finding jobs is not clear.

The data on the housing market remain solid. The S&P/Case Shiller national home price index rose moderately in July and over the year, it is up at a pace that is not excessive. That is not to say that there aren’t housing price surges occurring in some parts of the nation. Since July 2014, prices rose by double-digits in San Francisco and Denver and by 6% or more in Dallas, Portland, Las Vegas, Los Angeles Miami and Seattle. The national index is now only about 7% below the peak it reached in February 2007.

MARKETS AND FED POLICY IMPLICATIONS: We tend to watch the train wrecks, not the trains that merrily roll along and that seems to be the case right now when it comes to the economy. While some firms that have been battered by weak commodity prices are cutting back, the rest of the business sector is merrily rolling along, adding jobs, expanding output and making money. However, the losers seem to be setting the tone of the discussion. But you don’t get 3.9% GDP growth one quarter and have that followed up by something in the 2.5% range that is the current consensus for the third quarter if most firms are not doing well. And should we really worry about firms that might have had decent foreign sales but because of currency translation issues, their reported earnings are down? I don’t think that really matters, except for some quarterly numbers. Consumers are holding in there and that is driving domestically-oriented business activity. The economy is in good shape, no matter what is happening in Wall Street and I suspect the Fed members recognize that. Indeed, the Gang that Can’t Communicate Straight seems to getting its act together as another FOMC member, San Francisco Fed President Williams, has come out and indicated he thinks rates should rise this year. The ducks are getting in line, even if there are still some who are off on their own. While the markets expect a rate hike next year, most economists are now in the December camp, and that includes me.

August Consumption, Income and Pending Home Sales

KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: 0%; Excluding Food and Energy: 0.1%/ Pending Sales: -1.4%

IN A NUTSHELL: “Consumers are spending their growing incomes and that should help the confused members of the Fed make up their minds about raising rates.”

WHAT IT MEANS: If the Fed members need data that show the economy is in good shape, all they have to do is look at the consumer spending and income numbers. Consumption jumped in August after rising solidly in July, indicating the households are out there doing their part to make sure that the economy is strong. We knew that vehicles were flying out of showrooms, but people also spent heavily on nondurable goods and services. Services, which are two-thirds of spending, had been lagging until this year and the rise we have seen continues unabated. So far this quarter, adjusting for inflation, consumption is growing at a very respectable 3% pace. Can this pace be sustained? Given the income numbers, absolutely. Disposable income, which is what we actually have to spend, not what we earn, rose strongly for the fifth consecutive month. Even adjusting for inflation, household earnings are rising solidly. The key has been a rebound in wages and salaries. They are now growing decently and given largely nonexistent inflation, consumer spending power is up a robust 3.7% since August 2014.

On the housing front, the National Association of Realtors reported that pending home sales fell in August, which was unexpected. Only in the West did contract signings rise. Demand is up solidly over they year, but the rate of increase is slowing, in part because of higher prices but also because there is not much inventory to choose from. Black Knight Financial reported that their National Home Price Index rose moderately in July and is up 5.3% over the year. The Index is only 5.5% below the peak reached during the housing bubble.

MARKETS AND FED POLICY IMPLICATIONS: Fed members, including Chair Yellen and NY Fed President Dudley, are trying to ease the confusion created after the last FOMC meeting. While that may have be an heroic task given the Tower of Babble that the Fed has become, today’s talk by Mr. Dudley did reinforce Chair Yellen’s Thursday’s comments that the suddenly critical international events were really not that important, so never mind. Mr. Dudley also reiterated that he thought rates would rise this year and inflation could actually reach the Fed’s 2% target next year. This is the person who warned that a rate hike was “less compelling” just before the last meeting, so listen carefully to his words. The Fed members, at least those in favor of raising rates soon, look like they got the message to talk with a unified voice. That voice says rates will be increased this year, so maybe we should believe them. Maybe. Clearly, the U.S. economy is growing solidly and if you believe the Blue Chip Forecasters panel, of which I am a part, we should get above-trend growth once again in the third quarter as well as next year. Panelists also expect inflation to exceed 2% soon. Conditions are either already in place, or are expected to be in place in the foreseeable future, for the Fed’s growth and inflation targets to be met. Whether the members act or not this year, though, remains anyone’s guess.

Revised Second Quarter GDP, September Consumer Confidence and Fed Chair Yellen’s Comments

KEY DATA: GDP: +3.9% (from 3.7%)/ Confidence: down 4.7 points

IN A NUTSHELL: “With the economy in good shape, Chair Yellen’s strong hints that hike this year is likely have to be heeded.”

WHAT IT MEANS: Second quarter GDP was revised up again. Consumers spent even more than thought and business construction was actually decent. On the other hand, the inventory build was a little less. There was also an upward revision to profits, which grew a little faster than initial estimated. Overall, this report reminds us that the U.S. Economy is in good shape.

Consumer confidence faded in September as the University of Michigan’s Consumer sentiment index fell fairly solidly. However, this was likely due to the wild volatility in the equity markets early in the month. Indeed, confidence rose from the mid-month reading.

Chair Yellen’s Comments and Fed Policy: Last night, Fed Chair Yellen gave a speech that should be reviewed closely. Yes, she reiterated a lot of what had been said, but there were some clear messages that she was sending. First, She once again stated that she and most other Fed members expect to raise rates this year. As today’s data show, the economy can absorb a rate hike. As for the Chinese wrench that was thrown into the rate hike gears, she noted that “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In other words, never mind. On the inflation front, she is sticking to her view that “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”. We now know that the “medium term”, the phrase used in the FOMC statements, refers to a “few years”.   As for those who argue we should wait until all the uncertainties have dissipated, she noted that “monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”   Finally, she quashed the “one and done” rate hike theory when she noted that after the first increase, there would be a “gradual pace of tightening thereafter.” The Fed is not going to simply stop, look and listen. Once started, the members expect to move in a restrained, but consistent pattern.

With only two meetings left before the end of the year, October 27-28 and December 15-16, it seems that it will take disappointing data to prevent a rate hike. If by December, the unemployment rate is at or below 5% (not a heroic assumption since it is currently 5.1%), job gains are strong enough to point to further unemployment rate declines and there are indications that wage inflation is accelerating even modestly, the FOMC should finally pull the trigger. With only one employment report and no Employment Cost Index number before the October meeting, it looks like December 16 could be H-Day, the day the long-awaited hike occurs.

August Existing Home Sales

KEY DATA: Sales: -4.8%; Prices (Year-over-Year): +4.7%

IN A NUTSHELL: “Home sales are still solid, even if they did come off their 8½ year high.”

WHAT IT MEANS: The housing market is being watched closely as it has been a key driver of growth and we know that the Fed is locked into the domestic economy. Okay, I will stop being snarky about the Fed. No, I will not! Anyway, the National Association of Realtors reported that existing home sales dropped more than expected in August. After having reached in July a level not seen since February 2007, a slight come down was forecast, and we got it. Still, let’s not get carried away here. This was the third year in a row that sales fell in August. Is there a seasonal adjustment issue here? Probably not, but it is worth noting. If you chart the monthly difference in existing home sales, there do not appear to be any trends you can find on a monthly basis. Looking at the details, sales were down sharply in the South and West, they fell relatively modestly in the Midwest and were flat in the Northeast. On the costs side, prices rose moderately, but the gain over the year was the smallest in a year. The South and the West continue to post price increases of 6% or more, the Midwest was up 4% while there was a modest 2.4% rise in the Northeast. As for inventories, they rose from July’s level but were still down over the year. The supply of homes remains fairly low.

MARKETS AND FED POLICY IMPLICATIONS: The world is trying to figure out what the FOMC members were thinking when they met last week and decided not to raise rates. Some of the Fed members were out trying to provide some perspective. St. Louis Fed President Bullard, who didn’t vote, said he would have dissented as he is in favor of raising rates, while San Francisco Fed President Williams, who voted, said the decision was close. Chair Yellen speaks on Thursday at UMass Amherst on “Inflation Dynamics and Monetary Policy” and hopefully that will provide some perspective on what she is looking at. We will likely get a lot more comments over the next couple of weeks. But it is still unclear what the key factors are that will shift the close decision from no move to let’s get going, so we really need to wait and listen to the comments from more of the Fed membership. As for the markets, the housing report may be viewed as negative, but I think we can dismiss the decline as being a normal down after several ups. Also, third quarter sales are averaging 2.8% above the second quarter and that translates into a nearly 12% annualized quarterly increase. And that is happening despite the relative dearth of homes on the market. It is likely supply, not demand, that is creating the slowdown in sales, as buyers cannot find that “perfect” home. Fed member comments, economic issues around the world and trends in oil prices will likely overwhelm the economic numbers this week. Next week we get consumer spending on Monday and the September jobs report on Friday, at which point we can start thinking about the domestic economy again.