All posts by joel

September Job Openings, Hiring and Quits

KEY DATA: Openings: -284,000; Hires: -162,000; Quits: -47,000

IN A NUTSHELL: “Despite some weakness in the labor market numbers, there is really no indication that conditions are softening.”

WHAT IT MEANS: It’s Election Day so get out there and vote. I did and the turnout was heavy, despite rainy conditions.

Meanwhile, out of the political world and back into the real world, the so-called JOLTS report, which stands for job openings, layoffs and terminations, came in a little soft. Of course, this is the September release and we know that the hurricane didn’t help job gains. That said, while the number of openings fell sharply, it remained near record high levels. Don’t be surprised if there is a rebound in October that sets a new record. But the section of the report I watch most closely is the quits data. A truly robust market would have people freely moving from job to another. The number of quits is close to record levels and the rate of quits, which is the number of quits as a percent of total employment, is almost at a record high. The only time it was higher was at the end of the era. I would like to see the rate rise even further, and expect that it would, but I suspect with labor being in such massive shortage, firms are doing all they can to keep workers from walking away.

MARKETS AND FED POLICY IMPLICATIONS: While the JOLTS report usually is watched carefully, it will likely be the tree falling in the forest. Few will pay any attention to it. What we will be spending most of our time thinking about is the impact of the election. There are differing views all around. Unless the Republicans retain the House and the Senate, not much change will likely happen. Even if the Democrats take control of both, it is unlikely they will be able to override a Trump veto. And it just may not be bad to have gridlock for a couple of years. The partisan anger created by jamming through bills supported by mostly one party needs to be quieted. But a Democratic victory in even one house will create a dynamic that will likely lead to all politics all the time. The Republicans created the playbook when they voted several million times to repeal the ACA without any alternative, knowing that either the Democrats in the Senate would kill it or Obama would veto it. Similarly, the Democrats will likely vote several million times to repeal some of the upper income and business tax breaks. It is highly unlikely any bill will become law. Just as the Republicans were playing to their faithful and trying to broaden their support, so will the Democrats be trying to build good will with the voting public. Will they be successful in persuading the electorate that the tax cuts were bad? That is to be seen. But we need to see the outcome of the election first.

October Employment Report and September Trade Deficit

KEY DATA: Jobs: +250,000; Private: 246,000; Unemployment Rate: 3.7% (unchanged); Wages (Over-Year): 3.1%/ Trade Deficit: $54.0 billion (up $0.7 bil.)

IN A NUTSHELL: “Continued strong labor demand, helped by a rebound from hurricane-depressed levels, is putting pressure on wages.”

WHAT IT MEANS: So, where is this lack of workers that every businessperson is complaining about? Maybe they cannot find “qualified” workers, but they sure seem to be able to find “qualified enough” employees. Job growth soared in October after having slumped sharply in September. Despite statements that the hurricanes didn’t affect the data, it appears they did. For example, restaurant payrolls declined by 10,000 in September but surged by 33,500 in October. Really? Retailing dropped by over 32,000 in September but rose a little in October. Another, huh? Over the past two months, the average gain was about 180,000, right where it is expected to average, at least for a while. That said, the report was still remarkably strong. Every major sector posted a gain and job increases were reported in 65.7% of the 258 industries. In other words, the increases were broad based. There was strong hiring in manufacturing, health care, transportation and professional services.

With employment surging, you would think that the unemployment rate would decline, but it didn’t. In part, that was due to a jump in the labor force, with the participation rate rising. While that is good news, the participation rate has been in a tight holding pattern around the current level for the past four years. At least it is not falling. But there is still a shortage of workers and wage gains over-the-year broke the 3% rate for the first time since April 2009, which was near the end of the Great Recession. Then, wage increases were decelerating. Now they are rising.

The trade deficit widened again in September. This time, though, the rise in imports was almost offset by an increase in exports. Exports had been on a downward trend, but hopefully, the bleeding has been staunched. We shall see. Overseas shipments of energy and aircraft surged, while foreign sales of consumer goods and vehicles were also up. On the negative side, soybean exports collapsed, but we may have finally seen the end of the wild swings in this component. On the import side, we bought a lot of consumer goods and it looks like much of the demand for capital goods is being met by foreign companies. There were cut backs in our purchases of food, energy and vehicles.

MARKETS AND FED POLICY IMPLICATIONS: That the job market is strong is hardly a shock. What is surprising is the ability of companies to find workers. Even if you average the last two months to smooth out the hurricane factor, you still get a level of job gains that seems to be unsustainable, except that most economists have been saying that for months. There has been a pick up in labor force growth, but that has been only enough to keep the unemployment rate from dropping rapidly. In October 2017, the unemployment rate was 4.1%, compared to 3.7% now, which is not a large decline given that 2.5 million jobs were added in the past year. But we are seeing wage inflation accelerate and while the surge in payrolls may be the eye-opener for the press and politicians, the 3.1% wage gain will be the data point that catches the attention of the Fed members the most. And they will not be happy about it. Look for a comment about wages in the FOMC statement that will be released next Thursday. It could be couched in a way that makes it clear the Fed will raise rates not only in December but in much of 2019 as well.

Third Quarter Productivity, October Manufacturing Activity and Layoffs, September Construction and Weekly Jobless Claims

KEY DATA: Productivity: +2.2%; Labor Costs: 1.2%/ ISM (Manufacturing): -2.1 points; Orders: -4.4 points/ Layoffs: 75,644/ Construction: 0%/ Claims: -2,000

IN A NUTSHELL: “The labor shortage is being overcome by solid productivity, even if it worker output gains are slowing.”

WHAT IT MEANS: The shortage of workers puts tremendous pressure on businesses to meet the growing demand by squeezing out more efficiencies from their workforces and it looks like that is happening. Labor productivity moderated in the third quarter, but it was still quite good. Indeed, it was large enough to keep labor costs from soaring. Still, we are not looking at any huge rise in productivity as the gain over the year of 1.3% is nothing to write home about.

The Institute for Supply Management reported that manufacturing activity continue to expand solidly in October, though for the second consecutive month, the pace moderated. If there was a negative in the report it was new orders. There was a surge in the share of respondents that said order demand declined. That is something that needs to be watched. That said, order books did fill a touch faster even with firms getting goods out the door more rapidly.

The number of layoff announcements jumped in October. So far this year, the Challenger, Gray and Christmas measure is up almost 26%, as a number of major firms announced that they were either closing or cutting back significantly. The only good news about that large rise is that the labor is so tight that many if not most of those workers should be able to find other positions.

Construction spending was flat in September, but that came after a strong rise in August. Private sector activity rose modestly but the government cut back sharply. Since September 2017, the value of construction put in place is up a very solid 7.2%. Given the tax breaks, there is not reason to think that nonresidential activity will falter anytime soon, though it is likely the increase for the year will be disappointing.

As usual, jobless claims remained close to record lows as there are no signs that firms are slowing their hiring. Despite the jump in layoff notices, firms seem to be holding on to their current work force as tightly as possible.

MARKETS AND FED POLICY IMPLICATIONS: The ability for an economy to expand is determined by labor force growth and productivity gains and right now, we are growing at a pace well in excess of what those two would predict. That implies either productivity has to rise faster or growth will have to slow. I am not sure how much more firms can load on their workers. There comes a point where even the most risk averse worker decides they have had enough and in this labor market, those employees are likely to be able to find other places to work. The alternative is to raise compensation, but that doesn’t seem to be soaring. I keep hearing anecdotal evidence that firms are starting to trade off higher wages for more responsibility, but the data have yet to indicate that is anything more than an urban legend. Of course, the government may be missing some of the early signs of the new trend and it may take a while to see it in the numbers. I suspect that by mid-2019, labor compensation gains will be at levels that would worry the Fed members. If that is the case, those who are hoping for only one or two rate hikes next year may be disappointed.  

October Private Sector Jobs, Help Wanted OnLine and Third Quarter Employment Costs

KEY DATA: ADP: 227,000/ HWOL: -267,300/ ECI (Over-Year): 2.8%; Private Sector Wages: 3.1%

IN A NUTSHELL: “Wage gains are finally accelerating, but that doesn’t seem to be slowing down hiring.”

WHAT IT MEANS: On Friday, the October employment report is released but today we got some other very important labor market data. Since it is Wednesday, that means ADP provides its estimate of private sector job gains in October and it is possible we will get a much bigger increase than expected. Robust hiring in medium and large businesses drove ADP’s guess of a strong payroll increase. Meanwhile, small companies, which generally lead the way, instead lagged behind. It may be that larger firms can pay the rising wages we are seeing, so they can attract the workers needed, some from the smaller companies. As for industries, there were no negative numbers in the report. That doesn’t happen all that often.

While firms are hiring heavily, they don’t seem to be willing to advertise for workers as much as they had been. The Conference Board’s measure of online want ads declined sharply in October. The data have been volatile for about three years now, but the trend seems to be down. There were declines across the entire country and in every one of the top ten occupations. In other words, the weakness was universal. The online want ads may not be providing valuable information right now as it is unclear if the drop was due to a lowered need for workers or lowered expectations about finding suitable workers.  

 The tightening labor market is finally causing firms to raise wages. Private sector wages and salaries rose sharply in the third quarter and the increase over the year was the highest since second quarter 2008. Surprisingly, benefit cost inflation moderated. Firms have been saying they are trying to hold the line on salaries but are willing to increase benefits, but that is not what the government is showing.

MARKETS AND FED POLICY IMPLICATIONS: The ADP forecast can be off by a lot for any individual month, but the data do follow the trend quite well. What the employment services company series seems to be indicating is that there is no fall off in hiring despite the low unemployment rate and the constant complaining about a lack of qualified workers. I suspect the government’s numbers will come in below what we saw today and my estimate is around 180,000. But I would not be surprised if the unemployment rate falls and the hourly wage gain comes in higher than expected. Those data points are what the Fed watches carefully. The labor market is extremely tight and the flat participation rate points to a further ratcheting up of wage gains in the months to come. Given that the government’s data point to accelerating wage inflation, it is likely that next week the FOMC will signal it will be raising rates in December.

September Consumer Confidence and August Home Prices

KEY DATA: Confidence: +2.6 points/ Home Prices (over-Year): +5.8%:

IN A NUTSHELL: “Consumers are so exuberant that even the limited income gains will not stop them from spending, at least for a while.”

WHAT IT MEANS: With income gains lagging badly, it is doubtful that consumers can keep spending at the pace they have been lately. But that doesn’t mean consumption will fall off the cliff, at least not right away. The Conference Board reported that household confidence rose in October to its highest level in eighteen years. The robust job market is underpinning the buoyant attitude about not only the present situation but also expectations. Indeed, the report noted “that consumers do not foresee the economy losing steam anytime soon. Rather, they expect the strong pace of growth to carry over into early 2019.Families may not have a lot more money to spend, but they will still go out and buy anyway.

As for the housing market, it is going the opposite direction of confidence. Though the S&P CoreLogic Case-Shiller national index rose solidly in August, the gain on a year-over-year basis fell below 6% for the first time in twelve months. Price gains had surged in the 2012 – 2013 period, but the increases were overdone. The rise in home costs then decelerated to more reasonable levels in late 2014. From then on, they steadily picked up steam until early this year. Now, we are likely in a slow deceleration phase that should not lead to a crash since sales are not faltering greatly.

MARKETS AND FED POLICY IMPLICATIONS: When people feel good about the future, they are more willing to spend and right now, they are really happy about current and future economic activity. They think that the current job market is really great, though they a bit more uncertain about the next six months. Still, there is not a lot of fear out there and that is good for the economy. And it is another reason that most economists don’t expect growth to fall off the cliff anytime soon. Even the problems in the housing market are more controlled than last decade, as sales remain at reasonable, not greatly elevated levels. Thus, we should not be saddled with lots of homes sitting vacant, as we were when the housing bubble burst. Taken together, today’s data are actually positive, since they point to a solid household outlook but only moderating, not collapsing housing prices. The Fed, which meets next Wednesday and Thursday may take note of the softening housing market, but not express any great concern. It will likely signal another rate hike is coming.

September Consumption and Income

KEY DATA: Consumption: +0.4%; Disposable Income: +0.2%; Prices: +0.1%; Ex-Food and Energy: +0.2%

IN A NUTSHELL: “The slow income growth may not be stopping consumers right now, but it is likely to start doing so very soon.”

WHAT IT MEANS: The issue facing us right now is whether the economy can sustain the strong growth we have seen for the past two quarters. The income data don’t seem to support that likelihood. Consumption expanded briskly in September, led by a surge in durable goods spending. But demand was solid across all categories and it has been strong for most of this year. So, what’s the problem? It’s all about sustainability and that comes from income. Personal income growth has tailed off with wage and salary gains moderating. Farm income fell sharply, likely the result of the trade battles. But the yin and yang of farm income is not my greatest worry. What is truly worrisome is the savings rate, which has declined consistently since February. The September rate was 6.2%. Using recent income distribution data, if the top 20% saved just 12% of their income, a very conservative estimate, the bottom 80% would have no savings. If the second highest income group had savings rate at the average, also conservative, the middle and bottom two income groups would have a negative savings rate of nearly 6%. In other words, to maintain the consumption levels we have been seeing, most households have to be dissaving and that is simply not sustainable. And while inflation remains fairly tame, any acceleration in price increases will simply put further pressure on consumption.

MARKETS AND FED POLICY IMPLICATIONS: While the tax cut-induced spending sugar high continues, the end is likely near. And the problem remains spending power. While some businesses have been announcing sharp increases in wages, especially the minimum wage, that attitude has not been adopted universally. Thus, we have yet to see any acceleration in wage and salary gains. Instead, the added spending seems to be coming from savings and there is simply no way that can continue much longer. It is also hard to imagine that inflation will not continue to accelerate, further reducing spending capacity. The year-over-year gains in real/inflation-adjusted earnings will start decelerating early next year, not only because of inflation but also because the impact of the tax cuts will already be in the income numbers. While investors and some stock market pundits and politicians rail at the Fed for raising rates, it’s the issue of worker compensation that is really the greatest concern. I know this sounds familiar, I write it several times a month, unless wages and salaries, not just benefits, start increasing faster, we are headed back by to a 2% to 2.5% economy. The Fed would actually love that growth pace as it is sustainable. That way, they can raise rates to the neutral level without having to start stepping on the brakes. Stronger growth, though, could force them to hike rates even more. Indeed, the members have already warned that is possible. So watch what you wish for as no good economy goes unpunished.

Third Quarter GDP and October Consumer Sentiment

KEY DATA: GDP: 3.5%; Consumption: 4.0%; Fixed Investment: -0.3%; Prices: 1.6%/ Sentiment: -1.5 points

IN A NUTSHELL: “The headline says strong growth but there are warnings in the details.”

WHAT IT MEANS: The economy grew really solidly in the summer. The headline number pretty much matched economists’ expectations. But if you look at the individual components, there are some concerns. First, almost sixty percent of the increase came from inventory building. Firms have been adding to stocks to support their strong sales, but the inventory build added over two percentage points to growth, which is greater than expected and clearly not sustainable. This is just the first estimate of GDP and I would not be surprised if the inventory number was revised. The consumer also spent money like crazy, buying everything that moved or didn’t. But the gain was also above expectations and it too is not likely sustainable. Over the past two quarters, disposable income increased at a 2.5% pace while spending soared at a roughly 3.75% rate. Again, something has to give. As for the business sector, except for filling up warehouses, firms did little investing in structures or equipment. They did buy lots of software (intellectual property), but business fixed investment overall was a drag. If we were going to see massive capital spending, we should have started to see it already. We haven’t. As for the trade deficit, it widened sharply as exports declined while imports surged. So much for tariffs turning things around. One bright spot was government spending. Government purchases added over one-half percentage point to growth. It is good to see that our politicians at all levels are now embracing Keynesian economics and have opened the spigot wide. Despite the strong growth, consumer prices rose at the slowest pace in a year. The rate was well below expectations as the costs of both durable and nondurable goods fell, at least that is what the government claims. Services inflation remained fairly high.

The University of Michigan’s Consumer Sentiment Index eased a touch in October. However, the level remains extremely high, indicating that households have not been affected significantly by either rising rates, rising inflation or rising political rhetoric.

MARKETS AND FED POLICY IMPLICATIONS: When we got the second quarter number, I suggested that it could be the high water mark for this expansion. It is looking more and more like it will be. Household incomes are just not expanding fast enough to sustain the rapid spending paces posted in the second and third quarters. Businesses are showing few signs of spending heavily on plants or equipment. Indeed, in yesterday’s durable goods report, the proxy for business investment declined for the second consecutive month. Firms are doing what they are supposed to do, regardless of tax cuts: They are looking into the future and deciding if spending large amounts of funds on major projects will pay off. It appears most business leaders have become somewhat cautious about the future and are holding off committing to major investment plans. That is what many economists feared and a point I have made for this entire year. As for the trade situation, how many times economists have warned that anything with war in it cannot be good, I don’t know, but the trade battles have not made things better. So, all we have to fall back on is expansionary fiscal policy. I will not point out the obvious irony of a government run by Republicans depending on heavily on government spending for growth. Oh, yes, I just pointed that out. So, don’t expect fourth quarter growth to be anywhere near what we have seen over the past two quarters. The economy is not faltering, it’s just that we are moving back toward more sustainable growth.

September New Home Sales and August Home Prices

KEY DATA: Sales: -5.5%/ FHFA Prices (Monthly): +0.3%; Over-Year: +6.1%

IN A NUTSHELL: “And the downbeat goes on, and the downbeat goes on.”

WHAT IT MEANS: Another set of housing numbers, another set of soft housing numbers. New home sales fell sharply in September and it wasn’t simply a matter of weather. Yes, demand tailed off in the South, but there were much bigger drops in the Northeast and the West. Home prices have been soaring in parts of the West and the elevated costs, coupled with higher mortgage rates, may be taking their toll on the ability to move new houses. Conditions would have been worse if it hadn’t been for strong sales in the Midwest. It looks like higher priced units are suffering the greatest decline. Sales of new homes above $500,000 fell, while the share of purchases in the middle range, between $200,000 and $500,000 increased. Indeed, the share hit its highest level since the data were first released in 2002. That is good news as it looks like middle-income households are still buying new properties.

Housing prices rose moderately in August. Still, the increase over the year in the Federal Housing Finance Agency’s index, which uses prices on mortgages sold to Freddie Mac and Fanny Mae, continues to decelerate. The gain remained above 6%, which is nothing to sneeze at. Prices are still soaring in the West, but with demand moderating, those increases should fade and the national slowdown in housing price inflation should continue.

MARKETS AND FED POLICY IMPLICATIONS: Are we headed for another housing market collapse? I don’t see that happening. First, and most critically, the market never did reach the bubble stage, at least as far as sales are concerned. In the new home market, sales peaked at about half of the high posted in 2005. Existing home demand peaked at about 20% below the highs set during the bubble. The problem is that demand has not been evenly distributed across the nation and prices have soared in some areas. Are there price bubbles in some of the major cities in the West? Undoubtedly, but we have gone through regional price bubbles in the past and come out the other side reasonably rapidly. It was when demand got totally out of hand and people were buying home with little equity and less financial capacity that the problems arose. Still, housing did add to growth for the last six years. It is likely that will not be the case this year. That is a reason I, and most other economists, think that the expansion should moderate going forward. As for the Fed, clearly, the members just don’t get it. We need zero interest rates. If it was good enough for the Obama economy, it should be good enough for the Trump economy. Of course, Obama had to deal with a housing market collapse, a meltdown in the world financial system, massive layoffs, deteriorating world growth and the steepest recession since the great depression, but hey, who’s counting? The president’s comment about zero interest rates probably gave even those at the Fed who might have been concerned about political pressure a reason to discount the president’s attacks. When faced with a choice between an economy that is collapsing but has zero rates and one that is growing strongly with rates rising, I think the Fed members will take the rising rate/strong growth economy every time. So don’t expect anything but another rate hike in December.

September Leading Indicators, October Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: LEI: +0.5%/ Phil. Fed (Manufacturing): -0.7 point; Orders: -2.1 points; Payrolls: +1.9 points/ Claims: -5,000

IN A NUTSHELL: “The economic momentum should be carried into next year.”

WHAT IT MEANS: The first reading on third quarter growth is released next week and it should be good. And if the Conference Board’s Leading Economic Index is any indicator of future growth (it is, even if it is a rough one), then the expansion should remain solid in the months ahead. The Index posted a strong gain in September after rising sharply in the previous two months. Taken together, they point to a solid gains in the next six months.

One sector that has been leading the way is manufacturing and it looks like it is continuing to do so. The Philadelphia Fed’s index of manufacturing activity eased modestly in early October, but the level remains quite solid. New orders are still strong, even if they are expanding a little less rapidly. To meet the high level of demand, firms are hiring a lot more workers and expanding hours worked, probably to make up for an inability to find even more employees. But there was one warning sign in the data for the Fed. Expectations on future price increases are rising and are at levels that indicate firms think they have significant pricing power. The last time we saw numbers in this range for any period of time was the 1980s. If Chair Powell thinks that inflation expectations are well anchored, he might want to think that over.

 Jobless claims fell last week. The level is quite low. Enough said.

MARKETS AND FED POLICY IMPLICATIONS: Investors are trying to figure out the impact of rising rates on earnings and the confusion is great. The minutes for the last FOMC meeting make it clear the members are steadfast in their belief that rates will rise through next year and that the Fed might have to not only take its foot off the accelerator but could be forced to put it on the brakes. I think that is likely and the Philadelphia Fed’s future prices received index supports the view that inflation will accelerate. It is difficult to look past the strong earnings numbers that so many companies are putting up, but given the huge tax breaks, they should be robust. Hopefully, firms will invest those funds and the rising capital stock will allow for more and more efficient production. But as of now, little of that is happening, though it is still early. The Fed has a conundrum. Growth may moderate, but it is still likely to be above trend for the next year. That means firms pricing power is likely to grow and inflation is likely to accelerate. But unless housing and capital spending improve, the expansion is likely to fade. If inflation accelerates before growth slows, the Fed will have no choice but to start stepping on the brakes. That is why I believe we will have at least three if not four increases next year. As long as the Fed doesn’t jam on the brakes, and four increases only means at worst a mild tapping, then we should be fine. The Fed is sending the right signals and following the correct policy, regardless of what the equity market focused commentators may think.

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.