Category Archives: Economic Indicators

November Job Openings and December Small Business Confidence

KEY DATA: Openings: +71,000; Hires: +59,000; Quits: +41,000/ NFIB: +7.4 points

IN A NUTSHELL: “Even with workers in short supply, small business owners are euphoric about the future.”

WHAT IT MEANS: Wages increased sharply in the last employment report and there is every reason to think those gains can be sustained. Job openings rose in November and while they are not near their record highs, they have stabilized at a very strong level. Most of those, however, were for government positions. Hiring, which had started a downward trend, in the middle of the year, has also stabilized. But the really important number in the Bureau of Labor Statistics’ JOLTS report was the quit data. It appears that workers are showing a growing willingness to leave their jobs and that is a clear sign that the labor market is really tight.

Small business owners are also indicating they are having trouble finding qualified workers. In December, the National Federation of Independent Business reported that 44% of their respondents said there were “few or no qualified applicants for the positions they were trying to fill”. As a consequence, job growth was minimal. Yet this business segment looks like it has welcomed the Trump victory with open arms. The percentage of business owners saying they expect the economy to improve rose by a “stratospheric” (NFIB term) 38 percentage points. Those expecting greater sales jumped by 20 points. We are not talking happy here, we are looking at euphoria. Interestingly, these companies will have to actually hire a lot more workers if they expectations are to be met.

MARKETS AND FED POLICY IMPLICATIONS: The buoyant views of the small business sector hold out great hopes that the economy can pick up steam this year. Owners seem willing to hire and expand, but they need to be able find the workers to hire and those are in short supply. Tax cuts will help the bottom line, but they unless the improved after-tax earnings translate into a willingness to pay more, small businesses will not be able to create as many new positions as we might expect. Let me repeat this mantra again: If you cannot attract qualified workers at the going wage (and it is clear that small businesses have been unable to do that), the choice is to do without or raise wages. If growth accelerates, owners will face the choice of not meeting demand because of a lack of workers or paying up to attract qualified workers from other firms. But the impacts of fiscal policy are well into the future, so don’t look for any major increase in wages for a while. With the inauguration ten days away, the markets will not be watching these secondary data very closely, so I don’t expect much of a reaction. But it is good to know that small business owners are hopeful. The pressure is on the political leadership to deliver tax and regulatory changes that help these firms, not the usual tax changes that do a lot for bigger companies but leave small businesses behind. Here’s a suggestion: Stop the double-taxation of small business owners. Don’t make them pay twice for Social Security and Medicare – once for their own income and a second time for the company, which is their own income anyway.

December Employment Report and November Trade Deficit

KEY DATA: Payrolls: +156,000; Private Sector: 144,000; Revisions: +19,000; Unemployment Rate: 4.7% (up from 4.6%): Wages: +0.4%/ Trade Deficit: $45.2 billion ($2.9 billion wider)

IN A NUTSHELL: “The tight labor market may be slowing job gains but it is also forcing firms to pay higher wages.”

WHAT IT MEANS: The economy ended 2016 pretty much as expected: Job gains that made few happy but were about as good as can be expected. Yes, the number of new positions added in December was not nearly as much as expected, but then again, the previous two months were revised upward by enough to put the total gains at consensus. The percentage of industries showing increases rose, meaning that despite fewer jobs being added, the hiring was more broadly based. The health care sector continues to expand like crazy (the ACA needs to be repealed quickly so that doesn’t continue) and while we may not have been shopping at Sears or Macy’s, we still went out to eat. Restaurant employment surged once again. Despite all the woeful stories coming from statehouses, state and local governments are hiring and it is not just educators. What I really liked was the sharp rise in manufacturing payrolls. The Institute for Supply Management has been saying that firms are hiring again and the government has finally found that trend. The weak links were general merchandisers, temporary help service firms, accounting companies and, strangely, the motion picture industry.

On the unemployment front, the rate rose a tick, but that was expected given the outsized decline in November. The labor force expanded and the participation rate was stable. The real (or really dumb) unemployment rate, which adds in part-timers for economic reasons and discouraged workers, declined to its lowest level since April 2008. Given businesses desires to hire more part-timers, this rate is nearing its likely bottom.

But the best news in the report had to do with wages, which rose sharply. The 2.9% increase over the year was the fastest since May 2009. We still have a way to go before way gains are strong, but we are getting there.

As for trade, the deficit widened sharply in November. Imports were up, led by increases in crude (higher prices helped) and food. Meanwhile, exports declined for the second consecutive month. The stronger dollar is not helping. Even adjusting for prices, the deficit widened, meaning the foreign sector might have restrained growth during the fourth quarter.

MARKETS AND FED POLICY IMPLICATIONS: With the inauguration just two weeks away, the economic data may be taking a back seat to politics. But discounting the numbers is risky since the new administration’s economic policies will work or not work based on where we are. Cutting taxes early in the Obama administration was truly dumb as firms were more worried about survival than hiring or investing. But when the economy is moving forward, tax cuts could work, depending upon their structure. In contrast, when unemployment is high, once the economy gets going, it is easier to hire workers than when there are few people looking for work – as is the case now. The labor force grew at the fastest rate in a decade, an indication that people are piling back into the workforce. Still, the unemployment rate declined. Going to 3.5 or 5 million new jobs per year, as some politicians have said is possible, would require a the labor force surge the likes of which we haven’t seen since the boomers were coming of age. Instead, expansionary fiscal policy will likely add somewhat to growth, but even more to wages. How businesses handle those added costs will determine the inflation rate and how fast the Fed actually raises rates. In other words, 2017 should be really exciting in oh, so many ways.

December Private Sector Jobs, Layoffs and Weekly Jobless Claims

KEY DATA: ADP: +153,000; Small (1-19): -3,000; Manufacturing: -9,000/ Layoffs: 33,627/ Claims: -28,000

IN A NUTSHELL: “The tight labor market is making it hard to find workers, so firms are holding onto they current employees tightly.”

WHAT IT MEANS: Tomorrow is employment Friday and it looks like job gains will be close to the consensus of about 180,000. The payroll services firm, ADP, estimated that private sector hiring slowed a touch in December, but there are some oddities that may lead to a higher government figure. First off, the small firm category, which runs from 1-49 workers, barely added anyone and the smallest, 1-19 workers, actually reduced payrolls. That is not normal. Also, this segment is largely estimated by BLS in their first calculation, so the government’s number may come in higher. Meanwhile, medium and large sized firms added workers solidly. Another issue is ADP’s indication that there was a further decline in manufacturing payrolls. For three months in a row, the Institute for Supply Management has been reporting that its respondents are hiring, not firing. Don’t be surprised if we get a small rise in manufacturing payrolls.

Another factor to be remembered when considering the jobs report is that it nets out hiring and firings (and openings and closings), and layoffs are just not happening. Challenger, Gray and Christmas reported that layoffs in December were up from the November number. Still, the total third quarter job cuts announcements were the lowest since second quarter 2000. And for the full year, layoff announcements were 12% below the 2015 total.

Reinforcing the belief that firms are just not firing people was the sharp decline in weekly jobless claims. These data keep bouncing around, as they always do, but the four-week moving average is at a record low level when adjusted for the labor force. That pretty much says it all.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow’s employment report should be decent but not great. It is likely the unemployment rate will move up a tick or two, but that is because the sharp decline in November was an aberration. Regardless, whether we end the year at 4.5% or 4.8% is largely irrelevant. The labor market is tight. Indeed, maybe the biggest complaint that firms have is their ability to find qualified workers. If that is the case, then hiring will be limited and may actually slow going forward. The option is for wages to rise, which I have been expecting for a couple of years. That would trigger worker musical chairs. The most skilled would move to the higher paid positions and other workers would take up their jobs. As everyone moves up the scale, the lowest skilled positions would become empty and that is where the supply of workers is likely the greatest. Given the large number of openings that exist at all levels, it is hard to accept the argument made by some that there is this huge pool of people who could get decent if not well-paying jobs, that are simply sitting around watching Wheel of Fortune. And let’s also not forget that a market has two sides: supply as well as demand. The lower the wage, the lower the supply. Currently, the wage rate at many levels, not just the minimum wage, is acting as an artificial ceiling. Employers don’t think they should have to offer more than either the minimum wage or what they have been paying for years. But at the current level, the supply of workers is simply too low to meet the demand. The answer, as some suggest, is not to lower the wage – especially the minimum wage – to raise demand. If you actually believe that markets work, that would only reduce the supply further, exacerbating the problem. The answer is to raise wages, increasing supply and reducing demand so the market moves back toward equilibrium. In the past, the private sector did just that. Until firms start increasing compensation faster in this cycle, they will continue to face a shortage of workers.

December Manufacturing Activity and November Home Prices and Construction

KEY DATA: ISM (Manufacturing): +1.5 points; Orders: +7.2 points/ CoreLogic Home Prices (monthly): +1.1%; Year: +7.1%/ Construction: +0.9%

IN A NUTSHELL: “The economy is ending the year on a high note with even the manufacturing sector showing signs of faster growth.”

WHAT IT MEANS: It appears that President Obama will be leaving his successor with a pretty good economy. (He can only wish the same could have been said of his predecessor.) Manufacturing has been the weakest link in the economy for a couple of years now, but that appears to be changing. The Institute for Supply Management’s reading of manufacturing activity was up nicely in December, hitting its highest level in two years. New orders surged and that led to a jump in production. Twelve industries reported increases while only four were down. There was even some additional hiring. That bodes well for Friday’s employment report. Backlogs are still disappearing, though that should change with the growing orders.

On the housing front, home prices are rising even more sharply. CoreLogic reported that their measure of housing costs rose sharply in November. The 7.1% jump from November 2015 was the largest since spring 2014. This acceleration in price increases could continue for a while, as the rise in mortgage rates seems to be forcing people off the fence, as expected. But the stronger demand is facing limited inventory, which is a recipe for price inflation.

The construction sector is also improving as activity was up across the board. Be it the private or public sector, residential or nonresidential, the value of construction put in place rose in November.

MARKETS AND FED POLICY IMPLICATIONS: The economy is in pretty good shape. Yes, it would be nice if growth was in the 3% range, but with the labor force and productivity stagnant, that would be hard to reach for any extended period. Realistically, 2.5% – 2.75% in 2017 would be really good and if it is faster, great. That would be possible if the economy is hyped by tax cuts and spending increases, but it is more likely the impacts will not be felt until the second half of the year and even more so in 2018. Also, there are risks to growth such as rising interest rates and energy prices. Ending the ACA may sound good but it could harm health care spending, slowing that sector. And, of course, a trade war would be really damaging. But that is for our politicians to sort out. For now, what we can say is that conditions are good and getting better. Investors should be pleased with today’s numbers, but they are looking ahead to major tax breaks. As long as there is hope that will happen, the markets should hold up. But eventually, budget reality has to enter the equation and the implications for the deficit are troublesome. I guess we will find out soon if the last seven years of spending controls and budget deficit reductions was a financial philosophy or a political strategy.

November Housing Starts and Permits

KEY DATA: Starts: -18.7%; 1-Family: -4.1%; Multi-Family: -45%; Permits: -4.7%; 1-Family: +0.5%; Multi-Family: -12.3%

IN A NUTSHELL: “Despite the sharp slowdown in multi-family construction, the housing sector remains in good shape.”

WHAT IT MEANS: When it comes to the headline number of an economic report, what we often have is a failure to communicate. That is the case with today’s home construction release. If you looked at the huge drop in housing starts and the declines across every region, you would think the sector cratered. It didn’t. What happened was the incredibly volatile multi-family sector data did what they sometimes do, which is fall (or rise) enormously. There was a nearly 50% drop in multi-family starts in November, driven by an 81% decline in the Northeast. Really? 81%? The huge national cut back came after a 75% increase in October, which followed a nearly 40% drop in September. Get the picture? Good. Smoothing out the data, for the first two months of the quarter, starts are over 6% above the third quarter rate. That implies housing could add sharply to growth in the fourth quarter. On the permit side, there was a little more stability. More importantly, permit requests for the past two months are still above starts. Also, the number of homes permitted but not started continues to rise, so there is some room for construction to accelerate.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC made its annual move this week and will not get back together again until the end of January. Unless something strange happens before then, the members will probably go back into to their usual turtle position. But that could change fairly quickly, if Congress and the new President get their act together and pass a stimulus bill. The size of that program will likely determine the Fed’s aggressiveness not only next year but in 2018 as well, when the full impacts of any tax cuts and spending increases will kick in. In November, for the first time since mid-2014, oil and gasoline prices posted an increase from the year before. It is unclear if the recent production reduction agreement will hold, but at least for a while, energy will be adding to rather than subtracting sharply from inflation. That is likely to push inflation above the Fed’s target and keep it there. If there is a significant stimulus bill, by the end of 2017, inflation could be running closer to 3% than 2%. In other words, unless the economic data tank in the next few months, and that doesn’t look likely, the markets will be focusing on and guessing about tax cuts, spending increases and regulation changes. Given that it is easier to say you are going to cut regulations than actually cut regulations, next year should be all about tax cuts and spending. (Obamacare changes, if they actually occur, are well into the future.) And since those actions greatly increase budget deficits, the most important thing may be the political calculations of the Tea Party member. Do they vote for major increases in the deficit in order to get tax cuts, or do they stick to their smaller government, smaller deficit mantra? Oh, and does anyone know what will happen to sequestration? Should be a fascinating few months and if you can tell me what will happen, we will both know and I can actually fill out my many economic forecast surveys.

November Consumer Prices, Real Earnings and December Philadelphia and New York Manufacturing Activity

KEY DATA: CPI: +0.2%; (Over-Year): +1.7%; Excluding Food and Energy: +0.2%/ Earnings: -0.4%/ Phil. Fed: +13.9 points/ Empire State: +7.5 points

IN A NUTSHELL: “Inflation is edging up and that is cutting into consumer spending power.”

WHAT IT MEANS: Yesterday, Fed Chair Yellen seemed to indicate the Fed had done its job as the labor market was pretty much at full employment and inflation was near where the Fed wanted it to be. It looks like she was right on target. The Consumer Price Index rose moderately in November, even excluding volatile food and energy. Food costs were flat but energy prices did jump. Importantly, over the year, inflation continues to move toward the Fed’s 2% target. The details, however, don’t point to any major acceleration in inflation as few components posted large gains. Even health care, especially health care commodities, was well contained. The cost of services, which is the largest component of consumer spending, continues to rise faster than commodities, though the days of declining goods prices should be over soon.

With inflation up moderately but wages oddly falling, household purchasing power declined sharply in November. I cannot explain the drop in the wage measure so I will simply report the data. This is a relatively new series so we really don’t have a good handle on what moves the numbers. Still, flat or down spending power is not positive for the economy.

Two Fed regional banks, New York and Philadelphia, reported that manufacturing activity in their regions improved markedly in December. Orders rose solidly in both districts but while Philadelphia reported improved hiring, New York indicated it softened. Most heartening was a surge in optimism in both regions.

Unemployment claims fell last week and we continue to run at historically low levels, when adjusted for the size of the labor force. Is there really any question that the labor market is pretty much out of slack?

MARKETS AND FED POLICY IMPLICATIONS: Rightfully so, the Fed Chair is proud of the work the Fed has done and she showed it at her press conference. The Fed did all the heavy lifting over the past eight years as fiscal policy restrained growth. But the reality is that interest rates are well below long-term trend levels and that is something that must be corrected before anyone can claim victory. So, what should we expect out of the Fed in 2017? Once the recent rise in energy costs is transmitted through the economy, inflation should exceed 2% for the overall index and core index. That could happen within the next couple of months. While it is likely the unemployment rate will tick up in December (the November drop was too large), it is clear from other indicators that the labor market is tight. But the Fed, especially Chair Yellen, will not believe that is the case until wage gains accelerate. The closely watched Atlanta Fed Wage Tracker is beginning to get into a more normal, strong economy range but we are still not seeing that in my preferred measure, the Employment Cost Index. It will be interesting to see what those numbers look like in the fourth quarter, which comes out on January 31, 2017. That is critical because the Fed Chair has made it clear that the members are waiting to see what the stimulus package looks like before they commit to any course of action. They are likely building some expansionary fiscal policy to be passed, which may be why they think rates will go up three times next year. But an aggressive package would change that. I think four hikes (or 100 basis points) next year would be likely with any decent-sized stimulus program.

November Import and Export Prices and October Foreclosures

KEY DATA: Imports: -0.3%; Fuel: -3.9%; Exports: -0.1%; Farm: +0.6%/ Foreclosures (Over-Year): -24.9%

IN A NUTSHELL: “The strong dollar is keeping inflation down, which is a challenge for the Fed.”

WHAT IT MEANS: The FOMC is going to do its annual duty of raising rates a massive one-quarter percentage point tomorrow, but the real question is: How much will the Fed hike next year? With the labor market pretty much at full employment, the only thing left is for inflation to hit the Fed’s 2% target and if energy prices remain where they are, that could happen in the next couple of months. But there is a countervailing force: the dollar. The Trump election has led to a sharp rise in the trade-weighted value and that could keep import prices down. The cost of imported products fell in November and that came even before any impacts from the higher dollar could translate into lower prices. One major factor, the fall in energy costs, has been unwound and that should lead to a rise in the energy component of the import price index this month. But even excluding energy, prices were down, though minimally. That said, over the year, non-fuel import prices are largely flat and with energy prices actually increasing, it looks like import costs could start adding to inflationary pressures. On the export side, the long-suffering farm belt is starting to see some increases in their prices. In 2015, agricultural export prices fell double-digits but will likely end up close to flat this year. Similarly, non-farm export prices will probably be up a little.

The deep pit that housing fell into when the bubble burst looks to be largely filled in. CoreLogic reported that the foreclosure rate declined sharply in October and is beginning to close in on the level seen before the bubble hit. The percentage of homes that are seriously delinquent in their mortgage payments hit the lowest rate since August 2007. We are not quite there yet, especially given the significant problems that remain in states such as New Jersey and New York, but the housing market is nearly healed.

MARKETS AND FED POLICY IMPLICATIONS: How long the dollar’s rally will continue is unclear. Irrational exuberance, at least to some extent, has likely taken hold in some of the financial markets. But a strong dollar does create some issues for the Fed, as the members seem ready to start taking seriously the task of getting rates back up to normal levels. The stronger the dollar, the lower the cost of imported goods. I think the FOMC members would love to see inflation closer to 3% than 2%. That would give them a blank check to do as they please, especially since the full employment mandate has been met. But, tomorrow is another day, which does correspond with a FOMC meeting and press conference, so let’s wait and see what comes out of that discussion.

November Employment Report

KEY DATA: Payrolls: 178,000; Private: 156,000; Revisions: -2,000; Unemployment Rate: 4.6% (down 0.3 percentage point)

IN A NUTSHELL: “With job growth as high as can be expected given the lack of workers and the unemployment rate near full employment, there is little reason for the Fed not to raise rates.”

WHAT IT MEANS: If it is all about jobs, and it is supposed to be, then there is little to be concerned about. The November employment report was about as good as can be expected. Yes, the total was hyped by a somewhat higher than expected rise in government employment, but there was also a surprising decline in retail jobs. Given all the reports that firms were adding seasonal workers like crazy, that drop was not expected. Manufacturers are still paring payrolls despite positive indications from the Institute for Supply Management. With qualified workers in short supply, temporary help firms are once again doing a decent business.

On the unemployment front, the rate dropped to its lowest level since August 2007. That is, we are at pre-recession levels. Even the “real” or really stupid unemployment rate is back to where it was in April 2008. In other words, all measures are near or at full employment. The labor force was down, but that bounces around like crazy. The participation rate declined as well, but it is still up for the year and where models, using demographic trends, pretty much predict it should be.

The one outlier in the report was a decline in average hourly wages. I have commented before that I really don’t know how to interpret this number as the data are less than a decade old. There is also a compositional issue in that older, higher paid workers are retiring at an accelerating pace and being replaced by lower paid Millennials. That could be biasing the number downward. Given the biggest problem firms face is finding workers, it makes not sense that wages would be declining.

MARKETS AND FED POLICY IMPLICATIONS: Payrolls expanded solidly, especially given the lack of available workers. It is not that firms aren’t trying to hire, they just cannot find qualified workers at the wages they want to pay. So don’t expect any major acceleration in job gains going forward. Yes, we can have some months with above 200,000 new workers being added, but given the slow growth in the labor force and the lack of available, let alone qualified workers, it is hard to see that there will but a major change from the current 175,000 per month trend. So, Janet Yellen needs to suck it up and raise rates on December 14th and I expect the Fed to do just that. But more importantly, the Fed members are starting to remind the world that if fiscal policy actually starts helping out, the Fed doesn’t need to keep rates at record lows. They are watching Washington carefully and no good expansionary fiscal policy will go unpunished. That is, the Fed is likely to use aggressive tax cutting and growing spending as an excuse to raise rates more than the markets currently expect. That is the warning some members are starting to give and those comments should be heeded.

October Existing Home Sales and November Philadelphia Fed NonManufacturing Index

KEY DATA: Sales: +2%; Prices (Over-Year): +6%/ Phil. Fed (NonMan.): -10.7 points; Orders: +6.9 points; Hiring: +5.8 points

IN A NUTSHELL: “The strongest housing market in nearly a decade is another clear sign this economy is in solid shape.”

WHAT IT MEANS: I know that in four years, America will be great again, but right now, it is not that bad. The National Association of Realtors reported that in October, existing home sales hit their highest pace since February 2007. The increases were spread fairly evenly across the nation, which points to a broad based expansion in the housing market. Condo sales were flat but single-family activity, which is about 90% of the market, was up decently. With demand rising, not surprisingly, prices were also up solidly. The price increases were similar for both single-family and condos. The supply of homes on the market is still relatively low and that points to further strong gains in prices.

The Philadelphia Federal Reserve reported that nonmanufacturing activity in its district continued to expand in November, but at a muted pace. This report was actually quite solid. New order growth accelerated sharply, as did sales, and firms were able to push through solid price increases for their own products. As a consequence, hiring of both full-time and part-time workers picked up quite nicely. In other words, the details were really good even if the headline wasn’t.

MARKETS AND FED POLICY IMPLICATIONS: The housing market has recovered and is nearing a more reasonable level of activity. Construction and sales are back to 2007 levels and we don’t need a whole lot more to get to levels that are consistent with long-term trends. Indeed, don’t look at 2005 as a standard: One bubble was one bubble too many. Can the market continue to improve now that interest rates are moving upward? Undoubtedly yes. First of all, rising rates tend to get the attention of fence sitters, who actually have to now start making decisions. The rising prices should allow those that didn’t have enough equity to start putting their homes up for sale, boosting inventory. And really, a 4% mortgage rate just isn’t very high. In 2005, at the peak of the housing boom, mortgage rates averaged nearly 6%. In the 1990s, when home sales were strong, mortgage rates hovered around 7.5% – and that is when 20% down payments were the standard! We have been spoiled and buyers will just have to get used to more normal levels of rates. Yes, some may not be able to get a mortgage, but prices will adjust, so I don’t expect a significant dislocation in the housing market even if rates rise another one percent. Of course, I am biased (or dumb), as my first mortgage was 17.5%. I did get a great price for the house, though. Barring something unexpected, the Fed is raising rates on December 14th. With rising long-term rates telling the Fed that inflation is going to accelerate and with the possibility that expansionary fiscal policy, which once was a dirty phrase to the Republicans now becoming a mantra, the economy, inflation and interest rates are all slated to accelerate. And the Fed needs to get going before it is way behind the curve.  

October Employment Report and September Trade Deficit

KEY DATA: Payrolls: +161,000; Private: 142,000; Revisions: +44,000; Unemployment Rate: 4.9% (down 0.1 percentage point); Wages: +0.4%/ Trade Deficit: $36.4 billion ($4 billion narrower)

IN A NUTSHELL: “The tightening job market is finally showing up in higher wages, which should make Janet Yellen and lots of workers happy.”

WHAT IT MEANS: Not that facts matter to politicians, but the last major economic report before the election, the October employment report, was really good. Yes, total payroll gains were a little less than expected, but there were significant revisions to the previous two months. Over the past three months, job increases averaged 176,000, which is clearly enough to keep the unemployment rate filtering downward. The October rise was driven by solid increases in the service-producing sector. Health care and professional and business led the way. In contrast, retailers reduced their payrolls. This sector usually adds 20,000 or so jobs and the decline was a major reason this report was only solid, not strong. In addition, manufacturing continues to hemorrhage positions. The recent reports from the Institute for Supply Management point to stabilization in hiring, so hopefully that number will be flat or even positive in the months to come. Government payrolls swelled at both the federal and state and local levels.

With firms adding more workers, the unemployment rate ticked downward. The so-call “real” unemployment rate, which I call the “really stupid” unemployment rate, hit its lowest level since spring, 2008. It is also not far above the average during the last expansion, so it cannot be said (even if it will be) that the unemployment rate is still high. You can see that in the hourly wage gain, which was quite strong. The 2.8% increase over the year was the highest in this expansion.

The trade deficit narrowed sharply in September, which was a surprise as well. Exports rose and imports fell. This report could lead to an even smaller trade deficit for the third quarter, so don’t be surprised if the first revision to the report shows that growth was above 3%.

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report, especially when you consider the upward revisions to August and September. Of course, politicians live in their own reality, which sometimes bears no relationship to the world or even galaxy that the rest of us live in, so the spin on this report should be fascinating. That said, I have noted in the past that we needed at most 150,000 jobs per month to keep the unemployment rate falling and we are above that. The three month average, which smooth’s out the volatility in the data, is about as good as can be expected given the tightness in the labor market and the inability of firms to find qualified workers to hire. And with the hourly wage number beginning to accelerate, the Fed will have all the cover it needs to raise rates in December. Of course, the November jobs numbers come out before the next meeting, so I cannot say with any level of confidence that the FOMC will indeed tighten next month. But barring a financial market melt down as a result of the election, look for that to happen.