Category Archives: Economic Indicators

November Wholesale Prices

KEY DATA: PPI: -0.2%; Goods: -0.7%; Energy: -3.1%; Services: +0.1

IN A NUTSHELL:   “With business costs well contained and consumer confidence rising, maybe even the Fed members will start feeling good about the economy.”

WHAT IT MEANS:  What am I missing?  I keep looking at my forecast for 2015 and I am well above most others.  Yet the recent data seem to point to an economy that is clearly accelerating and is being pushed forward by falling energy costs and improved consumer confidence.  On the cost side, wholesale prices fell in November, but that should shock absolutely no one.  We know that oil prices are slip, sliding away, so the headline decline was expected.  But even excluding energy, producer costs went nowhere.  Indeed, goods prices excluding energy were down a touch as food price increases eased up.  They had been soaring and that was offsetting some of the decline in oil.  If you look through the report, there were few goods categories where prices are rising.  The one place you can find it is in capital equipment.  I actually think that is just fine as it signals growing investment activity.  As for producer services, they continue to increase at a moderate pace.  Over the year, most wholesale prices are up between 1.5% and 2%, which is hardly threatening since the path from producer costs to consumer prices is not very direct.

There was some really good news on the consumer front.  The Thompson Reuters/University of Michigan’s early reading of December consumer sentiment was released and it looks like confidence is soaring.  The index hit its highest level in nearly eight years with expectations that growth would improve in the future leading the way.  This report reinforces the Bloomberg Consumer Comfort Index numbers that indicated that confidence has reached a seven-year high.

MARKETS AND FED POLICY IMPLICATIONS: If the early returns on holiday shopping are any indicator, people are translating their more ebullient outlook and the additional money left in their wallets after filling up into lots of gifts.  The costs of products should stay down as there is little reason for most retailers to raise prices.  The question, though, is how the FOMC members will balance a clearly strengthening economy with inflation that is generally below desired levels.  I suspect that in next week’s statement, the focus will shift clearly to the economy and the tightening labor market.  The Fed needs to set up its excuse, I mean rationale, for raising rates.  It is not likely it will get much help from too high inflation or even surging wages.  So it needs something else to explain why it is starting on the pathway to rate normalization.  The easiest thing is to focus largely on the economy and that is what I suspect them to do.  As for investors, if anyone can explain why stocks go up or down on any given day, tell me.  I know all the ex post explanations, but today’s excuse du jour, whatever it may be, doesn’t really provide me with any real knowledge.

November Retail Sales, Import Prices and Weekly Jobless Claims

INDICATOR: November Retail Sales, Import Prices and Weekly Jobless Claims

KEY DATA: Sales: +0.7%; Excluding Vehicles: +0.5%; Gasoline: -0.8%/Non-Fuel Import Prices: -0.2%; Fuel: -6.7%/Jobless Claims: 294,000 (down 3,000)

IN A NUTSHELL:   “A firm labor market is helping power stronger retail sales and it looks like we are having a very, merry holiday shopping season.”

WHAT IT MEANS:  Apparently, the reports of the consumers’ demise are premature.  The National Retail Federation was downbeat about Black Friday demand, but with sales running a week or two and Cyber Monday lasting a week, it appears households are shopping ‘till they are at least tired.  Retail sales soared in November and it wasn’t just the jump in vehicle purchases that propelled revenues forward.  Excluding vehicles, sales were still strong even when gasoline was included.  Declining prices led to a sharp drop in fuel purchases and excluding that portion of sales makes the rise even greater.  Indeed, the increases were essentially all across the retail landscape.  People even went to furniture and department stores, two areas that had been lagging. 

On the inflation front, the Fed has nothing to fear, unless they are hoping for higher inflation, which the members are.  Import prices fell in November and the declines were also across the board.  There was even some relief on the food side, which had been running counter to most other import prices.  A strong dollar is probably helping foreign companies grab for market share by lowering prices.

As for the labor market, another number, another indication that the November jobs report, while high, was not a total aberration.  Jobless claims continue to moderate and there is little reason to think that the December payroll increases will be weak.  The levels are consistent with job gains in the 250,000 range and a steady fall in the unemployment rate.  Only the return of frustrated workers can keep the unemployment rate from coming down consistently.

MARKETS AND FED POLICY IMPLICATIONS: It seems to be all coming together.  The labor market is continuing to improve, falling gasoline prices are adding to spendable income and households seem to be using that money to buy lots of things.  The holiday shopping season appears to be off to a very good start but we still have a couple of weeks to go.  Bad weather may create some ebbs and flows in the sales but I expect demand to be strong.  Last month I suggested that the holiday season could show upwards of a 5% rise and I am buoyed by the latest reports.  If we get anything close to that, we could have another quarter of GDP growth at or above 3.5%, confirming that the economy has shifted gears.  Next week the FOMC meets and it will be interesting to see how the members view the economy.  I think it is time to drop “considerable time” from the statement but whether that happens this month or next, it is coming.  The real issue is the first rate hike.  I think in spring the Committee will set the range around 25 basis points.  While that will not be a large move, it will signal the start of a long but steady process of rate hikes.

October Job Openings and November Employment Trends and Small Business Optimism

KEY DATA: Openings: +149,000; Year-over-Year: +838,000; Hires: -20,000; Year-over-Year: +543,000/Employment Trends Index: +0.4%; Year-over-Year: +6.1%/NFIB: +2 points

IN A NUTSHELL:  “The November job gain may have been a bit excessive, but there is little doubt that business hiring is accelerating and it needs to ramp up even more.”

WHAT IT MEANS:  Now that “jobs, jobs, jobs” has taken its place in the trash heap of political slogans and we are switching to “wages, wages, wages”, it is critical to understand how great the pressures are on businesses to increase labor compensation.  It looks like employment cost pressures are building and the dam that is holding it back could be breaking soon.  Two indicators of the condition of the labor market were released yesterday and today.  The Bureau of Labor Statistics’ closely watched Job Openings and Labor Turnover survey (JOLTS) showed that openings continue to increase.  Since October 2013, unfilled positions have increased an incredible 17.5%.  In part that is due to the failure of businesses to fill those positions.  Private sector hiring lagged by nearly 300,000 workers over the past year and actually eased a touch in October.  As a consequence, we are back to a job openings rate that we haven’t seen since the dot.com bubble began bursting in 2001.   Employees are quitting their jobs at growing numbers, though in fits and starts.  The level was down a touch in October but is still up over 12% from last year. 

A second measure showing that the labor market is tightening is the Conference Board’s Employment Trends Index, which rose solidly in November.  The index is closing in on the last expansion’s high reached in early 2007.  Also, the National Federation of Independent Businesses’ Small Business Optimism Index jumped in November.  Expectations soared.  It appears that even small company owners are starting to feel better about conditions. These indicators also support the view that the November employment report was not greatly out of whack.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC meets next week and the members have to make some determinations about the tightness of the labor markets and how long they will have to wait before they start seeing sharper wage increases.  The large increase in November is hardly enough to create any major worries at the Fed.  But just about every conceivable labor market indicator is blinking either yellow or red.  So the November wage gain should be taken as a warning that the hoped for – or dreaded, depending on where you sit – faster labor compensation increases may be closer than most believe.  The big debate right now is whether the FOMC’s statement will remove the phrase “considerable time”, which has been used to indicate that rate hikes are well into the future.  I think the November jobs report has given the Committee the perfect cover to do just that.  That would not signal that a rate hike was coming right away.  Indeed, several more months of decent wage increases would be needed.  But it would provide the foundation for starting the rate normalization process sometime during the first half of next year.

November Employment Report

KEY DATA: Payrolls: +321,000; Revisions: +44,000; Private Sector: +314,000; Average Hourly Earnings: +0.4%; Unemployment Rate: 5.8% (Unchanged)

IN A NUTSHELL:   “Is this liftoff?”

WHAT IT MEANS:  The jobs report is the first big one of the month and this was a really big one.  The economy may not yet be a big mean jobs machine but it is just about there.  November job gains were way above expectations and there were solid upward revisions to the previous two months numbers.  For the past three months, an average of nearly 280,000 new positions have been added and that can simply be described as very strong.  The increases were across the board as nearly 70% of the industries posted gains.  You have to search far and wide to find any major drop in employment.  There were strong gains in construction, manufacturing, retail trade, financial activities, transportation, professional services and restaurants.  Even the government chipped in despite a cut back in education.  In other words, everybody seems to be on the hiring bandwagon.  The key, though, is wages and while they rose more than they had been.  That is really good news.  Meanwhile, the unemployment rate was unchanged.  The labor force did rise, so that is an indication the strengthening market is pulling back in more people.

MARKETS AND FED POLICY IMPLICATIONS: This was a great report but don’t expect gains to continue at the 300,000 level.  The economy has not yet reached a growth rate that would support it.  But increases between 250,000 and 300,000 are likely and that would lead to further declines in the unemployment rate.  I expect the full employment rate, which is roughly 5.5%, to be reached in the spring but labor shortages should be showing up sooner.  The November wage increase is a warning that labor market conditions are already starting to turn.  The Fed will not react to a one-month solid rise but if we see additional solid gains, then the tone of the statement will change.  I suspect the Fed will be talking about a tightening labor market at its next meeting, which is in ten days.  As for investors, the yin and the yang is the strong economy vs. the potential that the Fed could raise rates sooner than others think.  But that has been overhanging decisions for a while; it’s just that few have been discussing it.

November Challenger Layoffs and Weekly Jobless Claims

KEY DATA: Layoffs (monthly): -29.8%; Year-to-Date: -5.8%/Claims: 299,000 (down 14,000

IN A NUTSHELL:  ‘It seems that every time we get labor market numbers, we get more indications that the market is tightening.”

WHAT IT MEANS:  The turtle is nearing the finish line.  The goal is a normal labor market and we can see that coming into focus.  Today’s numbers point to firms doing all they can to keep their current workers.  Challenger, Gray and Christmas’ November job cuts report was very encouraging as there was a sharp decline from the October pace.  That is important since there was a surprisingly large number of layoff announcements in October and it raised some questions about the direction of the market.  Those questions look to have been answered.  Layoffs are slowing sharply and are on target to hit the lowest level since 1997.  That was near the peak of the dot.com bubble when hiring was robust.

Confirming the strength of the labor market was a large drop in new claims for unemployment insurance.  This number had surged the previous week but we are back down below 300,000 per week and that is an indication that tomorrow’s payroll increase could be strong.

On a separate note, CoreLogic’s October foreclosure report indicates that the overhang of distressed homes is being whittled down rapidly as there is inventory has fallen by 31% since October 2013.  But there are still a large number of houses in process.  The pace of foreclosure is slowing but is still quite high.  That said, the inventory of delinquent homes is the lowest since July 2008.

MARKETS AND FED POLICY IMPLICATIONS: The slow but steady improvement in the labor market that has marked this recovery continues unabated and now we are facing the reality that the pendulum may finally be swinging away from employers and in favor of employees.  We are not there yet, but we are getting there.  That is crucial for the Fed since worker compensation seems to be the operative issue for rate hikes.  Tomorrow we get the November employment report and I wouldn’t be surprised if the job gains, including any upward revisions, total at least 250,000.  I include revisions because they have been pretty large lately and it is important to recognize the full extent of the payroll changes.  As for the unemployment rate, it is a good bet to edge down to 5.7%.  The labor market is closing in on full employment and should reach it by early spring.  That means shortages should be appearing more broadly and at that point, wage increases are likely to follow.  The timing is difficult given the change in attitudes of workers, who are still fearful of quitting or changing jobs, and business managers, who believe they should not have to give raises since they haven’t had to for so long.  That dynamic, though, creates the potential for a gap up in wage gains when more normal views of job mobility and worker compensation reappear.  And if the restraining effect of the foreclosure inventory can dissipate, the housing market would strengthen and that would add further to growth and accelerate the labor market tightening and wage increases.

November Supply Managers’ Non-Manufacturing Index, ADP Jobs and Help Wanted Online

KEY DATA: ISM: +2.2 points: Orders: +2.3 points; Employment: -2.9 points/ADP: +208,000/HWOL: +170,200

IN A NUTSHELL:   “The October lull was just temporary and it looks like the job market is getting better.”

WHAT IT MEANS:  Friday we get the “all important” November employment report but until then, we will be finding out from other sources how the economy did last month.  Right now, all signs are go.  It appears that the services sector pause in October was only to refresh, not depress.  The Institute for Supply Management’s Non-Manufacturing index rebounded sharply in November, led by a surge in new orders.  Similar to the ISM manufacturing report, export demand jumped, though service sector imports grew a little less rapidly.  Despite ramped up production, order books are filling more rapidly and that bodes well for future activity.  The only negative was employment.  But the index simply came down from a very high level to a high level so hiring is still solid.

I am still quite optimistic about Friday’s jobs numbers.  ADP estimates that November private sector job gains came in at a decent though nothing-great level.  Small businesses are hiring like crazy.  That is interesting as the Paychex/IHS Small Business Jobs Index fell in November, so I don’t know what to make of this.  There was some improvement in large firm hiring but that group needs to do more.  And more may be coming.  The Conference Board’s Help Wanted OnLine index jumped in November as the number of new ads surged.  Firms need more workers, but they don’t seem to be doing a good job filling the open positions.  That view was supported by the latest semi-annual survey by Dice Holdings, which indicated that “more U.S. companies are revving up hiring plans”.  Even if Friday’s report is not a huge one, next year is shaping up to be a great one for workers.  

MARKETS AND FED POLICY IMPLICATIONS:  Every day, we continue to see that economic conditions are not only good but they are getting better.  The labor market is tightening and orders are flowing in.  Meanwhile, businesses continue to hold the line on compensation.  Today’s revised productivity numbers indicate that there has been largely no gain in inflation-adjusted earnings over the past year.  That is good for earnings but bad for consumer spending.   Investors should appreciate today’s numbers as they point to a solid but hardly overheating labor market.  That implies the Fed may not be facing demands to raise rates anytime soon.  But the Fed members will be parsing Friday’s unemployment rate and the wages data.  Those are the key indicators and as long as wages remain reasonably well contained, the FOMC can dither. 

October Consumption, Income, Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Consumption: +0.2%; Real Disposable Income: +0.1%/Orders: +0.4%; Business Investment: -1.3%/Jobless Claims: 313,000 (up 21,000)

IN A NUTSHELL:   “On a day where there are a rafter of data, only some of them are turkeys.”

WHAT IT MEANS:  The long weekend has created a backlog of numbers and they are all coming out this morning.  The first group were somewhat mixed.  Consumer spending continued to improve in October, which is very good news.  Indeed, it rose despite a reduction in durable goods demand.  That was a little odd as total vehicle sales edged upward.  A solid holiday shopping season could push consumer demand up to 3% for the fourth quarter, which is where I have it.  As for income growth, that was not as strong as we would like, but conditions are clearly changing.  While gains are not spectacular, total wages and salaries have increased by 4.4% over the year.  Yes, some of that is due to more jobs, but about half is due to actual wage increases.  Still, adjusted for inflation, average wage increases continue to lag.

On the manufacturing front, durable goods orders rose in October.  That was a bit of a surprise, but the details are what matter.  There was a 45% increase in defense aircraft orders and that is not likely to be repeated given the spending restraints in place.  Excluding defense, orders were down sharply.  In addition, the best measure of business investment, nondefense, nonaircraft capital goods orders, posted a second consecutive 1.5% drop.  That is not a sign of aggressive business investment activity.  Order books are filling, so that should lead to more production.

Finally, there was the very strange large surge in weekly jobless claims.   The individual state data don’t seem to jive with the overall change so it is hard to really know why that happened.  Also, Thanksgiving is late this year so maybe there was an issue with the seasonal factors.  In any event, this number should be viewed with caution.  We need to see what happens over the next few weeks to determine if the labor market tightening process is moderating.  Keep in mind; the level is still consistent with solid, though not robust, job gains.

MARKETS AND FED POLICY IMPLICATIONS: It is unclear what to make of today’s numbers.  Nothing was overly strong and there were some weak reports as well.  So the best that can be said is that confusion about the strength of fourth quarter growth remains high.  The estimates range from the low 1% to over 4%, which shows that economists are clueless right now about what is happening.  I still think we could approach 4%, but we need a really good holiday shopping season.  So, go out and spend like crazy this next week.

Have a Happy Thanksgiving!

Revised Third Quarter GDP and November Consumer Confidence

KEY DATA: GDP: 3.9% (up from 3.5%); Year-over-Year: 2.4%; Corporate Profits: +2.1%/Consumer Confidence: down 5.4 points

IN A NUTSHELL:   “The economy really is growing solidly, which makes the decline in confidence very strange.”

WHAT IT MEANS:  Is the economy accelerating?  It sure looks that way.  The upward revision to the summer economic performance was a surprise, but it was not caused by anything that could be considered strange.  Both consumer and business spending was a bit better, but the changes were not large.  Similarly, government spending was cut, but also by a modest amount.  The trade deficit turned out to be wider than initially thought but businesses stocked up for the holiday shopping season at a greater pace, offsetting the negative impact of trade on growth.  All-in-all, the changes came in all the right places.  Inflation remained in check, which was expected, but there was a downgrade to personal income growth.  That is not good news for employees.  Corporate profits rose at a modest rate as well. 

Meanwhile, in the face of declining gasoline prices, improving economic activity, strong job gains and a lower unemployment rate, consumers suddenly turned sullen.  The Conference Board’s Consumer Confidence Index dropped sharply in November after having risen solidly in October.  There was an especially large decline in expectations as the labor market outlook seemed to dim.  These results were quite a surprise and given all the positive economic news, are hard to explain. 

Meanwhile, the slowdown in home price appreciation continued in September. The S&P/Case-Shiller national index fell slightly and the year-over-year gain came down again. It is hardly a surprise that the huge increases we had been seeing have disappeared but it is disturbing that we are not seeing some continued monthly gains.

MARKETS AND FED POLICY IMPLICATIONS: If the consumer confidence numbers had come in as expected, I would be talking about the economy being off to the races.  But the sharp decline does raise some questions, though I am not sure what they are.  Basically, there is every reason but one to believe that people should be feeling better about things.  That reason is wages, or lack thereof.  Nothing else should be standing in the way of this economy really picking up steam.  But businesses have done a great job of keeping worker demands for higher wages at bay and until the pendulum swings back to employees, firms will continue limiting pay increases to their workforces.  The Fed members are likely to take these reports in stride, as they really do not change anything.  But investors have to start wondering what shoppers are really thinking.  I believe this will be a really solid holiday season, but we need happy consumers for that to happen. 

October New Home Sales, Pending Home Sales and November Consumer Confidence

KEY DATA: New Homes: +0.7%/Pending Sales: -1.1%/Consumer Comfort: up 2.2 points

IN A NUTSHELL:   “The housing market is marking time but improving consumer confidence may be coming at just the right time.”

WHAT IT MEANS:  The housing market has been adding to growth since the winter wipeout but the impact has slowed.  That trend may be continuing.  New home sales did increase a touch in October, but only because the September pace was revised downward.  Builder confidence has been rising so the small gain, though better than some thought, was a surprise to me.  The level of purchases has been in a tight pattern for the past three months and it is still below 500,000 a month, annualized.  Strong sales would be around one million, so the sector has a long way to go.  Demand was strong in the Northeast and Midwest but off in the South and West.  Prices, however, did surge.  The high end of the market looks like it may be coming back.

Pending home sales, which are signed contracts for existing homes, dropped in October.  There were declines in all regions except the Northeast, which posted a modest rise.  This does not bode well for existing home sales, which are likely to rise minimally, if at all,

On a positive note, The Thompson Reuters/University of Michigan consumer sentiment index rose in November.  That was in sharp contrast to the large decline posted by the Conference Board’s confidence index.  There was a small fall off from the mid-month reading, but sentiment hit a level not seen in more than seven years.  Both current conditions and expectations were up.  This report is also supported by an increase in the Bloomberg Consumer Comfort Index to its highest level since December 2007. 

MARKETS AND FED POLICY IMPLICATIONS: Housing is just not improving very much at all.  But while it is critical that this market get going, for the holiday shopping season, the consumer numbers are what really matter.  I had mentioned in my commentary on the Conference Board’s confidence number that the decline made little sense.  That two other reports point to improving confidence is more in line with logic.  But logic and household perceptions don’t necessarily go hand-in-hand so we have to be a little uncertain about what people are thinking.  If confidence is rising, which I tend to think it is, then we could be in for a very good fourth quarter spending number.  That is what we really need.  So on that note, let me say to everyone:

Have a Happy Thanksgiving!

October Existing Home Sales, Leading Indicators and November Philadelphia Fed Index

KEY DATA: Home Sales: +1.5%; Leading Indicators: +0.9%; Phila. Fed: up 20.1 points

IN A NUTSHELL:   “It is looking more and more like the economy is accelerating.”

WHAT IT MEANS:  Where should I start?  How about the outlook for the future?  The Conference Board’s Index of Leading Indicators jumped for the second consecutive month, and the stock market didn’t even help this time!  If this measure has any predictive capacity, and it does, then it is pointing to a lot stronger growth in the months to come.  A second indication that growth may be picking up was the huge increase in the Philadelphia Federal Reserve Board’s Business Outlook Survey’s activity index.  This index does bounce around but the enormous rise points to a clearly improving manufacturing sector.  There was a special set of questions asked about employment and almost 56% of the respondents say that they expect to hire in the next twelve months.  That is up about ten percentage points since January and the major reason is that firms expect sales to rise.  The positive sales outlook should not be a surprise given that only 1.7% of the respondents expect growth to slow over the next six months.

For the economy to really hit its stride, we need the housing market to at least hold up its part of the deal.  Existing home sales rose in October and demand has finally clawed back above where it was when rates spiked.  For the first time since October 2013, the year-over-year change was positive.  The increases across the nation were solid but there was a decline in demand in the West.  Prices seem to firming again, in part because of the inventory is shrinking.  Rising prices is critical if homeowners are to have enough equity to sell their current houses and move into different ones.  That churn has been missing from the market.

MARKETS AND FED POLICY IMPLICATIONS:  What a day for the economic data.  While overall inflation may be restrained, we saw that services inflation is coming back and the level of jobless claims points to additional strong employment reports.  Now it appears that housing is picking up, albeit slowly, while manufacturing may be poised for a large increase.  When you add those numbers the jump in the leading indicators, you really have to feel optimistic about the economy.  The Fed is debating the use of the term “considerable time” when it comes to keeping rates low.  But the members may dump that phrase as early as the mid-December FOMC meeting if the economic numbers continue to show increasing economic and labor market strength.  They may also have to start talking about services inflation, something that really needs to get the attention that has been missing.  But investors like to focus on the positive and the latest numbers only feed the bullish beast.