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.

KEY DATA: ISM (Manufacturing): +0.4 points; Orders: -3.0 points; Hiring: +3.2 points/ Construction: -0.4%; Private: -0.2%

IN A NUTSHELL: “While the manufacturing sector continues to rebound, non-residential construction remains in the doldrums.”

WHAT IT MEANS: The FOMC meeting is today and tomorrow morning and the incoming data are not likely to change any minds. The Institute for Supply Management’s reading on October manufacturing activity index rose in October, its second consecutive increase. The malaise that gripped the sector in August seems to have dissipated. The details don’t tell a particularly consistent story. While production and employment expanded faster, new orders grew more slowly and order books thinned. The decline in orders occurred in spite of rising export and import demand. Strangely, there is a growing inability to get goods out the door. So, what exactly is happening is unclear, but it does look like this sector is not only growing again but is likely that activity is accelerating.

The oddities in the manufacturing sector may be, at least in part, a function of the issues in the construction sector. Total construction spending fell in September, but the major problem was nonresidential activity. If businesses are not building, demand for the goods that go into the construction process and into the offices and plants is not going to increase either. Key segments, such as office and manufacturing, were down. The government was also doing its best to keep growth from accelerating as it too cut back spending on almost every major category. Thankfully, there was some rise in highway construction and health care. On the other hand, residential construction spending rose solidly. Residential investment was down sharply in the initial GDP estimate and I wouldn’t be surprised if that was revised to show a much smaller decline. CoreLogic reported that home prices rose sharply in September and are up 6.3% over the year. It was also noted that “home-equity wealth has doubled during the last five years”. That should mean more homeowners can list their houses for sale, which should lead to greater sales of both new and existing homes, even if price increases slow going forward.

MARKETS AND FED POLICY IMPLICATIONS: The only major number that left to be released before the Fed issues its statement at 2:00 PM on Wednesday is the ADP October private sector job gains estimate. But this is not a government figure and it can differ sharply from the Bureau of Labor Statistics number. In other words, the economy we already see is the economy the FOMC members will be discussing. There is nothing that screams, “raise rates”, and it is highly unlikely the Fed will do that. With the October employment report coming out on Friday and the election next week, there is no reason to go out on the limb. Look for the statement to hint at a December rate hike. The strength of the hint will determine the reaction of investors. But given the political mess, I am more interested in what is said in the first set of Fed members’ speeches after the election than in tomorrow’s statement.

KEY DATA: Consumption: +0.5%; Disposable Income: +0.3%; Prices: +0.2%; Excluding Food and Energy: +0.1%

IN A NUTSHELL: “Incomes are rising and people are spending that money.”

WHAT IT MEANS: On Friday, we saw that the economy grew at a solid pace during the summer, though consumption increased more moderately. Today, we got the details on how spending was distributed over the third quarter. It was a roller coaster ride, driven in no small part by vehicle sales. July was a pretty good month as people bought lots of goods and services. A solid rise in vehicle demand did help things out. But in August, despite continued spending on services, a cut back in vehicle sales led to consumption actually dipping. Well, that decline was reversed quickly enough as vehicle and services spending popped again in September. Why am I spending so much time on that pattern? Simple, the Fed claims it watches incoming data. Well, the incoming data can be volatile, so watching any month’s numbers is a dangerous thing to do. What we learned from the September report is that household are buying goods and services, except maybe some soft-goods, at a moderate pace.

What happens to consumption going forward depends largely upon income growth and to some extent confidence. Consumer confidence has been bouncing around, but generally trending upward. Still, the election is creating a ton of angst. So the burden for better household spending falls on income gains, which right now are basically just okay. Disposable personal income, which is what we have left after taxes, rose moderately in September and for the third quarter as a whole. Importantly, wage and salary gains are beginning to improve. Still, when inflation is added into the mix, the rise has not been anything special.

As for inflation, it still isn’t a major threat. Since September 2015, overall consumer costs were up just 1.2%. When food and energy were excluded, the rise jumped to 1.7%, not that far from the Fed’s 2% target. Importantly, the negative impact of the collapse in energy costs is starting to dissipate and that should lead to faster yearly rises in the overall inflation measure going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed meeting starts tomorrow and ends on Wednesday and today’s report really doesn’t tell the members anything new. They continue to face an economy that is growing at 2% or so with inflation slowly rising toward their target. There is no compelling reason to increase rates. Given the tightness in the labor market and slow rise in inflation, there is also no great argument to be made that a rate hike would be problematic. But if the Fed was even thinking of doing anything before the election, the FBI Director’s action shows just how perilous it would be to raise rates right now, especially since it is totally unclear which candidate, if either, would be helped or hurt by a rate hike. It will be interesting to read the statement. I had been expecting it to signal clearly that the economy was strong enough (if not strong) and with inflation moving in the right direction, if conditions kept improving, a rate hike before the end of the year would be warranted. But even that largely nondescript comment would probably be attacked by the political spinmeisters, so who knows what the statement will look like.

KEY DATA: Durables: -0.1%; Less Aircraft: +0.5%/ Pending Sales: +1.5%/ Claims: -3,000

IN A NUTSHELL: “The economic data don’t require the Fed to do anything at next week’s meeting.”

WHAT IT MEANS: If the Fed members are being driven by the data, they really don’t have to worry that the numbers are pushing them to do anything. Durable goods orders were largely flat in September as sharp declines in demand for computers, communications equipment and especially defense aircraft were mostly offset by a rise in demand for civilian aircraft, machinery, motor vehicles and electrical equipment and appliances. Basically, some sector did well while other didn’t, which has been the story of this recovery. There was one disturbing aspect of the report: Private sector capital spending broke its winning streak as businesses cut back on their investment activities.

Meanwhile, there were more signs that the housing market is improving. Pending home sales rose solidly in September led by a jump in demand in the West and a solid rise in the South. However, contract signings were down in the Northeast and Midwest. Both new and existing home sales have been trending upward and this report indicates that pattern should continue.

New claims for unemployment insurance eased last week. Given the size of the economy and the dynamic nature of the labor market, we are basically at the bottom. We could have numbers below the current levels but it is hard to see that they would stay that way for very long.

There were two other numbers released today that point to a better economy. The Richmond Fed’s manufacturing index posted its second consecutive rise in activity. This part of the country had been hurting and its turnaround is good to see. Also, the homeownership rate rose in the third quarter. The rate has been trending downward since 2004 and maybe Millennials, who are entering their thirties, are finally starting to buy houses.  

 

MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen and her band of fearless monetary policymakers skate into next week’s FOMC meeting with little worry about having to raise rates. With a rate hike having become a political issue, if the Fed fiddled while the economy burned, there would be a problem. But this economy simply continues to grow at a trend rate meaning the Fed has the option to do what it wants – which is likely nothing. As for investors, while it is still all about earnings, the election is a cloud hanging over everything. In two weeks, we should be done with this horror, but until then, don’t expect any great movement.

KEY DATA: Sales: +3.1%; Over-Year: +29.8%; Prices: +1.9%

IN A NUTSHELL: “Housing sales are rising decently despite the lack of homes for sale.”

WHAT IT MEANS: Housing is a critical component of the economy and the new home sector is the most important part of this key segment. It looks like conditions are steadily improving as new home sales rose moderately in September. Of course, there was a huge downward revision to the August numbers, so the increase did come from a smaller base. The gain was driven by a sharp rebound in Northeast sales and a solid rise in the Midwest. Sales were up more moderately in the South but in the West they fell. For the first nine months of this year, demand has creased by 13% compared to the same period in 2015. I think that pretty much tells the story. As for prices, they were up modestly over the year, which is a puzzle. The supply of homes is nearing the lowest levels we have seen in the last forty years, which should be causing prices to rise faster. The percentage change over the year has bounced around lately, so this may just be a data volatility issue. With homes under construction not rising, it is doubtful that the supply/demand mismatch will be eliminated anytime soon. Those looking to buy a new home will either have to settle or wait for new product to be built.  

MARKETS AND FED POLICY IMPLICATIONS: The housing market may not be booming but it is clearly moving forward at a steady pace. New home sales in the third quarter were up solidly from the second quarter. While total housing starts were off slightly in the third quarter, single-family construction was up a bit. That implies housing may be a wash in the GDP report. Since residential investment reduced growth by 0.30 percentage point, that is good news for growth. But the big problem is still the lack of inventory. Builders are cautious and tend to do very little speculative construction. The number of homes under construction or completed that are for sale is rising but is way below what had typically been the case over the previous forty years. Part of that may be finance issues, but a lot is the unwillingness of developers to take a lot of risk. As a consequence, buyers don’t have a lot to choose from. This report is not going to affect the thinking at the Fed or in the investor world. It really isn’t a change from the pattern. And with the election less than two weeks from now, it makes a lot of sense for everyone, be they monetary policymakers or investors, to sit back and watch.

KEY DATA: Home Sales: +3.2%; Prices (Over-Year): +5.6%/ LEI: +0.2%; Phila. Fed: -3.1 points/ Claims: +13,000

IN A NUTSHELL: “Another day of data, another round of decent economic news.”

WHAT IT MEANS: The economy is doing okay, despite what some may be saying. Take the housing numbers. While the housing starts data were soft on the surface, the details made it clear that construction was not weakening. Today, the home sales numbers support that view. The National Association of Realtors reported that existing home sales rose solidly in September. The gains were across all regions, which hasn’t happened often lately. Prices increases remain strong as well. Maybe the most interesting part of the report was the break down between single-family and condos. Similar to the housing starts numbers, the single-family segment is becoming the driving force for growth in the sector.

On the manufacturing front, the Philadelphia Fed’s manufacturing index fell in October. But the details show that the sector is not weakening. While respondents indicated the region’s economy softened a bit, their businesses did better. New orders jumped, shipments surged and order books essentially stopped thinning. While hiring did not turn positive, employment cut backs and the reduction in hours worked slowed sharply. The future looks good as manufacturers expect orders to grow even faster, hiring to pick up and hours worked to expand.

Other forward-looking numbers are also pointing to further strength. The Conference Board’s Leading Economic Indicator Index rose moderately in September. The report summarized things best: “The U.S. LEI increased in September, reversing its August decline, which together with the pickup in the six-month growth rate suggests that the economy should continue expanding at a moderate pace through early 2017”.

Finally, the weekly jobless claims number jumped, but that is hardly a worry. Most economists, including myself, were mystified at how low the new claims had fallen. The current level – or slightly lower – is where we think claims will settle in. That number of new claims is consistent with solid job gains and indicative of a tight labor market.

MARKETS AND FED POLICY IMPLICATIONS: We are getting a clearer picture of the state of the economy and it looks fine. Okay, it isn’t soaring along, but given that trend is in the 2% range, we need a mindset reset on what is good growth. It is not 3.5% to 4%. That is not a reasonable range for any extended period of time. Housing is in good shape, manufacturing seems to be coming out of its funk, consumers continue to spend, third quarter earnings seem to be solid and the election is less than three weeks away, so investors should be heartened. And Fed members should have less fear of the economic future. But the election is creating uncertainty. Trump has indicated he will not reappoint Yellen, first saying she is not a Republican and then criticizing her for seemingly running monetary policy to aid Clinton. Hillary has stayed quiet about the Fed, but most expect her to reappoint Yellen when her term expires in February 2018. That means there is some disquiet about the direction of the Fed, as it is not likely Yellen will resign if Trump wins. Worse, given Trump’s political attacks on the Fed, would the person he might appoint be viewed more as a politician than a central banker? The previous two Fed Chairs worked for presidents of both parties. Politicizing the Fed is a dangerous thing to do.

KEY DATA: Starts: -9%; 1-Family: +8.1%; Permits: +6.3%; 1-Family: +0.4%

IN A NUTSHELL: “Home construction is in decent shape, despite the volatility in the multi-family segment.”

WHAT IT MEANS: At the end of next week, we get the first guess, excuse me, estimate, of third quarter growth, so it is important to see what the current data are telling us. One sector that had been expected to add to growth was residential construction. Weakness in the key single-family segment had dragged down activity in the spring and residential investment reduced GDP growth by 0.3 percentage point. While it doesn’t look as if housing added much over the summer, the restraint may be minimal. Housing starts did drop sharply in September, but as usual, it’s all about the details. Single-family construction surged to its third highest pace in nine years. Strong increases were posted in all regions except the West. However, the multi-family segment cratered, declining nearly 30%. The biggest issue was the Northeast, where multi-family construction was off nearly 70%. This is a relatively small region when it comes to total starts and a few large projects can skew the data. A similar large decline was seen in February, but it totally unwound in March. That is likely to happen going forward. In other words, don’t take the starts data at face value. Understand the details.

Looking forward, permit requests, which had been running behind starts, played catch up in September as they rose solidly. For the quarter, there is a now a backlog of permits and we know that firms are now taking out permits only when they expect to begin construction in the near future. Thus, look for a rebound in construction in October, but maybe not a huge one. The number of home under construction is at the highest level in nearly nine years.

MARKETS AND FED POLICY IMPLICATIONS: If you skip the headline number, the housing report was a fairly good one. Activity is growing in the key single-family segment and permit requests are strong. That points to more homes being built going forward. And it also reminds us that data are volatile and one month of strange numbers can create oddities even in quarterly reports, such as GDP. A weird pattern in starts due to weather, a surge in vehicle sales because of incentives, a rise in inventories because a dock strike ends or whatever, can create large increases or decreases in overall growth rates. That is also a problem for the Fed. When you base decisions on incoming data and those numbers are volatile and can be revised significantly, you are really flying without a gyroscope. Good luck with that. Meanwhile, investors will continue to follow oil prices and earnings releases, which look pretty good so far. There are still lots of numbers that will be released before the election, including third quarter GDP and October payrolls, but who knows if anyone will be listening. One thing we do know, no matter what they look like, they will be spun into something that bears no resemblance to reality.

KEY DATA: CPI: +0.3%; Less Energy: +0.1%/ Real Earnings: -0.1%/ NAHB: -2 points

IN A NUTSHELL: “Inflation may be slowly accelerating, but it is also cutting into consumer spending power.”

WHAT IT MEANS: The Fed members are wishing and hoping (and thinking and praying – sorry Dusty) that inflation will start approaching their target of 2%. That could happen this year, but largely because of the rise in energy costs, not a generalized increase in consumer prices. The Consumer Price Index rose solidly in September, led by sharp increases in energy commodities. Gasoline, fuel oil, natural gas and electricity prices all jumped. In addition, shelter costs continue to soar, medical commodity prices are up and if you eat out, it is costing a lot more as well. On the other hand, if you are buying a vehicle, new or used, prices are going nowhere or even down. And the cost of eating at home is also falling. Over the year, the CPI has not yet reached the Fed’s target, though excluding food and energy, it has been there for ten months now.

While the Fed may think higher inflation is good, I doubt that most households would agree. With wages still rising modestly, the acceleration in inflation is cutting into the spending power of workers. Adjusting for prices, hourly earnings declined in September and have been on a decelerating trend since January 2015. That will not generate stronger consumer spending or growth.

The National Association of Home Builders’ Housing Market Index declined in October, but don’t take that as a weakening in the housing market. There was a sharp rise in September (due to an outsized gain in the West) and the modest October reversal gets us to a more realistic level. That said, the national level is still high, indicating the housing market is in good shape in all regions except maybe the Northeast.

MARKETS AND FED POLICY IMPLICATIONS: Housing is in good shape, inflation is on a slow but steady upward trend and job gains are decent. So, what is the Fed waiting for? I am sure they would like to see a report where inflation is near or even above their target, but that may not happen before the last FOMC meeting of the year. October is when energy costs should turn flat from the year before. They are likely to add to inflation afterward. Unfortunately for the Fed, the November CPI report comes out after the meeting. Also, the Fed’s preferred measure, the Personal Consumption Expenditure price index is running a little cooler than the CPI and it may take a longer for that index to break the 2% barrier. So, the Fed members will have to fudge it if they are to say the data support an increase, which I still think is likely in December. As for investors, as long as earnings are good, they will worry about the economy later, such as after the election – which cannot come soon enough.

KEY DATA: IP: +0.1%; Manufacturing: +0.2%/ NY Fed: -4.8 points

IN A NUTSHELL: “Manufacturing remains soft but there might be some signs that the bottom is being reached.”

WHAT IT MEANS: It is hard to have a full-blown, strong economic expansion if the manufacturing sector is hurting and that has been the case this year. It cannot be said that conditions are good, but they may not be deteriorating any more. Industrial production rose modestly in September after a sharp decline in August. Manufacturing output was up a little faster, but a major drop in aerospace restrained activity. Boeing still has a huge backlog, so that is not likely to continue. More worrisome was continued weakness in machinery. That may indicate uncertainty on the part of businesses about the future direction of the economy and an unwillingness to make any major bets. Overall activity was restrained by declining utility production. It’s tough to seasonally adjust for the weather when there is climate change. (No, I don’t think it is a hoax perpetrated by the Chinese.) But the most optimistic number in the report was the robust gain in petroleum production. Output is now actually up over the year.

While there may be some hints at conditions improving in the Industrial Production release, conditions in the New York Fed’s regional manufacturing sector faltered further. Orders are still declining, but less so. However, optimism about the future is improving. This part of the country is not a hot bed of industrial activity, but a decline there is another indication that manufacturing has a way to go before it can start adding greatly to the economy.

MARKETS AND FED POLICY IMPLICATIONS: While manufacturing has been soft, that doesn’t mean the domestic economy is falling apart. Remember, we are in a global economy and world growth and the value of the dollar matter. Those factors have been working against the sector. In addition, the collapse of the oil complex has hurt firms that provide goods, much of them manufactured, to the energy companies. But as Nobel Laureate Bob Dylan wrote: The times, they are a changin’. Energy prices are no longer sinking like a stone and firms are starting to swim again (apologies to those who know the lyrics). Indeed, rig counts are rising consistently and are up sharply from the bottom reached in the spring. We might even see some investment in the industry in 2017. That would be a great turnaround that could help the manufacturing sector. But that remains a hope, not a reality. For the markets, though, today’s reports probably will not have much of an impact. We are in earnings season. But for the Fed, which produces the industrial production data, the recent data provide a little for everyone. The production rise was modest enough so those that want to wait can say economic conditions are still not great. Meanwhile, those who want to hike rates can say the worst looks to be over, especially with the dollar off its highs and reasonably stable. Which means, we are still nowhere when it comes to having data that demands a Fed rate hike. Of course, that is only a concern to those who actually think the Fed is data driven.