All posts by joel

November ADP Private Sector Jobs, Help Wanted OnLine and Revised 3rd Quarter Productivity

KEY DATA: ADP: +217,000/ HWOL: +232,000/ Productivity: 2.2%; Compensation: 4%

IN A NUTSHELL: “If Friday’s job gains come in anywhere near what ADP thinks they will, then a December rate hike becomes a slam dunk.”

WHAT IT MEANS: With more and more Fed members sending strong signals that a rate increase in December is likely, the only things that could prevent that from happening are either a major crisis or disastrous data. The biggest release left is the November employment report that comes out on Friday and it looks like it could be quite good. ADP estimated that private sector hiring accelerated last month and for the first time in a while, the gains were spread across all industries and firm sizes. Small and midsized companies are no longer shouldering the hiring burden as even large firms added workers at a solid pace. Renewed hiring in the manufacturing sector and strong gains in business and finance indicate that a broader expansion is under way. ADP’s estimates don’t exactly match the government’s private sector numbers, so don’t be surprised if Friday’s employment increase is lower.

Adding to the belief that the labor market is strong and getting stronger was the large rise in online want ads in November. This was the second consecutive strong gain for the Conference Board’s measure and points to a potential break out in hiring. Firms had been cautious for about six months but that has changed. They are once again aggressively looking for workers in all regions and occupations.

Third quarter productivity was revised upward, as expected, given the large upward revision to third quarter GDP growth. But what jumps out in this report is the huge increase in hourly compensation. Instead of a 3% rise, it is not put at a 4% annualized gain. It looks like hourly compensation will rise by over 3% this year, the biggest gain since 2007. When adjusted for inflation, the increase should be over 2%, which would be the fastest rise since 2000. The tight labor market is already causing wages to rise faster and that trend will only accelerate next year when the unemployment rate dips below full employment.

MARKETS AND FED POLICY IMPLICATIONS: All signs are pointing to a Fed rate hike two weeks from today. Any payroll increase above 150,000 should seal the deal and a number above 200,000 might even get them hiking early – just kidding. This is a Fed that has been dragged kicking and screaming to the conclusion that the economy can absorb not just one rate hike but a series of increases. The discussion should finally turn to what constitutes a slow series of increases? I have argued that every other meeting is cautious enough. Once the huge energy price declines come out of the inflation indices, and that will start happening early next year, the top line number should go back above 2% and start approaching 2.5%. The unemployment rate will fall below 5%, if not in November then most likely in December. By June, it could be closing in on 4.5% – a rate that only the nattering nabobs of negativity will argue is not below full employment. At that point, labor compensation costs could be rising fast, not just faster, and that should lead to accelerating inflation excluding or including food and energy. By next fall, the markets could be calling for an increase at each meeting. That has been my forecast for a while and I am sticking to it – at least until next fall.

November Manufacturing Activity and October Construction

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

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

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

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

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

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

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

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

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

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

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

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

Have a wonderful Thanksgiving!

Revised 3rd Quarter GDP, Housing Prices, Consumer Confidence and Philadelphia Fed NonManufacturing Index

KEY DATA: GDP: 2.1% (up from 1.5%)/ S&P Home Prices (Year-over-Year): 4.9%/ Confidence: -8.7 points/ Philadelphia Fed: up 8.8 points

IN A NUTSHELL: “The economy is growing at its potential and home prices are accelerating, so why all the long faces?”

WHAT IT MEANS: With terror being on everyone’s minds, it is hard to focus strictly on the economic data, but we must do that so we know where things are given the risks the world is facing. And the data look fine. It turns out that the economy grew at a solid pace in the summer. I use the term “solid” because we have to base out evaluation of growth on what the economy can do, not what we would like it to do. Trend or potential economic growth is running between 2% and 2.25%, so the upwardly revised GDP number comes in right at that pace. It is strong enough to keep the labor market tightening and to maintain modest upward pressure on prices. The revision was mostly due to more inventory building than initially thought. Equipment and residential spending were also revised upward, while consumption came in a touch lower. It looks like growth this year growth will come in at about 2.5%, above trend but not strong enough to create major bubbles. That said, wage pressures are building.

On the housing front, prices continue to rise. Both the S&P/Case Shiller and CoreLogic indices rose faster over-the-year in September than they did in August. S&P/Case Shiller had prices rise by 4.9% for its national index while CoreLogic came in at 6.4%.

The Conference Board’s Consumer Confidence Index fell sharply in November. There is growing concern about the labor market as more people thought jobs were hard to get and fewer found it easier to get a job. How much the terror news affected the results is unclear.

The Philadelphia Fed reported that the regional economy picked up some steam in November. But the same time, nonmanufacturing firms reported that their business grew a little less rapidly. There were some very interesting results in this report. Compensation rose faster and firms seem to be reacting by slowing hiring. Looking toward 2016, firms expect prices and compensation to increase by about 3% over-the-year, which is above what most people have been predicting. Rising labor costs and pricing power may be returning to the economy.    

MARKETS AND FED POLICY IMPLICATIONS: There are growing calls for the Fed to once again put on hold its first rate hike because of the uncertainty created by the Paris terror attacks. But while that is a logical reaction, history tells us that major negative events don’t usually cause the economy to falter. Despite the horrors of September 11th, fourth quarter 2001 growth was positive and the recession ended in November. That is not to say there will not be any short-term or even longer-term dislocations. Because of the need for heightened spending on security, the economies of just about every nation look different today than they would have had there been no terror attacks. The current attacks will only add to increased security spending. And while consumers tend to become more conservative initially, they usually bounce back fairly quickly. We may have to mark down fourth quarter growth a little, but that could mean a somewhat stronger first quarter 2016 expansion. Barring a domestic terror attack, I still expect the Fed to raise rates in December.

October Existing Home Sales

KEY DATA: Sales: -3.4%; 1-Family: -3.7%; Condos: -1.6%; Prices (Year-over-Year): +5.8%; Inventories: -2.3%

IN A NUTSHELL: “Home sales have been bouncing around and one of the reasons may be the lack of homes on the market.”

WHAT IT MEANS: The existing housing market is a key segment of the economy in no small part because a purchase usually triggers additional purchases of a variety of residence-related goods. To get back to strong economic growth, housing demand needs to be solid. Existing home sales have been rising this year, but in fits and starts. After hitting the highest pace in eight years in July, the level has flattened out. Still, we are looking at a 2015 sales pace that should be the highest since 2006. The National Association of Realtors reported that demand declined in October. There was a sharp reduction in sales in the West, a more modest one in the South and very little or none in the Midwest and Northeast. Purchases of single-family units fell more rapidly than condos. As for prices, they continue to rise solidly in most regions except for the Northeast. The price data are not seasonally adjusted so you have to compare to the same month in previous years. Doing that, the October price level was the second highest October on record, exceeded only in October 2005, the peak in housing prices during the bubble. That pretty much indicates that at least on the price side, conditions are normalizing. One issue, though, continues to overhang the market. The supply of homes on the market is relatively low. That lack of choice may be keeping sales down

MARKETS AND FED POLICY IMPLICATIONS: The housing market is in decent shape but could be a lot better is people decided they were ready to move and listed their homes. But the real issue for housing is what will happen when rates start to rise. It looks like December is when the Fed will start increasing rates and variable mortgage rates should follow. Assuming the markets believe the FOMC that inflation will trend back to 2% in the medium term, longer-term rates could rise as well. As I have argued previously, I think that at least initially, sales should rise. Buyers will have to start factoring into their purchase calculus the simple fact that mortgage costs could be increasing. That should cause some to make decisions that they were able to put off when rates were stable. Realtors have reported that there are lots of “lookers” and fewer “buyers”. That should change when mortgage rates start rising. But one of the long-term costs of the extended low rate environment is that many homeowners have refinanced into very low mortgage rates. Are they going to be willing to move and trade those low rate mortgages for higher rate mortgages? To the extent that low inventories are a problem for the market and that the churn needs to return before sales reach trend levels, the extensive amount of refinancing into historically low mortgage rates may slow the market’s return to normal.

October Housing Starts

KEY DATA: Starts: -11%; 1-Family: -2.4%; Multi-Family: -25.1%/ Permits: +4.1%; 1-Family: +2.4%; Multi-Family: +6.8%

IN A NUTSHELL: “Home construction has been up, down and all over the place this year, but the trend is still upward, at least slowly.”

WHAT IT MEANS: The curse of this expansion is that the moderate pace has meant the economic data bounce around like crazy. That has been the case with the construction data and we saw that once again with the latest housing starts numbers. And once again, the headline number hid what was happening. On the surface, it appears that builders slowed their pace of construction in October, but let’s go to the details. Single-family construction eased only modestly. The big decline was in multi-family activity and if there is one thing we know, that component is the epitome of volatility. Indeed, the huge October drop came after a robust 18% rise in October. Over the past year, multi-family starts have ranged from a low of 300,000 units annualized in February to a high of 524,000 units in June – and these are seasonally adjusted numbers! So, let’s not take too much from the October decline in starts. Will construction pick up? The October permit requests were about 8.5% above the starts number and for the past three months, permits have been running a little ahead of the building pace, so don’t be surprised if housing activity rebounds solidly in November. And if the strong rise in the Mortgage Bankers Association’s mortgage applications numbers are any indicator of demand, that should happen. Purchase mortgage applications are running about 15% above last year’s levels. Builders should see their fair share of that new demand.

MARKETS AND FED POLICY IMPLICATIONS: Housing is a key sector in the economy and housing sales and starts are still improving. They may not be where most of us would like to see them, but there are factors at work that may be constraining home demand. Housing formation is a major factor in sales and that has been lagging. Younger workers are burdened by high school loan payments. Boomers are bailing out of their homes and may not be looking for new product. Simply imposing past trends on current patterns without making adjustments for changing conditions may not shed a whole lot of light on the state of the housing market. While housing sales and starts may be below desired levels, they may not be that bad if the demographic trends are factored in. That is similar to the situation with the labor force participation rate. Failing to recognize that changing demographics are affecting the labor supply allows people to complain about the decline in the participation rate. But it could be that given the demographic trends and the changing structure of the job market, the decline may not be far from what would have been expected. And that goes for economic growth as well. We would all love to see 4% or even 5% growth. However, trend growth has fallen to less than 2.5%, so those robust growth rates are not likely to be seen. The Fed members understand this and that is why they are likely to believe the economy is currently strong enough to absorb a rate hike fairly easily.

October Consumer Prices, Real Earnings, Industrial Production and November Home Builders’ Index

KEY DATA: CPI: +0.2%; Excluding Food and Energy: +0.2%/ Real Earnings: +0.2%/ IP: -0.2%; Manufacturing: +0.4%/ NAHB: -3 points

IN A NUTSHELL: “With consumer prices stabilizing and manufacturing rebounding, the barriers to a Fed tightening continue to come down.”

WHAT IT MEANS: Inflation is coming back, at least a little. The Consumer Price Index rose moderately in October and that was the case in almost any way you sliced and diced the data. For the first time in a while, there were significantly more categories posting gains than declines. Even gasoline prices were up, which was a surprise since the Energy Information Agency had costs declining. Food costs edged upward, but the real gains were found in shelter and medical care. People buying vehicles got a break on prices. Look for more vacation car trips as airfares soared. The strong dollar probably helped drive down apparel costs, but it doesn’t look as if the falling import prices are being passed on greatly to consumers. Importantly, services prices continue to rise at a moderate pace and as I have mentioned so many times before, this is over 60% of costs. Over-the-year, services prices are up 2.4% and excluding energy services, the rise in now at 2.8%. So much for no inflation.

Inflation-adjusted wages rose moderately in October. Importantly, average hourly wage gains are accelerating, a sign that the tight labor market is starting to force firms to raise wages.  

Manufacturing has been weak lately but that seems to be changing. Cut backs in energy production and a warm October that limited utility output may have caused overall industrial to decline, but there was a solid rise in manufacturing production, especially durable goods. Output of consumer goods, business equipment and industrial supplies all improved.

The National Association of Home Builders/Wells Fargo builder sentiment index declined, though it remains at a level consistent with moderate activity. Builders seem worried that potentially higher mortgage rates will slow sales, though the opposite could happen.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow, the “minutes” from the October FOMC meeting are released. Low inflation and what was perceived to be at the time slowing job gains were likely key factors in the decision to do nothing. Well, the recent data are now on the side of a Fed rate hike in December. Inflation is not decelerating and there could be a real shocker come early next year as the huge declines in energy prices disappear: It is possible that the year increase could be above 1.5% in January, not the 0.2% rise in October. With the core at 1.9%, the Fed’s inflation target is really not that far away. In addition, we have seen that job gains are back on track, wage gains are accelerating and manufacturing is starting to recover. In other words, everything seems to be coming together for those at the Fed who want to start normalizing rates. Investors really need to come to grips with the likelihood that interest rates are going up and the first rise could come in four weeks.

September Consumer Prices, Real Earnings and Weekly Jobless Claims

KEY DATA: CPI: -0.2%; Excluding Energy: +0.2%; Gasoline: -9%; Real Earnings: +0.1%/ Claims: 255,000 (down 7,000)

IN A NUTSHELL: “Outside of energy, inflation is already at more normal levels.”

WHAT IT MEANS: Since inflation has generally been the Fed’s major worry, the September Consumer Price Index should provide some clues to the direction of consumer prices. Household costs fell in September, led by another sharp decline in gasoline prices. Excluding energy, price rose moderately. Indeed, over the year, consumer prices are up 1.9% when just energy is excluded from the index. That is not to say gasoline and fuel oil don’t count: They most definitely do. But it is not very likely that energy commodity prices will fall over the next year by the 30% they dropped in the past year. As for the details of the report, they were mixed. Food prices are bouncing back. Critically, cake and cupcake prices jumped. I was devastated. After solid increases in August, apparel and medical care expenses declined. We are still seeing a drop in used car costs, the result of so many vehicles being traded in for new ones. And finally, the services segment of consumer costs continues to accelerate. Few may focus on this grouping, but it does constitute over 60% of the index. Over the year, non-energy related services costs are up 2.7%, which is hardly tame. Shelter is leading the way, which shouldn’t surprise anyone trying to rent an apartment.

The declining consumer prices helped keep household spending power from falling in September. Real hourly earnings rose slowly as the modest decline in wages – which was odd -was more than offset by the drop in prices.

Unemployment claims fell to the lowest level since November 1973. Adjusting for the labor force size, we are at historic lows. Clearly, the labor market is continuing to tighten.

MARKETS AND FED POLICY IMPLICATIONS: One of my favorite phrases is: “The answer to all economic questions is: It Depends!” That is so true when it comes to the question: Is inflation too low? It depends upon which index you use. If you use the top line CPI number, it appears that consumer costs are going nowhere. But the huge fall in energy costs, which is the prime factor in the low inflation rate, is not likely to be repeated. Excluding that wildly volatile commodity, low inflation is not an issue, unless you expect similar massive declines in oil prices going forward. If, over the next year, energy prices are flat and we get the exact same changes in all other categories, next September’s inflation rate would be 1.9%. That is why many are saying that the Fed’s inflation target could be reached next year.   Indeed, the tight labor markets are already driving up wages. Over the year, real hourly wages rose by 2.2% in September. In September 2014, the yearly gain was only 0.4%. With the unemployment rate likely to fall below 5% soon, wages will be rising a lot faster next year. Will rising wages trigger higher inflation? That is really the issue the Fed is struggling with and how the members answer that question will determine when they start to increase rates.

September Retail Sales and Producer Prices

KEY DATA: Sales: 0.1%; Excluding Vehicles: -0.3%/ PPI; -0.5%; Goods: -1.2%; Energy: -5.9%; Excluding Food and Energy: 0%; Services: -0.4%

IN A NUTSHELL: “Consumers have become more cautious, though lower prices are helping keep their total spending down.”

WHAT IT MEANS: Is the economy growing strongly or softly? The answer, if you believe the data, is yes. On the surface, the September retail sales report looks pretty disappointing. But the details don’t necessarily indicate that. Households bought lots of big-ticket items such as vehicles and furniture, but didn’t hit the appliance or electronics store at all. Sales of clothing and sporting goods surged but spending at gas stations, supermarkets and home stores was off. We didn’t buy online but boy do we like to eat out. So what do we make of this? First, it is good to see that there is enough confidence so buy expensive products. Also, these data are not adjusted for prices, so the fall in gasoline sales and at supermarkets may be more a function of declining costs rather than unit sales. Indeed, the average price of gasoline fell nearly 10% in September but sales of gasoline were down only 3.2%. It looks like we were enjoying driving again and at a lower cost! I suspect the inflation-adjusted numbers will look much better than the unadjusted ones.

On the inflation front, the ability to buy more but still pay less for some products looks like it is not going away soon. Wholesale prices fell sharply, helped by another huge decline in energy costs. For the eighth time in eleven months, food prices declined. If you drive and eat, you are doing pretty well. In addition, services costs, which had been rising moderately, took a turn downward. And if you look at the special indices, which break out wholesale prices by just about every combination possible, it was almost impossible to find one that had a positive sign. Even my beloved bakery product prices are going nowhere. There are also no price pressures in the pipeline, as intermediate and crude costs were down. About the only place there is any inflation is in finished consumer goods less food and energy. This index rose moderately in September and over the year, it was up 2.6%.

MARKETS AND FED POLICY IMPLICATIONS: The economy is still in good shape but it is hard to make the case that it is booming. Can it absorb some rate hikes? Undoubtedly. Retail sales are still solid enough that consumer spending will be strong in the third quarter. But it is inflation that is the real issue. The “sturm und drang” at the Fed over China notwithstanding, it is the uncertain course of inflation that could keep the FOMC from hiking rates this year. Unfortunately, the gang that cannot communicate straight is still sending out as many unclear signals as possible, so we will simply have to wait until the statement is released on December 16th to really know if rates are going up. It is highly unlikely anything will be done at the October 27-28 FOMC meeting. As for the markets, today’s numbers will likely be viewed as showing economic weakness, though I don’t’ think that is entirely accurate. Is that good or bad for equity prices? Got me, though the recent theory is that what is good for the economy is bad for stocks. Crazy, I know. But the soft inflation data should keep interest rates down.

September Import and Export Prices

KEY DATA: Imports: -0.1%; Nonfuel: -0.3%; Exports: -0.7%; Farm: -1.1%

IN A NUTSHELL: “The disinflationary impacts from falling import prices is easing, but it has not gone away.”

WHAT IT MEANS: The Fed can live with the current state of the domestic economy, even if it continues to be worried about international activity. But what is causing some members to want to wait before raising rates is low inflation. Declining energy and commodity costs, coupled with falling nonfuel import prices, have combined to keep inflation well below the Fed’s 2% target. Today’s import price numbers don’t provide a whole lot of support for the belief that inflation will pick up anytime soon. Import costs fell only modestly In September as energy prices actually rose. That was a change. But excluding petroleum, there are still some decent downward pressures. Indeed, we saw food, nonfuel industrial supplies and capital good prices ease in September. Vehicle costs were flat and the rise in consumer goods prices was minimal. Previous declines in energy costs are still working their way through the system, so price declines are likely for a while, even if energy prices keep rising. On the export side, the problems facing the agricultural sector continue as the prices for farm products overseas just keeps going down. Food export prices have fallen by over 14% during the past year and that has to be eating into the farm belt’s income.

MARKETS AND FED POLICY IMPLICATIONS: It was nice that the import price declines are moderating, but they haven’t turned positive just yet. The strong dollar is making sure that import prices and thus U.S. inflation remain low. Thus, there is little reason to expect that inflation, at least as measured on a year-over-year basis will move up to 2% soon. But stable or even slowly rising energy prices will allow monthly changes to become positive and that could provide some basis for the argument that inflation will reach the Fed’s target in due course. Basically, we don’t know what the Fed will do and when they will do it. Heck, we don’t even know what ‘it’ is. Minneapolis Fed Bank President Kocherlakota said we should be cutting rates, not raising them. I didn’t realize that the current level of rates was restricting borrowing and therefore economic activity. You learn something new each day. Anyway, the Fed will likely do nothing at the October 27-28 meeting so the focus of attention is on the October and November jobs reports that come out before the December 15-16 meeting. They have to be strong if the Fed is to raise rates before the end of the year, as many keep saying is a possibility.