Category Archives: Economic Indicators

August Consumer Spending and Income and September Consumer Confidence

KEY DATA: Consumption: +0.3%; Disposable Income: +0.3%; Inflation: +0.1%; Ex-Food and Energy: 0%/ Consumer Sentiment: +3.9 points

IN A NUTSHELL: “Consumers are exuberant and that is translating into some pretty good spending.”

WHAT IT MEANS: Third quarter growth is becoming clearer as more data come in and it will be good, just not great. Household spending was solid in August, led by a surge in services. This was expected as utilities are in the services category and it was a brutally hot month in many parts of the country. Don’t expect that to be repeated in September. Vehicle sales were soft and that led to a decline in durable goods spending. Nondurables were up, which says people are buying lots of different things. So far this quarter, consumption is growing at a better than 3% pace, which means overall economic growth should be at least that high. As for income, there was a decent but not robust rise in wages and salaries. There seems to finally be a bit of an upward trend in this category, but not yet a strong one. On the inflation front, there really isn’t a lot. The rate is above 2% for all measures, but it is not accelerating. That is good news and it supports the Fed view that it looks like we are not headed to an upside shock on inflation.

Consumer’s are in a great mood. The University of Michigan’s Index of Consumer Sentiment rose solidly in September and it the level was above 100 for only the third time since mid-2004. Views on current conditions jumped while expectations rose more moderately. Interestingly, upper income households are becoming more cautious while low-income respondents indicated that they are more positive about the conditions.

MARKETS AND FED POLICY IMPLICATIONS: Today’s economic numbers were very solid. How much of the consumer spending was due to utilities is unclear, but don’t expect service demand to be nearly as high in September. Since services comprise about two-thirds consumer demand, that implies we could see a more modest number. We still need to see faster income growth to support the very solid spending we saw in the spring and likely during the summer. I am not sure if that will emerge and if not, we could be looking at a softer fourth quarter number. But investors are not likely to worry until they see softer numbers. The economy is evolving in a manner that is consistent with the Fed’s slow but steady rate hike/balance sheet reduction strategy. It will likely continue on that path over the next year.

August New Home Sales

KEY DATA: Sales: +3.5%; Prices: +1.9%

IN A NUTSHELL: “With the previous few months of new home sales being revised downward, it is hard to say the August increase is good news.”

WHAT IT MEANS: The Fed is raising interest rates, energy prices are rising and household income growth is modest. What does that tell you about the future of the housing market? That it is going nowhere. There was a nice rise in new home sales in August, but the gain was just enough to take us back to where the July numbers were before they were revised downward. Demand for newly constructed units peaked last November and have been going downward since then, though in a saw tooth manner. Thus, the rise in August should not be taken as a sign that conditions are firming. Looking across the nation, demand spiked in the Northeast, was up sharply in the West, increased modestly in the Midwest, but fell in the South. The South is the big dog, as over 55% of the sales are in that region, so weakness there drags down the national number. Hurricane Florence will likely cut sales initially, but a lot of homes will have to be replaced, so the data for the fall and even early winter should be looked at with caution. As for prices, the medium sales value was up modestly, another indication that the sector is softening.

MARKETS AND FED POLICY IMPLICATIONS: The Fed’s decision on rates will be out soon so this number will likely be a tree falling in the forest. But the likely rate hike, coupled with inflation pressures that are building from the increase in oil costs, tariffs and strong growth, are expected to keep up the pressure on longer-term rates as well. Thus, homebuyers are finding both variable and fixed rate mortgage costs rising, making affordability a growing issue. As for the Fed, the statement, projections and Chair Powell’s press conference may provide some insight into how many more rate hikes we will see. The Fed is sailing somewhat blindly, as who knows how the trade wars will play out. The problem is that there is the potential for both higher inflation and slower growth in the near term. The benefits, if there are some, are more longer term. Since the Fed doesn’t have any idea about the magnitude of either impact, they have to pick which error they want to make: Too much tightening to guard against inflation or too little to guard against an economic turndown. This is when they start earning the big bucks.

September Consumer Confidence and NonManufacturing Activity and July Housing Prices

KEY DATA: Confidence: +3.7 points; Phil. Fed NonManufacturing: -4.3 points; Case-Shiller Prices (Over-Year): +6.0%; FHFA Prices (Over-Year): +6.4%

IN A NUTSHELL: “Consumers are delirious but are not bidding up prices of homes as much as they had been.”

WHAT IT MEANS: The third quarter is almost over and it looks like it was a good one. At least consumers think things are wonderful and will continue to be great. The Conference Board’s Consumer Confidence Index jumped in September. The index is beginning to take aim in on the high posted in 2000. There was a surge in expectations about the future even as the current conditions measure rose modestly. Critically, views on the labor market are not only upbeat but also keep getting better. Over 45% of the respondents said that jobs are “plentiful”.

Echoing the optimism of consumers is the outlook of business owners. The Philadelphia Fed’s September NonManufacturing index of regional activity eased a touch but respondents said their own businesses did better over the month. This seems to reflect the growing concern about the economy despite the gains being made by businesses. Indeed, the regional economic activity expectations index also fell but expectations about individual business activity were up.

The housing data are all saying the same thing: A slowdown is already here. We saw that in sales numbers, which have been slowly trending downward since early spring. And that has led to a deceleration in price gains. Both the Case-Shiller Federal Housing Finance Agency’s home price indexes rose modestly in July while the over-the-year increase moderated.  Increasing prices and mortgage rates are reducing affordability and sales and that is translating into slower price gains.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting today and tomorrow and it is largely a done deal that there will be an increase in rates. The question is how much more do we have to go. That, of course, depends upon whether growth remains strong and inflation accelerates further. Right now, the Fed has achieved its economic and inflation targets. But the full impacts of the massive fiscal stimulus have not been felt, so we should be able to maintain 3% growth for a while. If that is the case, inflation should accelerate, forcing the Fed to keep raising rates. The probability of a December increase is extremely high and most economists have a minimum of two more increases next year. I have three to four. That would put the rate above 3% and likely above the rate of inflation. Except when oil prices collapsed, that has not been the case for the last nine years. That should create some interesting reactions in both the stock and bond markets. With the economy humming along, investors should start strategizing for when that happens.

August Consumer Prices, Real Earnings and Weekly Jobless Claims

KEY DATA: CPI: +0.2%; Over-Year: +2.7%; Ex-Food and Energy: +0.1%; Over-Year: 2.2%/ Real Earnings: +0.1%; Over-Year: +0.2%/ Claims: -1,000

IN A NUTSHELL: “Inflation may have moderated in August, but inflation-adjusted wages are still going largely nowhere. ”

WHAT IT MEANS: Inflation pressures have been building this year so it was nice that they didn’t accelerate further in August. The Consumer Price Index rose at a decent but not threatening pace even when you exclude the volatile food and energy components. The good news in the report is that medical care costs declined. I guess the repeal of the ACA is doing what was expected. Oh, that’s right, it wasn’t repealed. My mistake. The likelihood is that the drop was a random occurrence and we will start seeing those costs accelerate soon. There was also another sharp decline in apparel prices. If the market was flooded by a surge of imports intended to beat potential tariffs, the drop is not likely to last. On the upside, shelter costs were up solidly and look like they will continue to rise. Gasoline prices were up, as anyone who drives a non-electric vehicle knows. (When are those cheap Teslas going to become readily available, I think I could use one.) But food costs were largely flat, though the all-important cakes, cupcakes and cookies component was down significantly. Time to get off my no-chips, no-cookies diet.

The race to see which can rise faster, wages or prices, remains largely a tie. Earning rose a touch more than consumer costs in August and that was the good news. The bad news is that inflation adjusted wages, which is a measure of spending power, has barely budged since August 2017. Consumers are spending more, but there are limits to their ability to keep emptying out there wallets. We are likely to see a slow but fairly steady moderation in demand for the rest of this year despite the impacts of the tax cuts. Consumption is where the distribution of the tax cuts matters the most and given the concentration of benefits on upper income households, there is not that much more that most families will have to spend unless wage gains pick up significantly.

Weekly jobless claims fell again and the level is so low that it risks making the indicator irrelevant. The Department of Labor should simply say that just a few people applied for unemployment insurance and be done with it.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC is meeting in less than two months and the August moderation in both consumer and wholesale inflation will do nothing to change the belief of just about everyone that watches the Fed that rates will go up at the end of the meeting. The Fed’s inflation and full-employment targets have been met so it is time to get back to a neutral Funds rate. While there may be little agreement on exactly what that is, it is probably at least 3%. That means we have four or more rate hikes to go. But the Fed will only stop at neutral if inflation and growth don’t look like they are getting out of hand. Right now, both are running a little hot but are nowhere near boil. With the full impacts of the tax cuts still to be seen, I expect the funds rate to exceed 3%, in part because I believe the neutral rate is above 3% and also because I think we are headed to an inflation rate in the 2.5% to 3% range. But it may take inflation above 2.5% for an extended period before investors realize that rates may go higher than they think or hope.

August Employment Report

KEY DATA: Payrolls: +201,000; Revisions: -50,000; Private: +204,000; Unemployment Rate: 3.9% (Unchanged); Wages (Month): +0.4%; Over-Year: 2.9%

IN A NUTSHELL: “Job growth remains solid but more importantly, we are finally seeing the tight labor market show up in rising wages.”

WHAT IT MEANS: The labor market is tight but businesses are finding ways to get the workers they need. Job growth in August was solid once again. Indeed, it was slightly above expectations. But before you start saying we shouldn’t listen to economists, keep in mind that the July gain was revised downward by 10,000 and the June increase by 40,000. If you look at the three-month average, which is what I always argue should be done, the economy added 185,000 per month. That is pretty close to what most economists think is likely to be the pattern for a while. With the labor force participation rate not rising and the labor force growing only moderately, it will be hard to replicate the above-200,000 job growth gains we had recently. That was an aberration.

As for the details, there were strong increases in construction, transportation, wholesale trade, health care, restaurants and professional and technical services. Most of those are high-paying industries. However, there were declines in manufacturing, retail (there was a huge decline in clothing stores) and information. The government shed a few workers.

As for the unemployment rate, while it remained at 3.9%, it was just a rounding issue. It was 3.85%. It should be down next month.

But the key number was the average hourly wage, which was up sharply. It needs to keep rising if the inflation-adjusted wage, which is a better measure of purchasing power, is to increase at a decent pace. Inflation is accelerating and that is largely offsetting the wage gains.

MARKETS AND FED POLICY IMPLICATIONS: Has Godot finally arrived? We have been stuck on the bench wondering when, if ever, the strong economy, low unemployment rate and supposed lack of qualified workers would cause wage gains to accelerate. Well, that time may have come. Job growth is probably as good as it can get given the tightness in the labor market. Even the “really stupid” unemployment rate (others call it the “real” unemployment rate) is signaling tightness, dropping to its lowest level since April 2001. The only time it was below the current rate was for about a year and a half at the peak of the bubble. With the tax cuts and spending increases creating a sugar high, there is little reason to expect labor demand to moderate over the rest of this year or even in the first half of next. The unemployment rate could approach the 3.5% level that was hit only during the Viet Nam and Korean Wars, when many young adults were not in the labor force but in the military. In other words, no matter how you measure it, the reserve army of the unemployed, underemployed, otherwise employed or uninterested in being employed is just not very large. The lack of workers and the accelerating wage gains reinforce the Fed’s belief that it has to continue its rate its normalization process unabated. The next meeting is September 25-26 and a rate hike is as close to a certainty as you can get when talking about the Fed. It is hard to believe that wage and price inflation will decelerate anytime soon, so a December increase and three or four next year are highly likely. Investors are wishing and hoping that does not happen, but they also want strong economic and job growth. They better watch what they wish for as they just may get it, as well as all the issues a strong economy and tight labor markets create.

August NonManufacturing Activity, Private Sector Jobs, Layoffs and Weekly Jobless Claims

KEY DATA: ISM (NonManufacturing): +2.8 points; Orders: +3.4 points/ ADP: 163,000/ Layoffs: 38,472/ Claims: -10,000

IN A NUTSHELL: “Economic momentum remains strong, even if third quarter growth may be somewhat less robust than in the spring.”

WHAT IT MEANS: “When supply managers talk, economists listen”. No, purchasing professionals are not EF Hutton, but they are at the forefront of the economy. Well, this week they opened up and it looks like business conditions are really good. On Tuesday, the Institute for Supply Management reported that manufacturing activity rose solidly in August, led by surging orders. Today, they released their non-manufacturing numbers and they show that the service sector is booming as well. New order rose sharply, causing employment to rise. Despite a sharp rise in activity, deliveries slowed and order books swelled, indicating that this sector should continue to expand solidly for months to come.

Tomorrow is Employment Friday (my name) and prior to that release we get the ADP estimate of private sector job gains. The employment services firm number came in lower than expected. There was a robust job increase in manufacturing but a moderate increase in the services component. While mid-sized firms added workers like crazy, large and small firms hired more cautiously. It looks like there was a good summer tourism season as leisure and hospitality payrolls surged. Keep in mind, this report tends to do a good job of following the government numbers over time, but in any given month it can be off significantly. ADP’s estimates of private sector job gains over the last six months averaged 187,000. This seems more reasonable than the roughly 230,000 that we will likely average once the August numbers are released.

Challenger, Gray and Christmas found that layoffs were up in August, when compared to both this July or August 2017. This was the third month this year that layoffs were higher than the year before, which is quite odd given how strong the job market has been. Keep in mind, these are announcements, not actual cuts and they don’t indicate where in the world the downsizing will occur.

Jobless claims fell to the lowest level since November 1969. When you adjust for the size of the labor force, it is the lowest on record. It is hard to believe how few people are being cut given these data include not just typical layoffs but also business closings and downsizings. It is clear the last thing firms want to do is let people go and that is the clearest sign that the labor market is drum-tight.

MARKETS AND FED POLICY IMPLICATIONS: The data are clear: This economy is soaring. Yes, the widening trade deficit and weakening vehicle sales point to more moderate headline third quarter GDP growth. But when it comes to the business sector, there seems to be little or no marked slowdown at all. The issue is not where we are now, but how do we sustain the current growth pace through next year. That will depend upon better consumer spending, which means wage increases will have to accelerate, and stronger business capital spending, which means some of the money will actually have to start buying machinery, equipment and structures. That could happen, but as the saying goes, “we shall see”. I expect the August job gain will be in the 185,000-range. Firms are finding people to hire and holding onto employees, but payroll increases above 200,000 is not likely sustainable.

August Consumer Confidence and June Housing Prices

KEY DATA: Confidence: +5.5 points; Expectations: +5.2 points/ Home Prices: +0.3%; Over-Year: +6.2%

IN A NUTSHELL: “Consumers remain exuberant and that bodes well for continued solid spending in the months to come.”

WHAT IT MEANS: Maybe the 4% growth we saw in the second quarter will not be sustained, but that doesn’t mean growth will falter significantly in the near future. The Conference Board reported that its consumer confidence index rose in August to the highest level in nearly eighteen years. The details of the report were generally upbeat. A rising proportion of the respondents think business conditions are good and that it is getting easier to find a job. Actually, it is hard to understand why over twelve percent of the respondents still think jobs are hard to get, but that is a different story. The strong job market, coupled with improving expectations about the ability to find a job fed through into increased belief that income will rise. Still, just over twenty-five percent think they will see their incomes increase in the next six months, which is somewhat disconcerting. It shows that workers may think labor market conditions are strong but they still don’t expect to benefit from that situation. Unfortunately, if workers think their incomes will remain stagnant, they don’t tend to spend more.

With housing sales ebbing, it should not be surprising that the surge in prices is fading as well. The S&P CoreLogic Case-Shiller national home price index rose modestly in June. Over the year, prices are still going up solidly, but it looks like the rate of gain may have peaked. As for metro areas, I guess gambling on housing remains fun as the fastest increase in prices over the year was in Las Vegas. Seattle and San Francisco are not that far behind, but the rise in costs in those two areas seems to moderating.

MARKETS AND FED POLICY IMPLICATIONS: As long as consumers are confident, and they really are right now, they will continue to spend money. So there is little reason to expect that the economy will falter the rest of the year. Something significant would have to happen to put the brakes on growth. But the question remains as to whether strong growth can be sustained. Workers are just not seeing wages rise and now there seems to be a growing trend toward promoting people without any salary bump. Boy, that sounds like a strange way to reward people. Congratulations, you did a great job, you now have more responsibility but your pay is the same. And businesspeople, economists and Fed members wonder why productivity is going nowhere. Do they really think that making people work more for the same pay creates an incentive to work harder? There was always a feedback between wages and productivity. If you worked harder and produced more, your pay increased. So why work harder if you don’t get paid more. Maybe I’m naïve, but I don’t think workers are dumb and are falling for the promotion trick. I think they just start looking for a way out. In any event, the high levels of confidence will likely be read as a positive for the economy. But the fact that relatively few workers think their pay will rise is something that should not be dismissed. It puts a damper on the willingness to spend.  

July Durable Goods Orders and Fed Chair Powell’s Comments

KEY DATA: Orders: -1.7%; Excluding Aircraft: +1.3%; Capital Spending: +1.4%

IN A NUTSHELL: “The Fed Chair expects more rate hikes because of the strong economy and strong business investment supports that view.”

WHAT IT MEANS: The tax cut provided created huge increases in profits and it looks likes firms are starting to spend their earnings on capital goods. Durable goods orders seemingly cratered in July but forget the headline number: The drop was due to large declines in both private and defense aircraft orders, which bounce around like super balls. Excluding aircraft, demand for big ticket items surged, led by sharp increases in machinery, computers and vehicles. The gains, though, were not universal. Demand for communications and electrical equipment was off. Still, private sector capital spending jumped and is up over 7% since July 2017. That indicates firms are finally using at least some of their newfound largesse to bolster production and productivity. That bodes well for continued solid growth this year.

The annual Jackson Hole Fed conference is underway and Fed Chair Powell talked today. It is easiest to summarize his views on future rate hikes by presenting his own words: “… if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate. … The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one. My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.” In other words, it will take a clear and significant slowdown to cause the Fed to slow or stop the rate hikes.

MARKETS AND FED POLICY IMPLICATIONS: With businesses finally starting to invest heavily, the second leg of the tax cut-induced strong growth is taking place. The expansion is likely to moderate as consumer spending settles down, but it should still be quite solid. That is why most economists, including myself, have said we still have one year – or more – of really good growth before the sugar high wears off. If that is the case, then there is no reason for the Fed to stop normalizing rates and shrinking its balance sheet. Next summer, conditions might be different and a slowdown in the process might be possible. Thus, it is likely that a minimum of four more rate hikes will occur over the next year. And if growth does not decelerate significantly, if inflation creeps upward and stays above the Fed’s target, then additional rate hikes should be expected. What that does to investors’ thinking is anyone’s guess. But they might want to focus on something the Fed Chair said: “I would also note briefly that the U.S. economy faces a number of longer-term structural challenges that are mostly beyond the reach of monetary policy. For example, real wages, particularly for medium- and low-income workers, have grown quite slowly in recent decades. Economic mobility in the United States has declined and is now lower than in most other advanced economies. Addressing the federal budget deficit, which has long been on an unsustainable path, becomes increasingly important as a larger share of the population retires.”  

July Existing Home Sales

KEY DATA: Sales: -0.7%; 1-Family: -0.2%; Condos: -4.8%; Prices: +4.5%; 1-Family: 4.6%; Condos: 3.2%

IN A NUTSHELL: “The slowdown in the housing market continues.”

WHAT IT MEANS: The housing market has hit a rough spot. Existing home sales fell in July, the fourth consecutive month that demand was off. The level of home purchases was the lowest in over two years. Condo sales, which had been holding up, joined single-family units in the downward trend. Looking across the country, sales rose nicely in the West but were off sharply in the Northeast and declined modestly in the South and Midwest. As for prices, the rise is also trending downward. Condo price gains are modest, but the single-family price increase was not a whole lot faster. The deceleration in prices is occurring as inventory is finally expanding, even if it edged down a touch in July. Unfortunately, supply is still quite low on an historical basis.

MARKETS AND FED POLICY IMPLICATIONS: Rising prices and increasing mortgage rates, coupled with limited supply, are reducing affordability and slowing home sales. It is hard to believe those limiting factors will change anytime soon. Tomorrow we get new home sales and they were weak in June. Another decline would add to the belief that the housing sector may restrain growth not only in the third quarter but going forward. The markets are setting records as business fundamentals are strong, but investors need to start looking outward. Right now, job gains are solid but income increases are limited and that does not bode well for sustained strong consumer spending growth. There is uncertainty about the impacts of tariffs and how long they will last. Businesses continue to spend most of their tax gains on stock buybacks, dividends and mergers and acquisitions, rather than buildings, machinery, equipment or software. That raises questions about improved productivity. So, the beat goes on in the markets and while the economic fundamentals are solid, it would be nice if we start seeing better wage growth and more money piling into capital spending. The Fed, meanwhile, has to deal with the economic strength and the political pressures coming from presidential tweets. In order to maintain credibility, additional rate hikes and balance sheet reductions are likely.

July Retail Sales, Industrial Production, Second Quarter Productivity and August Home Builders Index

KEY DATA: Sales: +0.5%; Excluding Vehicles: +0.6%/ IP: +0.1%; Manufacturing: +0.3%/ Productivity: +2.9%; Labor Costs: -0.9%/ NAHB: -1 point

IN A NUTSHELL: “The solid manufacturing sector and continued consumer spending hold out hope that third quarter growth will be good, though maybe not great.”

WHAT IT MEANS: Factors that drive and restrain growth are creating major uncertainties about the economy and even the data are unclear. Consider retail sales, which rose solidly in July. But that came after a sharp downward revision to the June numbers. That raises the possibility second quarter growth could be revised downward as well. The biggest increases were for food, both at home and at restaurants, gasoline and in department stores. Prices are rising in most of those categories. As for department stores, are sales really surging? There were strong online sales, which was not surprising given Amazon’s increase at its Prime Day sale. This was a good report, but it isn’t adjusted for inflation, so it is not clear just how fast consumer spending is growing, especially since vehicle sales were down in July.

One area which continues to do well is manufacturing. Output rose moderately in July after a robust production spurt in June. Rising vehicle assembly rates helped, but given the fall off in demand, that may turn around quickly. Still, most manufacturing sectors posted production gains, so this sector remains solid. Slowdowns in the mining and utility sectors reduced overall output gains.

With growth booming in the second quarter, it should not have been a surprise that productivity jumped by the fastest pace in over three years. Manufacturing productivity gains remain somewhat sluggish. While production surged, hourly compensation lagged well behind and that led to a sharp decline in labor costs. At least in part, the strong profit gains reflected those cost controls. Unless more of those profits find their way into compensation, the solid retail sales numbers may not be sustainable.

Homebuilders are not a happy bunch these days. Interest rates and input costs are rising while demand is moderating. Thus, the decline in the National Home Builders Associations index was expected. The level is the lowest in a year and is a warning that this component of the economy may continue to restrain growth.

MARKETS AND FED POLICY IMPLICATIONS: The problems in Turkey are the focus of attention right now and rightfully so. We just don’t know how long the crisis will go and what kind of contagion effect will be created. This uncertainty is causing some rush to safety. Meanwhile, back in the United States, the economy may be moderating, but not faltering. Still, the president’s economists at the Office of Management and Budget just downgraded growth for this year and Congress’s economists at the Congressional Budget Office recently projected a sharp moderation in growth next year and a further slowdown in 2020. The CBO’s forecast is very much in line with most private sector forecasts. At the same time, most inflation forecasts are for the rate to exceed the Fed’s target of 2% for a number of years, though not significantly. But it takes the slowing growth to keep inflation from getting even hotter. The Fed continues to face an economy that has strong growth, rising prices but economic uncertainties, especially when the trade situation is factored in. Unless Turkey unexpectedly creates major economic and financial problems, there will be time to slow rate hikes down next year, so two more rate hikes remain the likely course of action.