November Existing Home Sales

KEY DATA: Sales: -6.1%; Year-over-Year: +2.1%; Median Prices (Year-over-Year): +5.0%

IN A NUTSHELL:  “The housing market may still be improving, but it is doing so with two steps forward and one back.”

WHAT IT MEANS:  Is the housing market improving or softening?  If you look at the data, the answer is yes.  After two consecutive nice increases in existing home sales, the market went backward in November.  The sales pace fell to its lowest rate since May.  That is not to say the increase has been steady.  It was hardly that.  Sales rose in June and July, fell in August and then rose once again in September and October.  Hence, the two-steps forward, one-step backward comment.  In November, the declines were in every region.  The largest drops were in the Midwest and West and if anyone knows why sales were off in those areas by about 9%, which is really large, please tell me.  It was not as if the weather was terrible.  In other words, I just don’t get it.  As for prices, they have held in there quite nicely.  After bottoming in June, the year-over-year change in the median price has slowly increased.  That may be due to the sluggish increases in inventories.

MARKETS AND FED POLICY IMPLICATIONS:  It is hard to explain the sharp drop in home demand.  The weather in November was nothing exceptional and mortgage rates were not that far above the fifty year lows.  One explanation is that the supply of homes for sale is relatively limited – and it is – and so buyers are having a difficult time finding suitable options.  That makes sense and a limited supply may restrain home sales for a long time to come, especially when rates rise.  In the future, homeowners will have to decide that a different home at a higher mortgage rate is worth it.  Some may not feel that is the case, especially since the recent extraordinarily low rates will look awfully good compared to more normal mortgage levels.  That said, movers are not facing higher mortgage rates now, so the explanation for near-term supply weakness may be the lack of equity.  If people don’t have enough equity to pull out of their current homes, they may not have the ability to make a move.  That would limit the number of homes for sale and thus sales themselves.  The implication is that the pathway back to a more normal housing market, where what I call the churn or housing turnover helps drive sales, is a long and winding one.  What will investors make of this report?  Well, since any indicator that points to the Fed being “patient”, i.e., that only reinforce the view that the Fed will not tighten anytime soon, can only add to the strength in equity prices we have seen since the FOMC meeting.  Low rates are the markets drug of choice and as long as people believe the Fed will keep mainlining that drug, they will remain euphoric.

FOMC Commentary, November Leading Indicators, December Philadelphia Fed Survey, Jobless Claims

KEY DATA: Leading Indicators: +0.6%/Philadelphia Fed: 24.5 (-16.3 points)/Jobless Claims: 289,000 (down 6,000)

IN A NUTSHELL:   “The Fed may be shifting into “patience” mode, but the economy is continuing to accelerate.”

WHAT THE DATA MEAN: Today’s economic reports showed that the economy continues to improve.  The Conference Board’s Leading Economic Index jumped again in November and it looks like the increases are pointing to a very strong economy going forward.  Looking at a graph of the index, the rise seems to match the 2003-2004 housing bubble economic surge.  Supporting the view that the economy is picking up steam was another fall in weekly jobless claims.  The jump in claims near Thanksgiving seems to have been a one-week wonder and we are back to record lows, when adjusting for the size of the labor force.   As for the Philadelphia Fed’s Business Outlook Survey, a large decline was expected.  This index can be very volatile and the November number was one of the highest on record.  The December level also points to strong growth, especially since orders remain solid. 

FOMC Commentary: Yesterday, the Fed did and didn’t do what I thought they would and should do: Remove the “considerable time” phrase.  Maybe.  It didn’t do it because it repeated it.  But more importantly, the Committee substituted a new comment,that it can be patient (emphasis added) in beginning to normalize the stance of monetary policy”, and noted that patience and considerable time were similar if not equal.  Getting confused?  No kidding!  The statement seems to be the most tortured attempt at changing the psychology surrounding the timing of tightening I have seen.  I guess that is what happens when you worry more about market reaction than policy clarity.  We know little more now than we did before the meeting and press conference.  So much for better communications.

So, what does patience mean, when it comes to rate hikes?  Chair Yellen said we have a breather for the next two meetings. However, the chart of fed funds rate expectations points to a tightening in 2015, which will likely come at around mid-year.  What would make her lose her patience?  Stronger growth and that is where the data come in.  By the time we get to the April meeting, we will have three more employment reports and GDP numbers for the fourth quarter of 2014 and first quarter 2015.  If the Leading Indicators are pointing to anything it is the string of 3.5% growth rates could be sustained.  If that is the case and the job gains are above 250,000 and the unemployment rate continues to decline, it would be hard to see how wage increases don’t accelerate.  But I am guessing that patience will be tied to compensation and until we actually see large increases in wages, the Fed will continue to dawdle. 

November Consumer Price Index and Real Earnings

KEY DATA: CPI: -0.3%; Energy: -3.8%; Excluding Energy: +0.1%/Real Hourly Earnings: +0.6%; Year-over-Year: 0.8%

IN A NUTSHELL:  “Falling energy costs is a gift that we hope keeps giving.”

WHAT IT MEANS:  The continued decline in oil prices may not be the greatest thing since sliced bread, but it is close.  Yes, some energy-related companies are being hurt and there are a few countries whose economies may slip into recession if prices remain low, but for consumers, it is nothing but great news.  Another sharp drop in energy prices caused the Consumer Price Index to fall in November.  Falling clothing costs helped as well.  And with new vehicle purchases jumping, it is not surprising that more used vehicles are available and their prices are declining.  Still, there were some places where prices seem to be firming.  Medical care expenses, both services and commodities, are beginning to accelerate.  Shelter costs are up, though not that rapidly.  We are also seeing a rise in transportation services and tuition, of course.  Food costs have become better behaved, especially for the critical cakes, cupcakes and cookies category.  One final point needs to be made: Services inflation is running at a moderately high pace, with costs up 2.5% over the year.  This component is over 60% of the index.  The only way inflation to remain contained is for commodity costs to stay low, or as it was in November, actually down.  Any rise in commodities would push consumer costs up above the Fed’s target.

The fall in consumer prices is helping household spending power.  Real hourly earnings jumped in November, but over the year the increase remains below one percent.  That pretty much explains the lethargic nature of consumer spending.

MARKETS AND FED POLICY IMPLICATIONS:  The Fed will be coming out with a statement today and this report should have little impact on the members’ thinking.  Inflation, excluding energy, is still just below the Fed’s 2% target, so there is room to maneuver.  But the Fed is not likely to focus on the restraining impact that declining oil prices has on inflation and instead consider the effects on consumer spending.  Barring a large rise in oil prices next year, households will have a lot more money left in their wallets and if there is any acceleration in wages, consumption could be very strong.  Conditions could be in place to raise rates during the first half of next year.  Whether the FOMC opts to do that is unclear, but the idea that the Fed should set monetary policy based on concerns about energy-impacted economies doesn’t sit well with me.  Indeed, the oil drop can only help Europe and Japan.  Regardless, we will know soon enough what the Committee is thinking so I will leave it at that.

Revised Third Quarter GDP, November Spending, Income, Durable Goods Orders and New Home Sales

KEY DATA: GDP: 5.0% (revised up from 3.9%)/Consumption: +0.6%; Disposable Income; +0.3%/Durable Orders: -0.7%; Private Investment: 0.0%/New Home Sales: -1.6%

IN A NUTSHELL:   “The economy boomed in the summer and while growth may have moderated during the fall, it is still moving forward solidly.”

WHAT IT MEANS:  Lots of numbers today.  Third quarter GDP growth was revised upward to its strongest rate in eleven years.  The revision was powered by a realization that consumers spent a lot more than initially thought.   There was also better business investment activity.  It is nice that both households and businesses spent aggressively during the summer, but will that be sustained?  Maybe not at 5%, but we could easily get another number at or above 3.5%.  Consumer spending surged in November after a solid gain in October.  So much for a weak Black Friday.  The gains were across the board, when you adjust for price changes.  So far this quarter, real consumption is rising at a 3.7% annualized pace and that could come in even higher.  First, people have the money to spend.  Income, adjusted for inflation and taxes, surged in November and wage and salary gains were solid.  People are spending but the savings rate is fairly stable, a sign that households are not getting ahead of themselves.  Second, confidence is rising.  The Thompson Reuters/University of Michigan Consumer Sentiment Index rose sharply in December to its highest level in nearly eight years.  Happy people make for happy shoppers.

The manufacturing sector has helped lead the way but there are questions about how strong it will be going forward.  Durable goods orders fell sharply in November and that was with a pick up in civilian aircraft demand.  The report was mixed.  There was weakness in primary and fabricated metals, computers and defense aircraft.  On the other hand, orders for computers, communications equipment and vehicles were up.  Business capital investment was flat.

Housing has been moderating for a while and that trend seems to be continuing.  New home sales fell, surprisingly, in November.  Prices are rising, but not by much.  Indeed, the 1.4% increase over the year is much less than we are seeing in the existing market.  The Federal Housing Finance Agency’s October increase came in at 5% since October 2013.

MARKETS AND FED POLICY IMPLICATIONS: Patience is a virtue but it could also be an albatross around Janet Yellen’s neck.  (I never worry about mixed metaphors.)  The key to Fed policy is economic and wage growth and boy is it clear the economy has shifted gears.  The consensus for fourth quarter growth has been about 2.5%.  With the large upward revisions to third quarter growth, I am now closer to 3.5%, down from 4%, and the spending numbers support that estimate. While housing may not add much, the real uncertainty is consumers emptying shelves and causing inventories to drop.  That would moderate fourth quarter growth but when warehouses are restocked in the first quarter, activity would accelerate.  Regardless, the economy is in very good shape, probably better than the FOMC realized when it met and when Janet Yellen said she would be patient.  The Fed may want to be patient and err on the side of too much inflation, but the strong job gains are likely to continue and lead to solid wages increases fairly soon.  The FOMC may have to move earlier than most now expect.  Investors should love today’s numbers but once they stop drinking the spiked eggnog, they may realize that strong growth pushes forward the time when the Fed removes the syringe from the markets.  But for now, it is time to celebrate.

Have a Happy and Healthy Holiday!

November Housing Starts and Permits

KEY DATA: Starts: -1.6%; 1-Family: -5.6%; Multi-Family: +6.7%; Permits: -5.2%; 1-Family: -1.2%; Multi-Family: -11%

IN A NUTSHELL:  “The housing sector may not be restraining growth, but it is hardly adding much to it.”

WHAT IT MEANS:  The housing sector is neither too hot nor too cold.  But that doesn’t make it just right.  Activity is improving, but in fits and starts – pardon the pun.  Construction activity eased in November but that came after an upward revision to the October housing starts numbers.  That had come in as a decline but is now put at a modest rise.  The issue in November was single-family construction, which was off sharply.  This component is bouncing around but the trend has been upward, even if it is not a steep slope.  The multi-family number rose sharply, but large changes is usual for this very volatile number.  So far this year, housing starts are up over 8% compared to the first eleven months of 2013, so it is hard to complain about the housing sector.  Looking forward, permit requests were off but again, the multi-family segment drove the rise.  Permits are running only a little above starts for the last two months and that points to minimal gains in construction activity in the coming months.  

MARKETS AND FED POLICY IMPLICATIONS: So far this quarter, starts are up at a little less than 3% annualized pace from the third quarter.  It looks like housing could add to growth again, but unless there is a lot more activity in December, any addition will be relatively modest.  Nevertheless, I will take it.  With oil prices plummeting, there is every reason to expect that consumer spending will be strong this quarter.  Indeed, my forecast calls for another quarter of GDP growth in excess of 3.5%, which would make it five out of the last six.  Yesterday’s November industrial production number was really strong.  So far this quarter, manufacturing output is growing at a robust 4.4% annualized pace and that could rise with any decent increase in December.   Job gains have been strong and we got our first glimpse at solidly rising wages.  Yes, Europe and Japan are worries and some countries are being battered by the low price of oil.  In spite of that, the U.S. economy is on an accelerating growth path that should continue for quite some time.  We don’t need a robust housing market to drive growth.  There are other sectors, including consumer spending and non-energy investing that should be strong enough to keep the economy moving forward solidly.  So why are investors so negative?  Remember, Wall Street and Main Street are so totally disconnected that we cannot go directly from the economic data to market performance.  Declining oil prices may be wonderful for the macro economy but if it hurts certain members of a stock index, then you get a decline.  Ultimately, when it is clear how much additional growth and earnings we will get from an extended period of low energy costs, the markets should reflect that reality.  And that is what I expect the Fed to talk about when the FOMC statement is released tomorrow.

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.

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