August JOLTS report and September Employment Trends Index

KEY DATA: Openings: +235,000; Hires: -294,000; Quits: -74,000/ETI: +0.3%; Year-over-Year: +6.1%

IN A NUTSHELL:  “There are lots of openings but firms still seem to be reluctant to hire.”

WHAT IT MEANS:  There is cognitive dissonance in business workforce actions.  According to the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, JOLTS, firms have large numbers of job openings.  The level jumped in August and over the year, openings rose by more than 23%.  That is a clear sign of great need.  Unfortunately, companies did not go out and fill those positions.  Hires actually declined and since August 2013, the pace increased a mere 1%.  There is a real backlog in the HR departments that will have to be whittled down and for the economy, the sooner that happens the better.   That implies that job growth should accelerate.  As for job mobility, the quit rate moderated.  I am not sure if that is due to continued fear of becoming a free agent or that firms are starting to do things to retain workers.   A second indicator of the state of the labor market, released yesterday, also pointed to improving conditions.  The September Conference Board’s Employment Trends Index rose to its highest level since fall 2007, a few months before before the economy went into recession.

On the housing front, CoreLogic reported that home prices rose modestly in August.  Not surprisingly, the year-over-year rise decelerating once gain.  The question is, how much more will it ease?  We need prices to rise solidly so more homeowners will have enough equity to be able to sell their homes.

MARKETS AND FED POLICY IMPLICATIONS: Hiring and job openings are not in synch and ultimately, something has to give.  Firms can try to keep up with demand by pushing productivity, but we know that has not been very successful lately.  The next step is to throw in the towel and start adding to workforces.   The August hiring short fall is reflective of the less than stellar gain in nonfarm payrolls that month.  I suspect that the September JOLTS report will show that hiring expanded, in line with the jump in payrolls.  But the problem facing firms is that the number of people unemployed per job opening, a proxy for availability, has fallen to a level not seen since May 2008.  The vast supply of workers is just not there anymore.  Companies will have to start bidding workers away from other firms.  That is the change in the market that I have been waiting for because it will signal that wage increases will begin accelerating.  When that happens, incomes will rise and while housing price gains may be limited, the ability to purchase a home will improve and that would offset a rise in interest rates.  The Fed will continue to watch the labor markets closely and these reports reinforce the view that conditions are getting better but have yet to reach the point where the Fed absolutely has to act.  Of course, the Fed should move before they have no choice, but that is a different story. Investors, meanwhile, are worried about world economic conditions.  But falling gasoline prices should boost consumption allowing for better U.S. economic growth going forward.  Of course, you have to be linked to the U.S. economy for that to really help earnings.

September Supply Managers’ Non-Manufacturing Survey and August Trade Deficit

INDICATOR: September Supply Managers’ Non-Manufacturing Survey and August Trade Deficit

KEY DATA: ISM (Non-Manufacturing): -1 point; New Orders: -2.8 points; Employment: +1.4 points/Trade Deficit: $40.1 billion ($0.2 billion narrower)

IN A NUTSHELL:  “With all components of the economy expanding and with exports growing, it should be no surprise that firms are hiring.”

WHAT IT MEANS:  The September jobs report was better than expected but it should not have been.  The economy continues to grow across the board.  The Institute for Supply Management’s index of business activity in the construction and services sectors may have moderated a touch in September, but the level is still quite solid.  New orders grew at a slightly slower pace but there was a sharp acceleration in export demand.  The level of demand is strong enough that firms are ramping up their hiring, something we saw in the payroll data.  That is helping keep backlogs under control and order books grew at a more moderate pace.

Despite issues facing so many countries, our trade situation continues to improve.  The trade deficit narrowed slightly in August, but the big story was exports: They rose to a new record level.  Okay, the gain was modest, but new highs are new highs.  The increase was driven by rising sales of capital and consumer goods.  There was a surprisingly large decline in both vehicle and farm exports.  The surge in energy production is allowing us to dig deeply in our petroleum deficit.  We sold a lot more services as well.  Our purchases of foreign goods also were up, but not greatly.  Jumps in aircraft and consumer goods demand outweighed declines in food, oil and vehicles.  The revitalized domestic vehicle sector is helping out here.  Adjusting for inflation, the deficit has narrowed sharply in the third quarter, implying that trade should add solidly to growth, which could be as high as 3.5%.

MARKETS AND FED POLICY IMPLICATIONS: Everything seems to be coming together, except wages.  The increase in payrolls is generating a solid rise in total hours worked and that, conjunction with some rise in wages over the year, is helping generate moderate income gains.  But if we are to really get consumers spending, we need demand to come not just from the new workers, but also from those already employed.  And that requires businesses paying the current workers more.  Understandably, firms don’t want to do that, especially since they have not had to for so long.  But with the unemployment rate coming down, scattered labor shortages are appearing in some industries, occupations and geographic areas.  There is little reason to think the decline in the unemployment rate we have seen over the past two years will not continue over the next year and that means by next summer, we should be at full employment.  If the Fed waits until it sees the whites of wage-inflation’s eyes to pull the trigger, it will be overrun.  But for now, firms will continue to hold the line and the Fed will continue to continue to keep rates low because of less than stellar growth, a strong dollar and low inflation.  As for investors, today’s numbers should ease some of the wounds they have suffered recently.

September Employment Report

KEY DATA: Payrolls: +248,000; Private: +236,000; Unemployment Rate: 5.9% (down 0.2 percentage point); Hourly Wages: down $0.01

IN A NUTSHELL:  “Firms are hiring but that has yet to translate into any increase in wages.”

WHAT IT MEANS:  The greatly anticipated September employment numbers did not disappoint, unless you were hoping for some wage pressures.  Payroll gains were well above expectations, but the headline number actually understates the increase because there were large upward revisions to both the July and August totals.  There were a total of about 69,000 more jobs created in those two months than had been initially estimated.  If you add the 38,000 additional jobs in the August report to the 248,000 added in September, the net gain was 286,000.  (I had 289,000, so I feel pretty good, especially after last month’s debacle.)  Given the NFIB’s report that small business hired heavily in September and those increases only trickle in, I would not be surprised if the September job increase was also revised upward.  Over the past twelve months, businesses have added over 2.6 million new positions, the largest increase since May 2006.  The rise in payrolls was distributed across the economy.  Construction was up solidly, but the rise in manufacturing was less than expected.  Retailers, restaurants, personnel service firms, trucking companies and health care providers all added positions solidly.   States are also back into hiring mode.

The best news was that the unemployment rate dropped below 6% for the first time since July 2008.  (I expected a 6% number.)  Yes, the labor force participation rate dropped, as did the labor force, but the number of people employed soared and the number unemployed dropped sharply.  In any event, I have explained, ad nauseam, why this whole discussion is absurd so let it go.  What was disappointing was the lack of any increase in wages.  The labor market may be tightening, labor shortages may be appearing, but firms are still holding the line on wages.   

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report.  The economy averaged nearly 225,000 new positions over the past three months, which is pretty solid.  So, why is the growing job demand not showing up in worker compensation?  Part of the issue may be measurement and part structural.  Salary increases are not granted uniformly across the year.  They tend to be bunched at review times, which could be quarterly, semi-annually or annually.  There may be labor shortages, but in-between reviews, wages are not going to rise unless a worker can get another job and leverage the offer.  For those on contracts, wages are fixed until the contract ends.  Since the government reports average wages, any increases by the additional workers may not move the needle a whole lot.  That doesn’t mean wage pressures aren’t building.  It just means that when they show up, they will not rise smoothly.  They could gap up.  If the Fed waits for wage gains to appear in the data, they will be well behind the curve.  Wages have always been a lagging indicator and with businesses still convinced that they can hire people at the wage they want to pay rather than the wage they have to pay to actually get the person, it will take extreme shortages before businesses thrown in the towel.  But when they do, watch out.

September Challenger Layoff Announcements and Weekly Jobless Claims

INDICATOR: September Challenger Layoff Announcements and Weekly Jobless Claims

KEY DATA: Layoffs: down 23.8%; Jobless Claims: 287,000 (down 8,000)

IN A NUTSHELL:   “With layoffs nearing a 17 year low and jobless claims at historically low levels, the logical next step is for hiring to surge.”

WHAT IT MEANS:  One more day to the jobs report and a couple of indicators are really pointing to a solid increase in payrolls.  Let’s begin with the Challenger, Gray and Christmas monthly report on layoff announcements: In September, job cut warnings fell dramatically, hitting the lowest level in 14 years.  The third quarter total was down 8.6% from the same quarter in 2013 and it is possible that for all of 2014, layoff announcements will be the lowest since 1997.  I guess the simplest thing to say is that companies are holding on to their workers as tightly as possible.  The lack of pink slips is showing up at the unemployment office.  Jobless claims fell again and when you adjust the level for the size of the workforce, we are at record lows.   The number of people receiving unemployment payments is also declined sharply, reaching its lowest level since 2006.  While continuing claims are not near record lows, given the extended period that people can receive unemployment insurance, they are really low.

Several other reports were released today.  On the labor front, the National Federation of Independent Business found that small business hiring was strong in September, which supports a stronger than expected level of hiring.  However, small business hiring generally doesn’t make it into the initial BLS numbers, so don’t be surprised if the September gain, whatever it is, gets revised upward.  There was some concern about future hiring as plans to add workers easedThe New York City Supply Managers’ survey indicated that manufacturing activity picked up steam in September after moderating in August.  Expectations also rose solidly.   And August factory orders were off sharply, basically because of the wild swings we have seen in aircraft orders.  Fattening order books means output should expanding.

MARKETS AND FED POLICY IMPLICATIONS:  The underlying data on labor market conditions point to a firming in the market.  Companies are not cutting workers and as long as growth continues at a decent pace, hiring will have to accelerate.  Whether it shows up in the September or October report is hard to say but one of them should be really big.  Still, feedback I get from personnel firms are that companies continue to be hesitant about pulling the trigger on hiring.  The number of searches is up but placements remain difficult.  It seems that executive management is still resistant to expanding payrolls and adding to costs even though line management is begging for more workers.  Something will have to give with the question not being what but when.  Regardless, today everyone simply watches and waits.  Those who like to gamble may do so but keep in mind, the employment numbers can be very volatile.  There was no reason to have such a low gain in August and if it was just a seasonal adjustment issue, then we could get some make-up in September.  That would imply the likelihood is that the number will surprise on the upside than the downside.

September Job Estimates, Help Wanted Online and Manufacturing Activity

KEY DATA: ADP Jobs: 213,000; Conference Board Help Wanted: -137,200; ISM (Man.): -2.4 points

IN A NUTSHELL:  “The economy doesn’t seem to have picked up any steam in September.”

WHAT IT MEANS:  We had great growth in the spring but that high rate doesn’t look to have been sustained as the summer ended.  Today’s string of September numbers were simply disappointing.  The ADP estimate of private sector job gains was okay, but below what we need to have for the labor market to really be strong.  Essentially, it looks like it was more of the same.  What this means for Friday’s number is unclear.  ADP believes that the private sector created about 415,000 jobs in the last two months.  The Bureau of Labor Statistics’ first estimate of August private sector payrolls was a modest 134,000 rise.  Barring a major upward revision to the BLS August number, to get the two in synch would mean job gains of at least 250,000.  As for the ADP report, small and large businesses hired solidly.  The softness was in the mid-sized sector.  Why?  That is anybody’s guess.  As an added insult to those of us who think that the labor market is stronger than perceived, the Conference Board reported that online want ads fell sharply in September.  The trend is still up but the data are bouncing around an awful lot.

On the manufacturing front, the sector continues to expand solidly, but maybe not as robustly as it had been.  The Institute for Supply Management’s September activity index fell led by a sharp deceleration in order growth.  Let’s keep in mind that this is a diffusion index and if you reach a high level of orders and stay there, the index actually goes down.  The level of the index is still very high, indicating that demand is strong, which can be seen in robust and expanding production.  Hiring, though, did moderate.  Let’s see now: Orders are flowing in, production is ramping up but job growth is softening.  Got it.  Maybe the shrinking of backlogs can explain that.

MARKETS AND FED POLICY IMPLICATIONS: The first estimate of third quarter growth will be released at the end of October, so we have a month to wait.  It looks like the economy continued on a solid pace during the summer but well off the 4.6% rate posted in the spring quarter.  The recent data have provided few signs that the economy is picking up steam.  It would be nice to get a few quarters in a row of north of 4% growth but I doubt we will get that for a while.  Third quarter growth should be closer to 3% than 4%.  But at least the last six months have been pretty good.  Growth in the 3.75% range is something we have dreamed about yet people are discounting it.  I think that says a lot about how we are evaluating the economy.  Meanwhile, investors are waiting for Friday’s employment report and watching Hong Kong and the dollar, so who know if even today’s numbers will matter much.  As for the Fed, it still is all about the labor market and that means Friday is the big day.  I am sticking to my stronger than expected forecast but the consensus is for something in the 220,000.  An average number will keep the pressure off Fed Chair Yellen, but only as long as the other data remain moderate.

September Conference Board Consumer Confidence and July Case-Shiller Housing Prices

KEY DATA: Confidence: -7.4 points/Housing Prices (National): +0.5%; Year-over-Year: +5.6%

IN A NUTSHELL:   “Whether the sharp decline in consumer confidence is the result of rising international concerns or a slowing economy makes a big difference, so it is premature to start worrying.”

WHAT IT MEANS:  With the September jobs report on the horizon, we are looking for signs that the economy could be either stronger or weaker than expected.  Today’s reports were not particularly great, though they may not be as worrisome as the headlines imply.  First, there was a huge drop in the Conference Board’s Consumer Confidence Index.  That was a shocker as the August reading was the highest in nearly seven years.  The details were not particularly pretty either, as current conditions were down, though at only half the pace that future expectations dropped.  It is that difference that raises real questions about what is going on.  A cratering in confidence usually is caused by an event but there has been no major negative economic crisis.  Indeed, with gasoline costs falling, the logic would have been for consumers to feel better.  However, the emergence of ISIS/ISIL and the need to get militarily involved again in the Middle East was a very negative political event and that could be behind the drop.  If that was the driving force, the impact on spending should be limited as political issues usually don’t change consumption patterns significantly for any extended period.

As for housing, the S&P/Case-Shiller national index of home values rose but the pace of gains is slowing.  The year-over-year rise was the smallest in a couple of years.  Also, the 20-City Index of large metropolitan areas declined over the month.  Only three areas, Las Vegas, Miami and San Francisco, rose by double-digits since July 2013.  The deceleration is not bad as the last thing we want is for bubbles to start forming again. Prices need to continue rising moderately so homeowners’ equity can increase and the normal churn in the market can return.

Two other reports released today point to modest September growth.  The Paychex-IHL Small Business Jobs Index showed slowing small business hiring while the ISM-Chicago manufacturing index moderated.  So far, the September numbers have not been anything stellar.

MARKETS AND FED POLICY IMPLICATIONS: I will wait on the confidence issue as the Middle East worries may be dominating.  But any slowdown in spending would not be helpful as we need job growth to be strong and the unemployment rate to continue falling.  Of course, we will know more on Friday, but until then, we can only speculate, which is the most fun.  As for investors, the confidence drop has to hurt and given the unrest in Hong Kong, it is hard to see how any rational investor could feel great today.  Note, I said rational.  Remember, markets may be efficient by they don’t have to be rational.

August Income, Spending and Pending Home Sales

KEY DATA: Consumption: +0.5%; Real Disposable Income: +0.3%; Prices: flat; Excluding Food and Energy: +0.1%/Pending Sales: -1%

IN A NUTSHELL:   “With incomes starting to rise a little faster, the outlook for consumer spending on everything, including housing, is brightening.”

WHAT IT MEANS:  If wage pressure is the Fed’s focus of attention, then the most closely watched economic indicator should be labor compensation. Strong gains in worker income are the missing link to a robust economy and the key to the Fed raising rates.  We did see some better, though not great, increases in personal income in August.  Wage and salary gains, the biggie in this report, were the largest since March.  The increases need to almost double the August before gain it can be said that workers will have lots of money to spend.  Still, disposable income is rising and households are putting it to use.  Consumption surged as people bought lots of vehicles.  But the real gain came in services, which is the largest segment of the economy.  There was a decline in July, likely due to the relatively mild summer reducing utility spending.  A more normal August probably turned things around.  Health care is also in this category and that might have played a role, but we will not really know until the third quarter GDP figures come out at the end of October.  On the inflation front, the Fed still has little to fear.  Prices were flat and excluding food and energy, they were up modestly.  This allowed household spending power to rise strongly.  

On the housing front, the National Association of Realtors reported that pending home sales eased in August.  The level was the second highest in the last twelve months but was still down from August 2013.  As I have mentioned before, the housing sector is going through a rotation from investor driven activity to a more normal new home buyer/homeowner powered market.  This transition takes time as investors are pulling out, offsetting the increases in more traditional buyers.  That activity has increased fairly consistently since bottoming in the winter, is a sign that the sector should make it out of the other side in very good shape. 

MARKETS AND FED POLICY IMPLICATIONS: Friday we get the September employment report.  It should be really good, but I was wrong last time so I will wait to see the number before I start accepting my forecasting award.  Just kidding.  I do think job gains could challenge this year’s high water mark of 304,000 set in April.  I also expect the unemployment rate to come down to 6.0%.  But even if I am correct, what really matters is the translation of a tighter labor market into wage gains for workers.  Until that happens, there will be questions about when the Fed will move.  The August income numbers provide hope that the rise in compensation is starting to occur.  Adding to the belief that conditions are indeed changing, the Dallas Fed’s September Manufacturing survey found wages and salaries rising the fastest since February 2008.  But we need to see those rises spread across the nation before we can conclude that workers are getting a larger share of the pie and the Fed can start taking its foot off the gas.

August New Home Sales

KEY DATA: Sales: +18%; West: +50%; Inventories: -14.3%: Prices (Year-over-Year): +8%

IN A NUTSHELL:   “Home builders have become very optimistic and the explanation is simple, sales are rising!”

WHAT IT MEANS:  There has been a disconnect between the attitude of residential developers and the new home sales and housing starts data.  I have argued frequently that builders don’t smile unless they are selling something and right now, at least according to the National Association of Home Builders, they are giddy.  So housing sales had to have been rising and the August data finally point in that direction.  Sales surged, but the level of demand is a bit suspect.  There was a 50% jump in the West to a sales level not seen since January 2008.  Meanwhile, in the rest of the country, demand is solid, if not strong, but nowhere near as exuberant as we saw in the West.  Basically what I am saying is that there may be a bit of a seasonal factor issue involved in the West’s increase, which may come out in the September numbers.  That said, it is likely that sales are rising and probably sharply.  Indeed, we still need the sales pace to increase about fifty percent before we can say the new home market is really strong.  Prices seem to be holding in, as the 8% year-over-year increase is similar to what we have seen much of the past couple of years.  The number of homes for sale rose but the number of months of supply came down sharply because of the jump in the sales pace.

MARKETS AND FED POLICY IMPLICATIONS:  Even if the extent of the increase in new home sales is somewhat overstated, it is likely that demand is rising pretty solidly.  We haven’t seen this increase in sales show up in the starts numbers but that too is coming.  And when it does, it will be clear that the housing sector is doing just fine and can likely withstand the coming increases in mortgage rates.  The idea that a 5.5% or even a 6% 30-year fixed rate mortgage or a 4.5% to 5% 15-year rate would kill the market is, at least to me, bizarre.  Over the last twenty years, the 30-year rate has averaged 6.2%.  During the housing boom of 2003 through 2006, the rate averaged 6.0%.  We suffer from a false frame of reference.  Saying 6% is high may be true given the historically low levels that were created during the Great Recession and Disappointing Recovery, but they are clearly not normal rates.  Once it is accepted that the economy is in good shape and even the Fed figures that out, mortgage rates will rise, possibly quickly.  But that doesn’t mean the housing market will tank. Fed Chair Yellen doesn’t want to see another 100 basis point rise that occurred when tapering was announced, so she is going slowly on removing “considerable time” from its statement.  But that is just image.  The economic reality will drive Fed decisions and rate hikes are coming sometime during the first half of next.  Investors need to get their heads around the reality that higher rates are actually good because they represent a strong economy and solid growth supports improving demand in even interest sensitive sectors such as housing.

August Existing Home Sales

KEY DATA: Sales: down 1.8%; Prices (Year-over-Year): up 4.5%

IN A NUTSHELL:   “The rotation from investor to homeowner continues and that is keeping a lid on housing sales and prices.”

WHAT IT MEANS:  When no one else would buy a house, investors saw an opportunity and they came in by waves.  That started the housing rebound and led to solid increases in prices.  Now that costs are rising back toward levels that might have existed if we didn’t have the surge and bust, investor opportunities are shrinking and so is their share of the market.  The result: Existing home sales seem to have hit a plateau.  They fell in August and are down fairly sharply from the August 2013 pace.  But the weakness was hardly spread across the nation.  The West and South saw declines but there were almost equal increases in the Northeast and Midwest.  Over the year, sales in the West are down almost 10%, an indication that investors are pulling back sharply as this area was a prime spot for activity in the past.  As for prices, they are still up over the year and it looks like the deceleration has stopped. The number of homes for sale, while down in August, has been on a modest upward trend.  Still, it is not that much higher than existed during the early 2000s, before the irrational exuberance really hit.  Indeed, price increases and inventories seem to be reasonably well in line with historical patterns.

MARKETS AND FED POLICY IMPLICATIONS: The housing market is in transition from investor-driven to owner-occupied.  As is usually the case with transitions, you get some dislocations and that is happening.  But the sales pace has flattened over the past few months, not fallen, and that is good news.  First time buyers are still in the game and rates remain at very low levels, so the outlook is good for the market.  Just don’t expect any surge in sales, which also is something positive.  We hardly want another bubble.  Housing should be a positive for the economy this quarter but maybe not a huge one.  Of course, with Janet Yellen hung up over “extended period”, this type of report can only add to her obsession.  Why do anything to cause rates to rise when housing is not surging, especially since it is the key interest sensitive sector in the economy?   And with Charles Plosser retiring this spring, a major hawk will be leaving the group of bank presidents.  It will be interesting to see who replaces him.

August Housing Starts and Permits and Jobless Claims

KEY DATA: Starts: -14.4%; 1-Family: -2.4%; Permits: -5.4%; 1-Family: -0.8%/Claims: 280,000 (down 36,000)

IN A NUTSHELL:   “Home construction keeps bouncing around but with builder confidence soaring, it is likely the August slump will be followed by a September surge.”

WHAT IT MEANS:  Housing starts cratered in August but the Alfred E. Neuman in me holds strong: I am not worried.  July’s level was revised up to the highest rate in nearly seven years.  A 31.5% decline in buildings of five units or more was the major reason for the August drop and this component is extremely volatile.  For the first eight months of the year, starts are up by nearly nine percent, keeping up hopes that we could see another double-digit rise in construction activity.  I think that is likely for two reasons.  First, permits are still running above starts.  That points to an acceleration in construction.  Second, the National Association of Home Builders/Wells Fargo Housing Market Index surged in August to its highest level since November 2005.  Builders can get irrationally exuberant at times, but that is usually when construction activity is surging.  So look for a rebound when the September numbers come out.

With the Fed still focusing on labor, the sharp drop in the weekly jobless claims number was eye opening.  We are about as low as can be expected.  Don’t be surprised if this number soars soon.  The closing of three casinos in Atlantic City will likely mess up the data for a short time.   Also, the Philadelphia Fed’s Business Outlook Survey showed that activity grew at a somewhat slower pace in September.   Nevertheless, orders were strong, backlogs grew and hiring jumped.  Those details point to continued strength in the manufacturing sector.

MARKETS AND FED POLICY IMPLICATIONS: Housing continues to improve even if the gains are inconsistent.  Builders are a pretty confident bunch and that can only be because they are seeing activity pick up.  Thus, the fall off in construction activity should not be viewed as any sign of weakness.  With the labor market tightening, Janet Yellen may be repeating her point that if the data are stronger than expected, the Fed is prepared to act sooner than whatever the term “extended period” means.  Indeed, if housing starts do bounce back and manufacturing continues to grow strongly, that is precisely what the Fed will have to do.  Regardless, investors may be a bit confused by the inconsistencies of these numbers but that has never stopped them before.

A further thought on the Fed’s leaving in “extended period” in the statement.  Given her weird comments about the meaning of the phrase, that it was not calendar based but data based, I can only conclude that the Fed members would like to remove the words but only when they think the markets will not overreact.  They don’t want another 100 basis point gap up in rates.  I suspect that as soon as there are consistently robust job gains and the unemployment rate drops below 6%, which could happen by the end of the year, the phrase will be removed.  December is my guess.

Linking the Economic Environment to Your Business Strategy