KEY DATA: ISM (Manufacturing): +2.9 points/ ISM (NonManufacturing): -0.6 point/ HWOL: -45,800/ Paychex: -0.24%

IN A NUTSHELL: “The economy continues to wander along at a steady, but not so great pace.”

WHAT IT MEANS: While there may have been fireworks across the nation last night, there is not much happening when it comes to the economy. The Institute for Supply Management (ISM) released its June manufacturing index results on Monday and its survey of non-manufacturers today. There was good news and not so good news. The manufacturing sector, which had been softening for quite some time, is continuing to show signs that the slowdown is behind it. The ISM activity index rose sharply, helped along by solid gains in new orders, production and as a consequence, hiring. Even so, order books continued to fatten at an accelerating pace. In other words, this segment of the economy is improving. On the other hand, activity in the non-manufacturing portion is moderating a touch. Demand is still solid, but is expanding a little less robustly. Still, hiring remains strong, as firms do what they can to meet their expanding backlogs.

On the labor market front, the indications are mixed. While both the ISM surveys point to strong job gains, the Conference Board’s Help Wanted OnLine measure showed that there were fewer ads for positions in June. The trend in this survey has been down for a couple of years and that may reflect the inability to find qualified workers. There was a sharp decline in listings early this year, but they have rebounded over the past few months to what look like a more reasonable level. A similar message, that the labor market may be softening, was seen in the Paychex IHS Markit June index, which dropped for the fourth consecutive month. Nevertheless, wage gains are accelerating. That may be a further indication that even if job growth has slowed, the lack of suitable labor is finally forcing firms to pay a little more for workers.

MARKETS AND FED POLICY IMPLICATIONS: The best news in the recent reports comes from the apparent improvement in the manufacturing sector. I say apparent because there is some concern for the vehicle sector. Sales were not particularly good in June and the trend is down. Some manufacturers have inventory well above desired levels. While that may lead to a little better than expected second quarter GDP, the pop from the inventory will be short-lived. Companies will likely start working off the excess stock of vehicles in the summer by slowing assembly rates. That would reverberate through their entire supply chains. But when all is said and done, we need wage increases to accelerate if growth is to improve. Friday’s employment report may provide some additional evidence that the tight labor market is forcing firms to actually raise wages. I don’t expect job gains to be great, somewhere in the 160,000-range, and the unemployment rate might tick up a touch. But if hourly wages accelerate, the rest of the report could be downplayed. Alternatively, given current below target inflation and mediocre job and economic growth, lackluster wage gains could lead the Fed to slow its rate normalization process.

KEY DATA: Consumption: +0.1%; Disposable Income: +0.5%: Prices: -0.1%/ Confidence: -2 points

IN A NUTSHELL: “Despite better income growth, worries about the future may be restraining household spending decisions.”

WHAT IT MEANS: The consumer needs to get going if the economy is ever to reach the promised 3% growth rate and right now, that doesn’t seem to be the case. Consumption was up minimally in May as households bought few goods. Both durable and nondurable goods purchases were off. On the positive side, spending on services, which is the largest component of consumption, was up solidly. Hopefully, that will continue. So far this quarter, consumer demand is rising at a roughly 2.6%, so it will take stronger growth in June to get to the magic 3% number. Can that happen? I am not so certain. Income gains were strong in May, but the rise was mostly due to a surge in dividends, which don’t get translated into demand very quickly. Meanwhile, wage and salary increases were modest. And what people make, they seem to be stashing away as the saving rate is rebounding. On the inflation front, prices were largely flat, especially when food and energy were excluded. Over the year, both the headline number and the core, which excludes the volatile components, posted declines. That is something that the Fed will likely watch closely.

Consumer confidence is continuing to moderate. The University of Michigan’s Consumer Sentiment Index fell in June. The level remains solid, but there was a further deterioration in the outlook for the future. That stands in contrast to the view that the economy is getting better. Let’s see now. In Washington, the politicians are saying the economy is terrible but the future is bright. Consumers seem to be saying things are pretty good and getting better, but they are not so sure that trend will continue in the future. Does anyone in Washington have a clue to what is going on?

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports don’t point to any major acceleration in growth in the second half of the year. Wage and salary gains are mediocre and without a better increase in worker salaries, consumption can grow only so quickly. We will get a better picture of household spending on Monday when June vehicle sales are released. Unless there is a bigger than expected pop in demand, it will be hard for GDP growth to have been robust this quarter. We could get a 3% number, but that might be due to a rebound in inventories. Sales, though, look like they were soft. We have a month before we know that number, which comes out after the next FOMC meeting. So the Fed looks to be on hold at least until September. As for investors, all eyes remain on Congress. Can the gang that cannot think straight get anything done this year when it comes to tax reform and infrastructure spending? I just don’t know.

For all those who are heading out today for a nice, long July 4^th weekend, have a wonderful time.

KEY DATA: New Home Sales: +2.9%; Existing Home Sales: +1.1%; FHFA Prices (Over-Year): +6.8%:

IN A NUTSHELL: “The slowing in the housing market may be ending as demand is picking up and prices keep surging.”

WHAT IT MEANS: The housing market has been a puzzle recently, with sales and starts tumbling. That may no longer be the case. New home sales jumped up in May and the gain was on top of a sharp upward revision to the April sales pace. The rise in purchases over the year was nearly 9%, indicating that conditions are indeed getting better. That said, the increases were not well distributed across the country. The robust surge in sales in the West and strong gain in the South were almost entirely wiped out by double-digit declines in the Northeast and Midwest. As for prices, they hit record highs. The nearly 17% rise from the May 2016 median price level undoubtedly overstates the gain, so let’s don’t get too carried away. Nevertheless, supply remains limited and it is likely that the pressure that has been building for so long on prices will not go away anytime soon.

Earlier this week, two other reports on housing were released. The National Association of Realtors released their report on existing home demand and it too showed that demand is rebounding. Unlike the new home numbers, sales rose across the nation. And similar to the new home market, a lack of supply is keeping pressure on prices, which were up nearly 5% over the year.

There are many different reports on home prices, which is difficult to quantify given the changes in prices don’t necessarily measure the rise or fall in the cost of the same unit. Still, all the indices are showing the same thing: Prices are on the rise. The Federal Housing Finance Agency’s index posted another sharp increase in April and over the year. This index had decelerating during most of 2014 but has been on a slow but steady rise since.

MARKETS AND FED POLICY IMPLICATIONS: I don’t know how many times I have written that if it isn’t for sale, it is hard to buy and the housing market is clearly suffering from a lack of inventory. Just today I was cold-called by a realtor asking if I was interested in selling my house. That is how desperate things have gotten. Locational mobility has declined sharply and even those whose homes are now above water are hesitant to sell. Builders face cost and regulatory issues and those factors, plus more rational lending practices, is keeping new construction down. There is no simple solution to the problem, so don’t expect housing sales to surge. What should continue to rise are prices. For the Fed, that is good news as it will keep non-food and energy consumer costs from decelerating further and allow for additional rate hikes this year, assuming the economy keeps growing at a moderate pace. Investors, though, don’t seem to worry about economic fundamentals, so what, if anything, will slow the markets is unclear.

KEY DATA: Starts: -5.5%; 1-family: -3.9%; Permits: -4.9%; 1-Family: -1.9%/ Confidence: down 2.6 points

IN A NUTSHELL: “The downward trend in home construction does not bode well for growth either this quarter or this year.”

WHAT IT MEANS: Business leaders and owners, whether they are involved with small or big businesses, are exuberant. But the optimism doesn’t seem to be translating into surging economic activity. The latest signal that the economy is bumping along comes from the home construction numbers. Housing tarts fell sharply in May, with both single-family and multi-family activity declining. This was the third consecutive decline in activity. There were big reductions in home building in the Midwest and South, while conditions were flat in the Northeast. Only the West posted a gain, and it wasn’t anything great. The level of starts is the second lowest over the past eighteen months. While permit requests are falling as well, they are still running a little above starts, so we might see some improvement in construction in the next couple of months. Still, don’t expect the rate to be anything great.

Consumer confidence continues to fade. The University of Michigan’s Consumer Sentiment index fell fairly sharply in the first part of June. Both the current conditions and expectations components were down. Consumers are still quite optimistic, but the bloom is off the rose when it comes to the euphoric outlook that people had after the election. Indeed, the expectations index was the lowest since October 2016 and is up only modestly since last June. The current conditions index is actually below its June 2016 number. As for inflation, while near-term expectations were stable, people now believe inflation will be higher over the next five years. That was surprising given the recent slowing in price increases. 

MARKETS AND FED POLICY IMPLICATIONS: I have been expecting second quarter growth to be pretty solid, somewhere in the 3% range. But the data that have come in recently raise doubts whether that handle could be reached. Housing has been a key driver of growth over the past two quarters, but that doesn’t look like it is the case during the current quarter. In addition, the slide in vehicle sales doesn’t bode well for second quarter consumption. And with businesses waiting for some indications about the shape of tax changes, we shouldn’t expect capital spending to be great either. Put that all together and I suspect most forecasters will be marking down their second quarter GDP growth estimates. I am. That is important because now that the Fed has moved twice this year, we need some economic strength to have confidence that process will continue. Living in Philadelphia, I have learned to “trust the process”, but Fed policy is different from sports management. The Fed appears to want to continue raising rate at a steady pace and once it begins shrinking its balance sheet, to do so consistently as well. For both of those things to happen, the economy has to expand at least at the trend rate of roughly 2% to 2.25%. We may not get there during the first half of the year if second quarter growth turns out to be 2.5% or less. That cannot be ruled out. As for investors, there is no reason to be bullish unless you think there will be significant tax changes, be it real reform or the more likely tax cuts (the two are very, very different). Given the chaos in Washington, you tell me what is going to happen and we both will know.

KEY DATA: PPI: 0%; Over-Year: +2.4%; Goods: -0.5%; Energy: -3%; Services: +0.3%/ NFIB: Unchanged

IN A NUTSHELL: “With inflation at reasonable levels and small businesses optimistic, tomorrow the Fed can do what it is expected to do, which is raise rates again.”

WHAT IT MEANS: The Fed is starting its two-day meeting today and it would take a blockbuster number for the Fed to change course. Today’s reports don’t qualify as they were in line with what we all know and expect from the data: Inflation is not a threat but business leaders are exuberant. Wholesale costs were flat in May as declining food and energy prices offset moderate increases in other goods and services. Excluding energy, goods costs were up moderately with the pace over the year pretty much at the Fed’s target. Indeed, if you look at the details and the special indices, most rose since last May by somewhere between 1.5% and 2.5%. In other words, at least when it comes to producer prices, inflation is right where it needs to be for the Fed to make any move it wants to make.

If inflation is pretty much on the mark, what about growth? The disappointing first quarter will likely be followed by a better second quarter. But going forward, it will take businesses expanding more aggressively to move the expansion into higher (not necessarily high) gear. If you believe the business optimism numbers, the corporate sector is ready and willing to do its part. We already knew that CEO confidence was soaring and that exuberance is being matched by small business owners. The National Federation of Independent Business’ Confidence index was flat in May. However, that is misleading. It remained near record highs. Respondents think it is a great time to expand and they are extremely hopeful that business conditions and earnings will improve. They are hiring and hope to hire more workers, but they cannot find qualified applicants. No surprise there.

MARKETS AND FED POLICY IMPLICATIONS: The Fed will announce its decision tomorrow afternoon and we are likely to see another tick up in rates. The markets have given the FOMC a free pass so it might as well take it. But it isn’t just the funds rate that will be watched. It is clear the members want to start reducing the Fed’s balance sheet and we need to look for any signals on when that might start. We need to also watch for indications that the process of normalization will continue on a consistent basis. The view on the economy is important in making any judgment on how many more times the Fed may move this year. Today’s data should have made few waves with investors. It’s tomorrow’s statement, press conference and economic projections that most people will be watching closely.

KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: +0.2%/ Confidence: -1.5 points/ National Home Prices: +0.3%; Over-Year: +5.8%

IN A NUTSHELL: “With income growth solid, consumers should be able to keep spending at a decent pace.”

WHAT IT MEANS: If there is any possibility that the economy can break out of its 2% growth trend, the consumer will have to play a major role. To do that, wages and salary increases have to accelerate and that may be happening. Incomes grew solidly in April, the third month out of the last four where the increases were strong. That is another sign that the tightening labor market is finally starting to force firms to pay up a little more for workers. And households are taking that money and spending it. Consumption was also pretty good in April as people bought a lot more goods. Unfortunately, the demand for services was largely flat and that component is nearly two-thirds of consumption. Even with the weak services spending, consumption is growing above 2% so far this quarter, which is a good start. As for inflation, prices continue to rise moderately. Actually, the year-over-year rise has decelerated and is now below the Fed’s 2% target.

Consumer confidence has started to wander around. Today, the Conference Board reported that their confidence index fell in May as expectations moderated. Last week, the University of Michigan said that consumer sentiment was largely flat as the current conditions measure declined. Put the two together and it appears that the Trump confidence bump has run its course. Given all the chaos we saw in May, that confidence hasn’t faded sharply is a good sign that people are still holding out hope that things could change.

With the supply of homes limited, is it any surprise that housing prices continue to rise solidly? The S&P CoreLogic Case Shiller national index of home prices was up again in March and over the year, the price increase is approaching 6%. This is somewhat below the Federal Housing Finance Agency’s reading, but both are indicating that the price gains are accelerating. 

MARKETS AND FED POLICY IMPLICATIONS: Did the government change the date for Memorial Day to April? That is the only reason I can explain temperatures in the sixties this past weekend. The government gets blamed for everything else, so why not the unseasonably cool Memorial Day weekend weather on the East Coast? As for the economy, today’s number provide hope that second quarter growth will be a lot better than the anemic, but at least upward revised, first quarter increase. This week we get vehicle sales and the May jobs report and those two should help determine what the quarter will likely look like, though I doubt they will influence what the Fed will do at the next FOMC on June 13-14. I expect vehicle sales to rise a little from the May pace but job gains could be below expectations of about 185,000. I would not be surprised if the payroll rise is around 140,000 and the unemployment rate ticks upward. The average monthly number of jobs added so far this year is 185,000, which I don’t think is sustainable. Something in the 140,000 range would bring the monthly average closer to the 150,000 to 175,000, which is what is believe is reasonable given the growth rate and the shortage of workers. But the number to watch is average hourly earnings. That is really the only measure in the employment report that attempts to gauge wage pressures, and it should be strong. It isn’t a good measure, but it is the best we have on Friday, so look for it.