All posts by joel

August Trade Deficit and Job Openings

KEY DATA:  Deficit: +5.9%; Exports: +2.2%; Imports: +3.2%/ Openings: -204,000; Layoffs: -272,000; Hires: +16,000

IN A NUTSHELL:  “The skyrocketing trade deficit may not make a large dent in the record third quarter growth, but going forward it could be a real problem.”

WHAT IT MEANS:  The reopening of the economy has worked its magic on economic growth, but there is still one problem area for the economy, the trade sector.  The U.S. deficit with the rest of the world soared again in August.  Exports have begun to pick up, but imports are rising more rapidly.  Keep in mind; we buy well over twenty percent more goods from the rest of the world than we sell to those countries, so the difference in the growth rate is magnified.  The resulting monthly trade deficit was the largest since August 2006.  So far this year, the total trade deficit is slightly down, though given the recent trends and the continued economic weakness around the world, we will likely wind up with a widening deficit for all of 2020.  So much for trade wars and recessions narrowing the deficit.  The trade war didn’t help much on the export side and the recession only slowed imports for a few months.  Where the trade war seemed to make a huge difference was with the imbalance with China.  For the first eight months of the year, the deficit with China has shrunk by 16.5%.  But that was all in imports.  The hoped for bump in our sales to China that was supposed to come from the trade agreement signed earlier this year went the way of the longest expansion on record.  Instead, our sales to China are down a little less than one percent.  Don’t expect that to be made up anytime soon, if at all.  As for the impact on growth, it looks like the widening deficit could cut growth by well over one percentage point, but given that third quarter growth estimates range from the upper twenties to the mid-thirties, that will hardly make a dent in the historic number. 

As for the labor market, conditions are really good and today’s report did little to dispel that notion.  The Job Openings and Labor Turnover survey (commonly called JOLTS) indicated that openings fell in August.  However, the level is still pretty high.  Maybe more importantly, layoffs and discharges declined and are back to what we would see in a growing economy.  But workers don’t feel a whole lot confident as quits declined as well.  The quit rate is pretty low. 

IMPLICATIONS:  Today’s reports basically confirm what we already knew:  The trade situation is bad and deteriorating further while the labor market situation is getting a lot better.  That means little for the third quarter but possibly a lot for next year, when growth rates will resemble more typical years.  The election could have an impact on our economic relationships not just with China but Europe and Mexico as well.  If Trump is reelected, you can assume that the trade wars we are running will be ramped up further.  Like most economists, I don’t think trade wars do anyone any good.  Companies are not going to come running back to the U.S. if there are countries other than China where they can produce their goods at a huge discount to the costs of U.S. manufacturing.  It would take massive subsidies to get that to happen and I doubt a Democratic House would go for that. If Biden is elected, the pressure on China might ease up, but not go away.  Where it could get better is with Europe and especially the rest of Asia.  The TPP trade agreement, which actually made conceptual sense in that it was intended to isolate China from the rest of Asia and open new markets for the U.S., might be resurrected. Maybe we can bring home some of the critical products in our supply chain by passing laws requiring them to be produced here, but that will raise costs to U.S. companies and individuals that need those products.  Which means the government may have to subsidize their production and/or purchase.  Four weeks to Election Day and who knows how long afterward until we know who won.  Should be a very interesting month or two.      

September NonManufacturing Activity and Employment Trends and August Help Wanted OnLine

KEY DATA: ISM (NonMan.): +0.9 points; Orders: +4.7 points; Employment: +3.9 points/ ETI: +2.8%/ HWOL: +1.7%

IN A NUTSHELL:  “Another set of reports; more signs of continued recovery.”

WHAT IT MEANS: The good numbers just keep coming.  Today, the Institute for Supply Management reported that activity in the service and construction portions of the economy continued to improve in September. Sixteen of the seventeen industries indicated they expanded.  Only Professional, Technical and Scientific Services was down.  It is hard to explain why that one group didn’t follow the crowd, but it is rare to see any survey that everyone is on the same page.  Indeed, less than eight percent of the respondents said activity slowed over the month, making it clear that the expansion is quite broad based.  The details of the report were quite solid as orders rose sharply and employment moved from contracting to growing.  The one warning sign was that order books have pretty much stop fattening despite the solid increase in demand.  

The Conference Board released two labor market related measures today and both pointed to further gains for workers, though not as massive as they had been.  The Employment Trends Index, rose again in September as all eight of its components were up.  Clearly, the improvement in the employment situation is pretty much across the economy as we saw last Friday in the jobs report. That was the good news.  The less good news was that the index is about half of what it was in February, showing how far we still have to go to get back to where we were.

The second Conference Board release was its August Help Wanted OnLine Index, which posted a somewhat modest gain.  But don’t get fooled by the less than spectacular rise.  The measure is only about four percent below its high.  Firms are looking for workers like crazy, even with the unemployment rate near eight percent.   Job gains may continue to decelerate, but compared to normal times, they should still be strong for the remainder of the year. 

IMPLICATIONS:The labor market has done a lot better than expected since the economy has reopened.  Nevertheless, total nonfarm payrolls are still 10.7 million below the peak in February.  It could take another three years or more to get back to that level, assuming a moderately effective vaccine is approved and is widely available and accepted sometime during the first half of next year.  The economy is not going to fully reopen and indeed remains at risk, until the vaccinations are widespread.  Keep in mind, just because a vaccine is approved, that doesn’t mean large numbers of people will get the shot or shots immediately.  The CDC shot itself in the arm (pun intended) by giving the impression, accurate or not, that it was susceptible to political pressure.  That is likely to slow the acceptance of the vaccine and increase the time needed to get most of the population immunized.  Until that happens, the final stage of the reopening will take a long time and as we have seen from recent events, hot spots are likely to appear anywhere if not everywhere without the vaccine.  That implies job growth will slow as the easy part of the reopening is largely done.  Now comes the hard part: Finishing the reopening, weaning ourselves off government welfare and cleaning up the mess created as firms that have been hanging on give up.  And I don’t even want to think about what the election will bring. 

September Employment Report and Consumer Sentiment

KEY DATA:  Payrolls: +661,000; Private: +877,000; Government: -216,000; Unemployment Rate: 7.9% (previously 8.4%); Wages: +0.1%; Hours: +0.1 hour/ Sentiment: +6.3 points

IN A NUTSHELL:  “The private sector keeps adding lots of jobs as the reopening continues unabated – for now.”

WHAT IT MEANS: The employment rebound is still going strong.  Job gains in September were spread across almost the entire economy, as over 70% of the 258 industries posted increases in payrolls.  That is impressive. Not surprisingly, the largest rise was in hospitality, especially restaurants, which added 200,000 new (or returning) workers.  Retail came in second, again not a major surprise.  What was a shock was that a large percentage of the increase was in clothing stores.  I guess people are going out and buying work clothes again.  Reopening hotels also hired back lots of workers.  Other areas of strength were health care, as people are visiting their doctors again, warehousing, as the online sector only keeps booming, amusement parks and casinos and manufacturing, where both durable and nondurable goods producers expanded their workforces.  There were the usual suspect increases, such as a huge increase in social services and the special cases, such as public transit.  And finally, construction was up, but at a somewhat less than robust pace given what is going on in the housing sector.  The large drop in public jobs was due to the modification of the education hiring patterns.  August was up more than usual and those gains, and more, were unwound in September. 

As for the unemployment situation, the rate declined solidly once again, but not for the reasons we hoped.  The labor force and participation rate fell sharply.  A strong labor market normally draws in new workers.  You cannot make much of one month’s decline, but it is something to watch going forward. 

On the income front, wages increased minimally, but hours worked rose to a level seen only once before (this past May) in the 14½ years the measure has been in existence.  Firms are really working those they have hired back quite hard.

The University of Michigan reported that consumer sentiment rose moderately in September to the highest level in six months.  Expectations of future conditions were up somewhat more than the current conditions index.  Interestingly, the report noted that “the data indicate that lower income households face continued income and job losses compared with the modest gains expected by upper income households”.  That is, the recovery is not being spread evenly across income groups.  That is not surprising, though it is quite troubling.IMPLICATIONS:The recovery remains on track, even if the government is getting sicker and sicker (you can take that in any way you want).  Yes, the number of new positions added was below consensus, but there was a large upward revision to July and August, so the shortfall was not that great.  So, where do we go from here?  This morning, it is not as clear as it was yesterday.  The political and therefore business dynamic of saying that the virus is under control and businesses, such as restaurants, can reopen fully may change now that the president has contracted the virus.We have to see the blowback in places such as Florida, which declared victory and moved on, before we know if the reopening process will slow.  Given that we are starting to see a resurgence in the virus and that flu season is upon us, I think that is a real possibility. Going forward, payroll gains and the decline in the unemployment rate may be slower than expected and it could raise the importance of producing a vaccine that is widely available and accepted.  Will investors care?  Who knows?  Bad news has been discounted before and the link between the president testing positive and a potential slowdown in the recovery may be a bridge too far for many.

August Income and Spending and Construction, September Manufacturing Activity and Weekly Jobless Claims

KEY DATA:  Consumption: +1%; Income: -2.7%; Prices: +0.3%/ Construction: +1.4%; Private Residential: +3.7%/ ISM (Manufacturing): -0.6 points; Orders: -7.4 points/ Claims: -36,000

IN A NUTSHELL:  “The huge decline in household income is a warning that the economy is still heavily dependent on government social welfare payments.”

WHAT IT MEANS:  We may have just finished the strongest quarter of growth in history and there is little question that it was the government that played a major role in the rebound.  All you have to do is look at the August income and spending numbers.  Total household incomes fell dramatically, as payments for unemployment compensation cratered.  The drop was nearly six times the increase in wages and salaries, which by itself was pretty strong.  Another way of looking at this is to think of worker income as the combination of wages and salaries and unemployment payments.  In July, when the enhanced unemployment payments were still being made, unemployment income accounted for 13.6% of the total.  After the enhanced payments stopped, that dropped to 6.4% and the total of the two sources of income declined by 5.4%.  Those numbers show how dependent households were/are on unemployment checks.  On the spending side, consumption was up strongly.  The rise was largely due to people eating out again and no longer being afraid to visit doctors. The rise in vehicle sales helped drive an increase in durable goods demand, but nondurable sales were down.  The savings rate, which is still just over fourteen percent, remains high, but it is falling.  As for inflation, it is accelerating.  Since it remains below the Fed’s target, I doubt anyone cares.    

Manufacturing activity was solid in September.  Yes, the Institute for Supply Management’s overall index fell, but the level is pretty high.  The same can be said of orders, which showed that demand grew robustly, just not as massively as they did in August.  Employment cut backs continued, but at a minimal pace.  The best news was that both import and export orders are rising.  That trade sector has been a real problem for the economy but that may be changing.

The housing market is on fire and that showed up once again in a huge increase in residential construction spending in August.  But there was a warning in the data.  Private nonresidential activity declined and public construction was up modestly, indicating that not all segments of the economy feel that now is a good time to build things.

Finally, unemployment claims fell again last week.  But they are still well above eight hundred thousand and for the month of September, about 3.5 million workers filed for assistance.  That is hardly a sign of a robust labor market.  

IMPLICATIONS:  Household spending came back with a vengeance in the summer.  After just the first two months of the quarter, consumption grew at a 37% annualized pace.  That is likely to rise with the September numbers.  But the economic surge conceals the true state of the economy, which at this point is very unclear.  The massive social welfare program, not just the return of workers to private sector payrolls, drove spending.  Job gains may be great, but they are slowing and that is causing wage and salary increases to decelerate.  Households built up their savings and that has likely cushioned some of the government cutbacks, but the question to ask is the same one I have been asking for months now: What will the economy look like once the twin crutches of household and business free money disappears?  The income data imply that we may need those supports for a very long time or consumer and business spending could slow significantly.  There are rumors that another stimulus package is in the works and the House may vote out a bill just to show it cares (as if politicians really do things out of the goodness of their hearts).  But to pass the Senate, where suddenly some Senators have rediscovered their fiscal conservative religion and once again, claim that too much spending is bad (yes, I have contempt for them, couldn’t you tell?), an agreement with the administration is needed.  That may not be so easy.  Anyway, tomorrow is employment Friday and given the way the week has been going, I cannot wait to see what that has in store for us. 

September Private Sector Jobs, August Pending Home Sales and 2nd Quarter GDP (3rd Estimate)

KEY DATA:  ADP: 749,000; Manufacturing: +130,000/ Pending Sales: +8.8%; Over-Year: +24.2%/ GDP: -31.4% (up 0.3 percentage point)

IN A NUTSHELL:  “Employment keeps rising and the housing market keeps soaring, additional signs that the recovery remains on track.”

WHAT IT MEANS:  Stimulus?  Who needs more stimulus?  (I will answer that in a little while.)  With the employment report coming out on Friday, Wednesday means the ADP estimate of private sector payroll gains.  They will likely look really good.  The ADP numbers have not been matching up very well with the Labor Department’s reports, they were only about one-third the official increase in August, but the estimate for September is still pretty strong.  And the gains are distributed across all sizes of companies and all industrial sectors.  Surprisingly, the report found that manufacturing could lead the way.  BLS reported that this sector added a total of seventy thousand new positions in July and August.  ADP says that the gain in September might be nearly twice that number.  That seems a bit high.

On the housing front, smoke jumpers may be called in soon to help slow the fires.  The National Association of Realtors reported that pending home sales continued to surge in August and the index hit a record high.  It is now almost twenty-five percent above where it was last year.  Either the market in August 2019 was a mess or this is a really crazy market that is beginning to get out of control.  With inventory almost nonexistent, I don’t know how realtors are selling so many homes, but apparently they are. 

The third and final (at least for a while) estimate of second quarter GDP was released and the revisions were modest.  Consumption, residential investment, and state and local government spending were revised upward. Those increases were almost completely offset by downward revisions to exports and investment in intellectual property.  Given the record overall decline, the change was not really worth noting.   

IMPLICATIONS:  The good data keep coming in and at least when it comes to the labor market, that should be the case for a while.  States continue to reopen further and Florida even appears to believe the virus threat is over as it is now largely open for business.  Good luck with that. Other states are easing restrictions more slowly, but the more they reopen, the more people who return to work.  Thus, the September employment report should be strong, though I would not be surprised if it is a lot less than the nearly 1.4 million increase we had in August.  Indeed, it should be closer to ADP number, which is pretty much the consensus.  With job losses (derived from the claims data) running at the same pace in September as they were in August, don’t be shocked if we don’t get the expected decline in the unemployment rate.  Indeed, a modest rise would not be out of the question.  Regardless, Friday’s numbers should be really good.  As for investors, they seem to understand what I have been arguing for months: The economy is not able to stand on its own.  Stories that another stimulus package could happen were greeted with cheers.  Or, maybe its just what I have noted about the markets, also for months, that bad news is no news, modest news is good news and good news is great news.  Despite the recent declines, the trend still looks to be up, as long as the stimulus package remains on the table (and we don’t have to go through another horror show like last night).  If prospects of more free money for everyone disappear, then as the saying goes, that will be when the rubber meets the road.  And it just might be icy.        

August Durable Goods Orders and New Home Sales

KEY DATA:  Durable Orders: +0.4%; Ex-Aircraft: -0.8%; Capital Spending: +1.8%/ New Home Sales: +4.8%; Inventories: -8.3%

IN A NUTSHELL:  “Business investment activity remained strong, a sign that confidence may be improving.”

WHAT IT MEANS:  Orders for big-ticket items are a key indicator of the willingness of companies to bet on the future and the overall rise in demand in August was less than expected.  Indeed, if you remove the aircraft sector, which is weird right now as it adjusts to the long-term implications of the pandemic, orders were down sharply.  But the details were not that bad.  Demand increased for machinery, computers and communications equipment.  Boeing’s aircraft order cancellations were down, which helped the numbers even though they were still high.  The weakness was in electrical equipment and vehicles.  Motor vehicle orders had skyrocketed the previous couple of months so it was not surprising to see a moderate pullback.  There was really good news in the measure that represents business capital spending.  Nondefense capital goods orders excluding aircraft posted another sharp rise.  The level was the highest in two years and second highest in six years.  That is a really strong indication that companies think this is a good time to start investing again. 

Yesterday, the August new home sales report was released and it was another big one.  Demand jumped above one million units annualized for the first time in nearly fourteen years.  That is amazing, as is the sector.  That said, the details weren’t quite as great.  Sales were off in the Midwest and West, and rose moderately in the Northeast.  It took a double-digit increase in the South, where about sixty percent of the sales are recorded, to get the total into positive territory.  Inventories, or the lack thereof, remain the major concern.  They are at about half of what they should be, and the sales rate adjusted 3.3 months of supply is the lowest on record.  That’s why there are bidding wars for homes and they are selling above asking price in some areas. 

IMPLICATIONS:The August durable good release was one of those skip the headline, examine the details report.  Economists were expected a better number and the more modest overall rise was a little disappointing.  But the sharp rise in the key indicator of business spending points to continued growth, though maybe not nearly at the level we had been seeing.  And that should not be surprising as we are closing out what will likely be the strongest growth in GDP in history.  So, decelerating from the reopening-induced, artificially high pace is something everyone is expecting.  Indeed, the massive rise in home sales is setting the sector up for a let down over the remainder of the year.  And that raises the real question: How fast do we slow?  The September numbers will start providing some answers, but we are not likely to have a good handle on things until the end of the year.  For now, let’s enjoy the reopening of the economy and we can start worrying about next year in a month or two.

August Existing Home Sales and September Philadelphia Fed NonManufacturing Survey

KEY DATA:  Sales: +2.4%; Prices: +11.4%; Inventory: 3.0 months/ Phila. Fed (NonMan.): +6.4 points: Expectations: +14 points.

IN A NUTSHELL:  “With existing home sales hitting the highest level in nearly fourteen years, it is clear the housing market is on fire.”

WHAT IT MEANS:  Remember the housing bubble?  Of course you do, even if you wanted to forget it.  Well, housing demand is moving back toward those levels.  The National Association of Realtors reported that existing home purchases rose moderately in August after having surged the previous two months.  The level may still be well below the peak posted during the housing bubble, but it is still historically high.  Sales were up fairly modestly in most regions, but jumped by double-digits in the Northeast.  Interestingly, condo/coop sales rose faster than single-family purchases.  And you thought density was out.  Home prices are skyrocketing, reaching a new high.  That occurred, in no small part, because the number of homes on the market is declining.  It is at a ridiculously low three months and only 2.8 months for single-family homes, about half of what it should be.   

The Philadelphia Fed’s NonManufacturing Index increased solidly in the first half of September.  The details, though, were a bit mixed.   Order growth moderated and backlogs increased sluggishly.  But hiring was on the rise and firms are spending on plant and equipment again.  But maybe the best news in the report was the sharp jump in expectations.  Optimism about the future may not be irrationally exuberant yet, but it is high.     

IMPLICATIONS:  For three months now, the housing market has posted big gains.  With the August home sales numbers at those we saw in 2006, it is fair to raise the issue of whether we are moving into another bubble.  That is not likely the case.  We likely have two factors at work that are temporarily causing the sales level to surge.  The first is that sales cratered in the spring and there is some catch-up going on.  Second, there is the sudden urge to escape high-density living that is adding to the demand.  The catch-up should start fading soon, if it hasn’t already.  Whether the change in location preferences is just a fad or a long-term trend is right now uncertain.  Those who were thinking of moving before the pandemic hit are probably rushing out to do so.  Those who may want out because of a fear of density, but are not in position to move right, away are the ones we need to watch. They represent a level of demand that may not have been there before and could allow the market to stay solid, even as the temporary factors fade.  Add that to the Fed’s intention to keep rates low for an extended period and you have the makings for a solid but not excessively enthusiastic market for a quite a while. As for investors, housing is a plus, but what about the rest of the economy?  The Philadelphia Fed’s report points to good, though not great, growth in the nonmanufacturing portion of the economy as well.  And the Chicago Fed’s National Activity Index, which came out yesterday, indicated that the U.S. economy began its expected growth moderation in August.  Activity was still above trend, but it is also trending downward.  I keep saying that we need to look past the second quarter collapse and the third quarter surge and see what growth may look like for the year starting in the fourth quarter.  Right now, it looks like it will slowly decelerate back toward sustainable growth.  What is not clear is how rapid that deceleration will be.           

August Housing Starts, Weekly Jobless Claims and September Philadelphia Fed Manufacturing Survey

KEY DATA:  Starts: -5.1%; 1-Family: +4.1%; Permits: -0.9%; 1-Family: +6%/ Claims: -33,000/ BOS: -2.2 points; Orders: +6.5 points; Expectations: +17.8 points

IN A NUTSHELL:  “Don’t let the decline in home construction fool you, the level is still really good.”

WHAT IT MEANS: Housing has been the star of the recovery, so should we be worried about the decline in housing starts in August?  Not at all!  First, the total level is quite decent.  In addition, the key single-family segment was up again.  Multi-family construction is extremely volatile and that portion of the market fell sharply after having surged in July.  Nothing unusual with that.  The second reason you shouldn’t think this is the start of something bad is that permit requests, while falling slightly, are also at a high level.  More importantly, they are again running above starts, so construction could pick up going forward. 

Jobless claims declined last week.  That is the good news.  The bad news is that they were at 860,000, an extremely high level.  It is likely that over three million more workers will lose their jobs this month.  Another sign the labor market has a way to go before we can say it is in good shape was the total number of people receiving checks from all programs, which remained near thirty million.  New claims for the special Pandemic Unemployment Assistance (PUA) program, which covers those who were traditionally not eligible for assistance, such as small business owners, declined.  While we don’t talk about it much, there are more people receiving checks from the PUA than from the traditional program. 

Manufacturing activity in the Mid-Atlantic area eased a little in early September, but again, that is nothing to worry about.  The Philadelphia Fed’s Business Outlook Survey activity index was down only modestly.  More importantly, the components were pretty good.  Order growth improved, shipments surged, backlogs started to build and employment growth accelerated.  Maybe impressive was the surge in optimism.  Indeed, the level of the expectations index is so high that it seems to indicate that respondents were nearing the exuberant stage.        

IMPLICATIONS:  Housing is fine but the unevenness in the recovery continues.  There are big winners and losers and while the overall economy is getting better, the labor market remains in a state of churn.  You cannot say that conditions are getting a lot better when nearly thirty million people remain on government income support and over three million workers a month are losing their jobs.  The longer this continues, the more the friction in the labor market is likely to keep those losing jobs from readily finding new ones.  Thus, while we have seen a rapid decline in the unemployment rate, that may slow, possibly sharply.  The low hanging fruit for unemployed workers, a return to their old jobs, is beginning to disappear and new/different jobs may be hard to find.  The good news is that the reopening also has a long way to go, so job gains and lower unemployment rates should be the story for the next few months.  As for investors, the bigger story could be comments made by CDC Director Redfield that a vaccine might not be widely available until the second or third quarter of next year.  While the president may be saying he made a mistake, that comment really cannot be walked back. It implies that it could be another nine months or more before we see large-scale vaccination in this country.  The economy will not get back to whatever the “next normal” will be until that happens. While investors may not be assuming a vaccine will be ready by Election Day, they may not be factoring in an extended period before it is.      

September 15,16 ‘20 FOMC Meeting

In a Nutshell:  “With inflation running persistently below (its) longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time.”

Decision: Fed funds rate target range remains at 0% to 0.25%.

The Federal Open Market Committee, in one of the more extensive statements it has made, attempted to explain in detail what its new monetary policy strategy meant.  And they did a pretty decent job at that.  Boiling it down, the Fed will not raise rates until the economy reaches full employment and if that takes having inflation run above the 2% target for an extended period, not only is that acceptable but it is desirable. 

Why is higher inflation okay?  Because the Fed intends to hit its inflation target over time and on average.  As the Committee noted, inflation has been running persistently below its target and to get back to the target, the economy must get stronger and inflation expectations have to be above 2%.  The way to keep expectations up is to run hot.  And the way to run hot is to keep rates down as long as necessary.

But there is more in this than just inflation.  Indeed, inflation is probably job two or three for the Fed.  The Fed Chair, in his press conference indicated that reaching full employment is a necessary condition before a rate hike could occur.  Just getting to the target inflation is not enough.  Importantly, the Fed is not defining full employment by any single measure, such as the unemployment rate.  Mr. Powell indicated that other factors, such as wages and participation rates, would be taken into account as well.  In other words, full employment is a subjective not an objective measure.  To paraphrase the late Supreme Court Justice Potter Stewart:  “The Fed will know it when it sees it.”

So, what does this all mean?  Actually, not anything different from what I and many other economists have been saying for a while.  The Fed will not be raising rates for quite some time.  The best guess is at least two years, but that assumes the recovery is strong in both 2021 and 2022.  (NOTE: The Fed’s economic projections do assume that.)  If it moves back toward trend growth of roughly 2% sooner, then there may not be a rate hike for three years.  And the Fed will keep doing what it has been doing to support the financial markets.  That means more additions to its balance sheet by purchasing all types of assets. 

So, if you are looking for a loan, especially a shorter-term one, you probably don’t have to worry about rates getting away from you for an extended period.  But if you are a saver rather than an investor, don’t expect any relief soon, as savings rates, which are already at rock bottom, are going nowhere.  As for investors, if you think low rates help the equity markets, well you are going to have low rates for quite a while. 

 (The next FOMC meeting is November 4,5 2020.) 

August Retail Sales and September Housing Market Index

KEY DATA:  Sales: +0.6%; Over-Year: +2.6%; Ex-Vehicles: +0.7%/ NAHB: +5 points

IN A NUTSHELL:  “Consumers are still spending, but not surprisingly, the pace is slipping a little.”

WHAT IT MEANS:  With the enhanced unemployment insurance payments disappearing in early August, economists have been looking for signs that consumption is fading.  The first report that could signal that is the August retail sales numbers and while they were a little softer than we had been seeing, they were still pretty good.  Overall demand was strong.  Yes, the increase was less than what it was in the late spring and early summer, but those were outsized gains that corrected for the early spring collapse.  There were solid gains in sales of clothing, health care, furniture, electronics, and of course, building materials.  With so many people working from home, fixing up the place has become a major priority.  But the biggest increase was in restaurants.  Inside dining is joining outside service and that is helping this sector improve.  Still, August restaurant sales were down over fifteen percent compared to a year earlier.  In comparison, total retail sales were up, though somewhat modestly.  There was a warning sign in this report.  The measure that most closely mirrors consumption, core retail sales, which exclude autos, gasoline, building materials and food services, declined slightly.  We could be starting to see some pullback due to the loss of income.  It is too early to conclude that, but it is worth watching.

As for the housing market, the NAHB/Wells Fargo National Housing Market Index popped again in early September.  The homebuilders’ measure is out of control.  It is now five points above the previous high and eleven points above the peak that was posted during the housing bubble.  It is hard to understand what the housing market indicators truly indicate.  By that I mean, are we in a bubble, a big bubble, a massive bubble, or just a short-term surge that is overwhelming the measures?  With households looking to escape high-density locations, it is not surprising that homebuilders are seeing greater demand, but this is crazy.  Let’s just say that housing should add greatly to growth in the third quarter and leave it at that.

IMPLICATIONS:  Today’s data show an economy moving forward strongly.  The consumer is consuming and builders are building.  But we also cannot totally dismiss the potential impact of the lack of additional stimulus.  Those buying homes are not likely those who are still on unemployment insurance.  The unemployed are the ones whose spending is most sensitive to income changes.  Many states are gearing up to provide the additional $300 per month that has been temporarily funded by executive order, but that is not universal and is not likely to hit for a while.  The fall economy is pretty much set, but the winter and next spring are up for grabs right now.  Meanwhile, the Fed members are finishing their meeting, which should provide little news.  As for investors, they just keep on keepin’ on.