KEY DATA:  Payrolls: +638,000; Private: +906,000; Retail: 104,000; Restaurants: +192,000; Construction: 84,000; Temporary Help: +109,000/ Unemployment Rate: 6.9% (down from 7.9%); Participation Rate: +0.3 Percentage Point

IN A NUTSHELL: “The virus may be raging, but it hasn’t stopped firms from hiring.”

WHAT IT MEANS:  You know those stories about the moderation in hiring?  Well, not so fast.  The economy added a ton of new workers in October.  Yes, the headline number was somewhat less than in September, but that was due to the Census ending.  Government employment plummeted.  The private sector, meanwhile, continued to hire like crazy.  Over the past three months, firms have increased their payrolls by 2.8 million workers, a truly impressive performance.  And the gains were spread across the economy.  Not surprisingly, given the housing data, construction soared.  With vehicle demand and retail sales solid, manufacturing was up solidly.  On the services side, other than continued weakness in the airline industry and education, which is being buffeted by virtual leaning, there were few areas where jobs were lost.  Indeed, nearly 69% of the 258 industries posted payroll increases. 

But the real story was in the unemployment portion of the report.  The unemployment rate cratered and for all the right reasons.  The labor force grew, the number of people unemployed declined and the labor force participation rate popped.  That indicates workers are confident enough that they will find a position if they start looking and that when they do look, they are getting jobs.  The work week remained elevated and wages rose, though somewhat modestly.  The only negative in this report was that long-term unemployment is rising rapidly.  For those in sectors that are coming back or who worked in firms that are reopening, becoming re-employed has been relatively easy.  For others, though, their jobs are gone and getting new ones is becoming more difficult. 

IMPLICATIONS:  This was a big report.  The recovery in the economy and the labor market remained on track in October.  Can we keep it up?  It is all about the virus, not any underlying weakness in the economy.  A look at the details of the report points to good, but not great numbers in the months to come, especially if the virus keep raging through the country.  Can we keep getting massive increases in restaurant employment, or will new restrictions be placed on this sector.  With cold weather moving in, outdoor dining is going to disappear in many parts of the country and coupled with the restrictions that are not likely to be eased anytime soon, there could actually be a decline in employment in this sector.  Will housing starts keep rising so builders will continue to need more workers?  Retailers continued to open up, but will customers come into stores if the virus keeps surging?  And it is doubtful that temporary help firms can come anywhere near what they did in October.  That was just an outsized number.  So yes, the labor market improvement will continue, but the private sector has been adding workers at a pace that can only be reproduced if the reopening process continues unabated.  That is not likely.  Still, investors will probably love this report.  Anything that feeds the beast is embraced and this report has a lot of meat on the bone.    

KEY DATA:  Durables: +1.9%; Ex-Aircraft: +0.5%; Confidence: -0.4 point; Current Conditions: +5.7 points; Expectations: -4.5 points/Home Prices: +1%; Over-Year: 5.7%

IN A NUTSHELL:  “The manufacturing sector continues to hold its own.”

WHAT IT MEANS:  The momentum from the reopening of the economy doesn’t appear to be losing a lot of steam, despite a lack of stimulus.  Durable goods orders soared in September, but the headline number is a bit deceiving.  If you removed aircraft from the mix, since an order today usually doesn’t lead to much change in production for a while, you get a much more moderate rise.  And if you just exclude civilian aircraft, orders would have been down.  And it was not as if Boeing’s orders surged.  Instead, they went from cancellations to new orders and that added greatly to total orders.  The problem is that the details were quite mixed.  While demand for metals, motor vehicles and communication equipment rose, orders for computers, machinery and electrical equipment were off.  There was one clearly positive number in the report:  The proxy for business capital spending, nondefense capital goods orders excluding aircraft, increased sharply once again.  Businesses are investing.

The Conference Board reported that consumer confidence was down modestly in October.  However, there was a major break between the current and future conditions segments.  Not surprisingly, the current state of economic activity was viewed as getting better.  But the hopes for a strong future economy faded.  Consumers are beginning to worry that growth could get worse in the next six months and that could affect their spending decisions.

Another housing report, another blockbuster number.  The Case Shiller national home price index rose sharply in August and the year-over-year gain keeps accelerating.  Most of the twenty major metro areas posted gains.  The only outlier was New York.  The city’s housing market is being battered by the trend toward suburban living. 

IMPLICATIONS:Thursday, the first estimate of third quarter GDP will be released and the data all point to a massive rise.  The estimates range from about +25% to +35 and anything in that range will set a new record.  But that is last quarter’s news.  Where do we go from here?  That is less clear.  Housing is holding up and with mortgage rates at historic lows this sector should remain strong. But given how far it has come, can it grow a lot more?  That is doubtful without getting into a real bubble situation.  Job gains remain strong, but so are layoffs.  That points to slowing payroll increases.  And the stimulus money is running out quickly and if we don’t get something before the election, we may not get anything until next year.  But that is speculation.  The reality is that we haven’t seen any major softening in the economy.  Businesses are investing, consumers are buying, homebuyers are frantically looking for something to buy at any price and the government, well it’s the government so let’s not say any more about that.  Until the numbers actually start showing a slowdown, it has to be assumed that the fourth quarter will also be very good, but very good in traditional terms: Let’s say over 4% growth.  The wild cards remain the surging virus and the uncertainty about a vaccine.  That makes economic forecasting not much more than throwing darts.  I’ve decided to switch to my left hand, since my right has not done particularly well lately.   

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.      

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.

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. 

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.        

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.