KEY DATA:  CPI: 0%; Over-Year: 1.7%; Ex-Food and Energy: +0.1%; Over-Year: +2.4%/ Real Wages: 0%; Over-Year: +1.2%/ Claims: -10,000

IN A NUTSHELL:  “Limited inflation pressure gives the Fed some room if the divided committee can manage to come up with an agreement.”

WHAT IT MEANS:  Clearly, the economy is not growing too fast for firms to keep up with demand.  Otherwise we wouldn’t have consumer costs rising so modestly.  The Consumer Price Index was flat in September and removing the volatile food and energy components left us with only a minimal gain.  Food prices broke a string of three consecutive flat months with a limited 0.1% increase.  Not much pressure there, unless you are eating out or, as in my case, you like cakes and cupcakes.  They are up way too much since September 2018 and the cost of feeding my bakery sweet tooth is getting out of hand.  Energy prices, meanwhile, fell sharply.  About the only places where inflation is an issue are medical care and shelter.  So, as long as you don’t have to see a doctor or live in a house or apartment, there is basically no inflation. 

With overall inflation flat and wages going nowhere, it was hardly a surprise that inflation-adjusted, or real wages were also flat.  The over-the-year rise keeps moderating and that is not good news for future consumer demand.  Worse, hours worked have declined over the past year and that has meant a slowdown in weekly earnings growth.  In other words, household spending power is not rising fast enough to support strong consumption unless families dip into savings and it is not clear they have any inclination to do that.

The sharp drop in jobless claims last week reinforces the view that the slow job growth is due more to a lack of supply than a faltering in demand. 

MARKETS AND FED POLICY IMPLICATIONS: No inflation really does little to change the feelings of either investors or Fed members.  For investors, it is all about trade and tariffs.  Indeed, the idea that a “more puff than pastry” agreement, something I have argued was the most likely agreement if the two sides ever manage one, is now considered to be the last great hope for the markets.  It is becoming quite clear that a major trade agreement with China is nowhere in sight if it is even possible.  Signs of progress (however that is defined) or backpedaling lead to major ups and downs in the markets.  Since that yo-yo effect has been going on for quite some time, I can repeat another of my favorite sayings: The markets may be efficient but that hardly means they are rational.  Right now, investors are simply grasping for any hope that a total meltdown doesn’t happen.  As for the Fed, the data do not support a rate cut and they haven’t for months, so I don’t know why I even discuss that.  The minutes from the last FOMC meeting indicate that the only thing driving rate cuts is tariffs.  But the Committee is extremely divided with just about every view, from sharp reductions to nothing being represented.  Does Jay Powell have an insurrection on his hands?  I don’t think we can go that far just yet, but making additional moves is becoming harder and harder.  I expect no more cuts this year, despite what the markets think. 

KEY DATA:  ISM (NonMan.): -3.8 points; Orders: -6.6 points; Employment: -2.7 points/ Manufacturing Orders: -0.1%; Backlogs: +0.1%/ Layoffs: 41,557/ Claims: +4,000

IN A NUTSHELL:  “The manufacturing sector is contracting but the service sector is still expanding enough to keep growth at a modest to moderate pace.”

WHAT IT MEANS:  While few economists, including myself, expect a recession to start this year, next year is a different story.  Whether we do wind up in one will depend upon the service sector as the trade war has already claimed its first major victim, the manufacturing sector.  Thus, we need to watch carefully the trend in services.  Right now, it is slowing, which should surprise no one.  The Institute for Supply Management’s NonManufacturing Index fell sharply in September, but that came after a surprisingly large rise in August.  The September level, though, did drop a little below the July number, meaning all of the August gain, and more, was wiped out in September.  The business activity, new orders and employment components were all off sharply.  In addition, prices paid for goods and services rose even faster, not a good sign for either inflation or earnings.  The report, though, was not all doom and gloom.  Backlogs increased and that holds out hope that the easing in growth will stabilize in the months to come.

Speaking of manufacturing, orders for all types of products declined in August.  While demand for durables rose a touch, demand for nondurables fell moderately.  That is a further sign that growth is softening.

As for the labor market, Challenger, Gray and Christian reported that layoff notices were down sharply not just from August, but also from September 2018.  Still, so far in 2019, notices are still up nearly 28% from the first nine months of 2018.  That is somewhat surprising given the shortage of workers. Restructuring, closing, bankruptcy and cost cutting explain about 65% of the layoff announcements, which makes sense given the issues in retail and other industries.

Jobless claims rose a touch last week but remain extremely low.       MARKETS AND FED POLICY IMPLICATIONS:Yes, the economy is slowing.  No, it is not in recession and there is no reason to believe it will go into the red this year.  But it cannot be said that conditions are strong.  Indeed, it will take continued strong consumer spending to keep the economy out of a downturn.  Can households keep it up?  That will depend upon both job and wage growth.  And that is why, when all is said and done, the key numbers are to be found in the monthly employment report.  We get the September data tomorrow and consensus is for about 150,000 or so.  The huge surge in government employment in August is likely to have been unwound in September and that makes it harder to get a handle on the headline number.  So look more closely at the private sector job gains.  In August, they came in below 100,000 but should be slightly above a September headline 150,000 number.  That would be okay but nothing great. That is, it would be consistent with a still growing, but slowly moderating growth pace.  But also pay close attention to the unemployment rate, which I think might tick up to 3.8%.  That could worry investors.  Another concern is wage gains, which should be at 0.3% over the month and 3.4% over the year.  Failing to meet those increases would indicate earnings gains are moderating as well and that would be an even greater warning sign.  As for investors, they cannot be happy to see the services sector slowing.  But they can take hope that it is still expanding enough to keep the economy moving forward.

KEY DATA:  Consumption: +0.1%; Income: +0.4%; Prices, Ex-Food and Energy (Over-Year): +1.8%/ Orders: +0.2%; Ex-Aircraft: +0.5%; Capital Spending: -0.2%/ Sentiment: +3.4 points

IN A NUTSHELL:  “Households have the money to spend, but it isn’t clear they will continue spending it at a robust pace.”

WHAT IT MEANS:  The broad shoulders of the consumer keeps bulking up on growing income, but they still need to spend it and in August at least, that didn’t happen at a very solid pace.  Consumption rose modestly in despite strong durable goods demand.  Nondurable purchases were soft while services, which make up about two-thirds of all spending, rose moderately.  In addition, the robust July gain, was revised downward a touch.  Will spending rebound?  If income is the driver, the answer is yes.  Wages soared in August.  They had slowed in July, which was likely an aberration.  The combination of strong income gains and modest spending led to a rise in the savings rate.  Households are stashing funds away for a rainy day.  On the inflation front, overall prices went nowhere.  Excluding food and energy they rose modestly, but over the year, the increase is approaching the Fed’s 2% target.

As for businesses, durable goods demand rose solidly, if you exclude aircraft.  But the key figure in this report is the capital spending number and that was down.  That was not expected and it speaks to the high level of uncertainty gripping corporate leaders.  Backlogs rose a little, but nothing to lead one to believe that production will surge anytime soon.

Looking forward, consumer attitudes will play a large role in the extent to which growth slows.  The Conference Board reported earlier this week that confidence cratered in September.  However, the University of Michigan’s Consumer Sentiment Index ticked up during the month.  Still, all is not good in consumer land.  As the report noted: “Despite the high levels of confidence, consumers have also expressed rising levels of economic uncertainty.”  Political issues don’t usually have a lasting impact on household spending, but fears about jobs or incomes do.  So we need to watch this carefully.MARKETS AND FED POLICY IMPLICATIONS:Chair Powell needs some data to fight off the insurrection that seems to be building at the Fed.  Today’s data only muddies the waters.  Income is solid but spending may be moderating.  Businesses are not investing but given the rise in durable goods orders, manufacturing doesn’t look to be falling apart.  We seem to be on track for another roughly 2% GDP gain for the third quarter, which may seem bad but it is trend growth.  And the Fed’s inflation figure, if you consider the non-food and energy number, is nearly at target.  Next week we get the September employment report and I suspect it will be decent but not great as well.  That is, it will signal even more 2% growth.  So, what will the Fed do?  I have it sitting tight until it sees that there really is a downturn brewing.  Right now, that is not the case, even if the risks remain to the downside.  Actually, the risks could be rising.  No one knows how the president will react to the impeachment process, but if he lashes out by raising tariffs to show he is boss, then we could be in real trouble.  But that is conjecture, which is really all we have to go on right now.      

KEY DATA: Sales: +7.1%; Year-to-Date: +6.4%; Prices (Over-Year): +2.2%

IN A NUTSHELL:  “The housing market is stabilizing, which is good news.”

WHAT IT MEANS:  Housing has been a drag on the economy but that may be fading.  We had already seen that existing home sales rose in August and the improvement in sales was more than matched by a jump in demand for new houses.  The pick up in sales, though, was hardly universal.  New home purchases fell in the Northeast and Midwest, rose strongly in the South and surged by over 16% in the West.  When looking at sales for the first eight months of this year compared to 2018, we see a similar pattern.  Overall demand was up solidly but there were double-digit declines in the Northeast and Midwest that were more than offset by strong gains in the rest of the country.   As for prices, they increased modestly over the previous year.  The share of sales that were priced at or above $400,000 jumped from 27% in July to 37% in August.  That is pretty unusual and explains the nice gain in the median cost of a new home. However, prices have been largely flat or down for the past year, so I am not reading too much into the August gain.  MARKETS AND FED POLICY IMPLICATIONS:It is not likely that anytime soon, housing will once again lead the economy forward.  Rates are already incredibly low again and that really didn’t do much.  Worse, the disappointing performance of the housing sector occurred when consumer confidence was extremely high.  That is changing.  Yesterday, the Conference Board reported that its Consumer Confidence Index posted its largest decline in nine months.  The level is still high, but there has been clear deterioration in household views on both current conditions and the expectations of the future are faltering.  That creates concern that the housing market may stagnate again going forward.  We are close to completing the third quarter and there is little reason to believe that GDP growth will be significantly greater than 2%.  The government may have wound up spending money like crazy to beat the end of the fiscal year, but it would be better if the private sector, led the way.  As for the Fed, we will have to wait for Chair Powell to get out of his bunker and say something meaningful before we can determine when or if there will be another rate cut.  I think that the employment data will be key.  If we stay in the 150,000 to 175,000 range in job creation and the unemployment rate is largely stable, there would be little reason to do anything.  But, of course, that has been the economy and the Fed did cut rates.  So, if anyone knows what economic model Jay Powell uses to help him make his decisions, please tell me.  I have no clue.

KEY DATA:  Sales: +1.3%; Over-Year: +2.6%; Prices (Over-Year): +4.7%/ LEI: 0%/ Phila. Fed: -4.8 points; Jobs: +12.2 points; Expectations: -11.8 points

IN A NUTSHELL:  “All signs point to continued but sluggish economic growth. ”

WHAT IT MEANS:  The Fed cut interest rates again yesterday but the small reduction is not likely to do much. Consider one of the major “interest sensitive” sectors, housing.  The National Association of Realtors reported that existing home sales rose a touch in August, led by a solid increase in demand in the Northeast.  The level was the highest in seventeen months.  Sales gains were moderate in the Midwest, modest in the South but down in the West.  Both single-family and condo purchases improved at nearly the same pace.  As for prices, they were up at a decent but hardly excessive pace.  Basically, the housing market is neither a major positive or negative for growth.

Will the economy pick up from its more moderate pace in the near future?  The Conference Board’s Leading Economic Index doesn’t point to that.  For the second time in three months, the index was flat.  The report itself said it best: “The recent trends in the LEI are consistent with a slow but still expanding economy…”.  So don’t look for any major reacceleration in growth anytime soon, but a recession is not likely to take hold in the near future either.

The manufacturing sector has been coming back recently and the Philadelphia Fed’s manufacturing survey supported that view.  Yes, the overall index indicated that general business conditions in the Mid-Atlantic region moderated a touch in August into September, but the details of the report were generally good.  Orders still expanded solidly, backlogs built and hiring and hours worked were up.  However, optimism continues to fade.  The expectations index level was in the range we saw in 2007, also when the economy was slowing. 

Jobless claims rose modestly last week but the level remains extraordinarily low.  MARKETS AND FED POLICY IMPLICATIONS:  I read the FOMC statement and listened to Fed Chair Powell’s press conference but the truth of the matter is I am not sure the Fed knows what it is doing or what it should do.  Housing is stable to up and that is actually just fine.  We don’t want another bubble to form.  Given the lack of supply and changing demographics/tastes, the sector is not in bad shape. And small changes in rates will do little to change that.  It’s just that too many people want the hare rather than tortoise.  The markets want lower and lower rates so growth can accelerate.  That the lower rates may be creating major risks is not something investors tend to spend a lot of time thinking about.  If the future mattered, would we have had the cot.com or housing bubbles?  Feeding the beast is the greatest investor concern and a 25 basis point cut will not do much to stave off hunger pains.It will also not do much to “insure” the economy doesn’t go into recession if the trade war’s impacts worsen.  The idea that the Fed is taking out insurance with such a modest move is a joke.  And then there is the 2020 election.  Janet Yellen got fired for keeping rates too low for too long.  The same person who fired Yellen wants to fire Powell because he is not keeping rates at Yellen’s level.  And people want politicians to run the Fed.  Just what we need.  Anyway, the data are at least consistent.  They point to continued trend-level growth and no need for the Fed to do anything. 

In a Nutshell:  “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent.”

Decision: Fed funds rate target range reduced to 1.75% to 2.00%.

As expected, the Fed cut the funds rate today.  But while some were wishing and hoping for a half point or more reduction, the FOMC decided on a simple one-quarter point move. 

That’s the bare acts.  But the move was maybe the least interesting and important aspect of what happened.  First, the statement that was released was extremely upbeat about the economy.  Indeed, the description of household spending was even more positive than in the previous meeting’s statement.  And the forecast for 2019 growth was increased slightly.  Another way of saying this is: The economy is in good shape so they had to cut rates.

Actually, the major concern was the trade war, which has created slower business spending and global economic concerns.  That was what Fed Chair referenced often in his press conference to explain why the FOMC was worried enough about growth to cut rates.

The second eye-opener was the extent to which the Fed is split.  Three members voted against the move, which is extremely unusual.  Even more fascinating was that two didn’t want to reduce rates at all while the third wanted to lower rates by 50 basis points – polar opposites.

But what to do today was not really the major point of contention.  In looking at the dot-plot of expected future rate cuts, there was no consensus about whether there should be another rate cut.  More members expected rates to be at or even above the new level than expect it to below.  That is the same for 2020.  The median estimate for the funds rate for this year and next was 1.9%, which is precisely where it is now.  In other words, there is no consensus for another rate cut.

There were a couple of other important tidbits that came out of the Fed Chair’s press conference.  First, he made it clear the Fed had ruled out negative interest rates.  Yeah!  Second, Mr. Powell focused on the economy softening and noted often that if it did so, the Fed would embark on a sequence of rate cuts to try to keep the expansion going.  While cutting rates significantly when facing a major slowdown is not surprising, what is interesting is that he didn’t talk at all about the possibility of the economy accelerating and what that might mean for monetary policy.  I make that out to be a bias toward weaker growth and lower rates. 

So, what should we take away form today’s actions?  Most importantly, don’t assume there will be additional rate cuts.  However, if the trade war worsens and the threatened additional tariff hikes are implemented, then the likelihood of further rate cuts would rise. 

Essentially, the fate of the world’s economy rests on trade war strategy and the hotter the war, the greater the possibility of a global economic slowdown.  While the Fed would react by reducing rates, it is not clear if it has the weapons to counteract an emerging global recession.  So hold on to your wallets people, we are in for a rough ride. 

(The next FOMC meeting is October 29-30, 2019.) 

KEY DATA: Sales: +0.4%; Ex-Vehicles: 0%/ Import Prices: -0.5%; Nonfuel: 0%; Fuel: -4.3%; Export Prices: -0.6%; Farm: -2.5%

IN A NUTSHELL:  “Consumers are still consuming, but at a somewhat lesser pace.”

WHAT IT MEANS:  The broad shouldered consumer continues to spend, though it may be that the declining level of confidence is causing some easing in the exuberance.  Retail sales rose more than expected in August but that was due to a surprisingly large jump in vehicle sales.  It is tough to get a handle on vehicle demand since a number of large companies are no longer releasing monthly sales numbers, only quarterly ones.  The Census Bureau does its own survey so it is not as impacted greatly by the change in practice.  That said, it is good that households continue to purchase big-ticket items.  People also bought heavily online, spruced up their homes and purchased lots of health care products and sporting goods.  There was a sharp decline in gasoline purchases, but chalk that up to falling prices, which were off more than the drop in sales.  There were some weak segments of the report.  Apparently, households went on diets as sales of both food at home and away were down.  General merchandise, clothing and furniture sales also declined.  In general, though, this was a decent but not great report.

On the inflation front, I am once again dusting off my microscope so I can see where inflation may be coming from.  It is not from imports.  Prices of foreign goods were down in August, led by a cratering of petroleum costs.  Imported food prices eased back, capital goods costs were flat while vehicle and consumer goods prices moved up modestly.  Basically, don’t look for imports (pre-tariff) to add to inflation.  On the export side, the trade war battered farm sector saw its export prices fall sharply once again.  That wiped out the gains posted in June and July.  Businesses selling capital and consumer goods overseas saw their prices go nowhere while vehicle prices fell.  MARKETS AND FED POLICY IMPLICATIONS:The more data that are released, the more it is clear that growth may have moderated but it hasn’t cratered.  If the Fed were a “data-dependent” organization, it would have little reason to fear a recession.  Actually, that is precisely what Fed Chair Powell said recently.  So, why are the markets expecting a rate cut?  Because, as I said, the Fed is no longer data-dependent.What it is depending on is anyone’s guess.  Maybe it is fear of the equity markets not liking it if it doesn’t do what the equity markets want it to do.  Maybe it is Jay Powell’s gut.  It ain’t the data, that’s for sure.  As for the markets, it is still all about the ebb and flow of the trade talks.  The Chinese seem to be up to their usual tricks.  They say they are willing to get married.  They start walking down the aisle.  But ultimately, they stop and say that they want to think it over more and walk away.  They have done all of those during the eighteen months of the trade war and maybe this time it is different, but I will believe it when I see it.  Yes, I am a cynic.  The strategy of putting off doing what they don’t want to do has been successful for decades and with the latest Chinese economic data seemingly pointing to a stabilizing economy, the Chinese may be encouraged to start the marriage process again.  Just don’t expect them to say “I do” anytime soon.  At least I don’t expect that to happen.  But hope springs eternal in the hearts and souls of investors, so any movement forward is received with open arms – and higher prices.   

KEY DATA: CPI: +0.1%; Over-Year: +1.7%; Ex-Food and Energy: +0.3%; Over-Year: +2.4%/ Real Earnings: +0.4%; Over-Year: +1.5%/ Claims: -15,000

IN A NUTSHELL:  “Whether or not inflation is low depends upon the measure you use.”

WHAT IT MEANS:  Is inflation tame?  The answer is, as it usually is with economic data, it depends.  Today’s inflation report was the August Consumer Price Index.  The rise was modest, as long as you include food and energy, which tend to bounce around.  Indeed, energy costs fell sharply while food costs were flat.  Excluding those components, though, consumer prices were up fairly sharply. What is driving that increase?  In August, it was a number of factors.  If you eat out, your tab keeps rising faster than most other goods.  If you are feeding a cake, cupcake and cookie habit, like me, you are paying more for those as well.  Medical expenses are once again soaring.  Men’s clothing prices are jumping as are women’s footwear.  Information expenses have risen solidly three of the past four months.  Shelter costs are seemingly always rising and if you travel, not only are airplanes uncomfortable but they are more expensive.  And used vehicle prices are soaring.  In other words, there are lots of goods and services whose costs are moving upward, at least according to the Consumer Price Index.

One of the problems with rising inflation is that it eats into consumer spending power.  At least in August, the modest top line increase allowed inflation-adjusted earnings to surge.  Both hourly wages and hours worked were up nicely and the inflation offset was limited.  That led to a strong gain in consumer spending power.  That said, the 1.5% rise over the year is nothing great and makes it hard to see how consumers can continue to keep the economy growing strongly without some help from other sectors.

One bit of really good news was the sharp decline in weekly jobless claims.  It is near its historic low level.  That shows that the labor market remains tight, which should limit the deceleration in wage gains.  MARKETS AND FED POLICY IMPLICATIONS:  The Fed is always mentioning that inflation remains below target, though they continuously state that it will eventually get back there.  The Fed uses the Personal Consumption Expenditure deflator as its benchmark and indeed, when you exclude the volatile food and energy components, inflation is below the 2% target.  But that is not the case with other measures.  The core Consumer Price Index, which excludes food and energy, is now rising faster than it has in eleven years.  There are a number of other indices that use the CPI but try to factor out volatile elements.  The Cleveland Fed’s median and trimmed mean CPIs and the Atlanta Fed’s Sticky Price CPI are also up at their highest pace this decade. In other words, there are some reasons to believe inflation is not nearly as tame as Mr. Powell thinks.  We will get the next reading of the PCE price index in two weeks and that is likely to remain below target.  What will be important is how much the core index rises and how close it gets to 2%.  The July increase over the year was only 1.6%, so it still has a way to go.  As for the markets, it is still all about trade and when hopes rise that the war will not go nuclear, markets do well.  When threats of a greater war are raised, the fallout shelter becomes a favorite place to hide.Right now, the news is positive.  If you know what it will be tomorrow, please tell me so we both know. 

KEY DATA: Jobs: 130,000; Private: 96,000; Revisions: -20,000; 3-month ave.: +156,000; Unemployment Rate: 3.7% (unchanged); Wages: +0.4%

IN A NUTSHELL:  “The softening in job growth should surprise no one but it doesn’t mean the economy is headed toward a recession right away.”

WHAT IT MEANS:  The job slump, if you want to call it that, continues.  In August, payrolls rose moderately, though much of the gain was from government hiring.  The decennial census temporary job surge is starting and that added 25,000 workers, so you can say the top line number was even weaker than it looks.  Indeed, the relatively modest private sector gain better matches what happened.  But the details are hardly negative.  Health care, professional and technical services, finance and construction all posted solid increases in payrolls.  Manufacturing was up a touch as well.  But retail keeps shrinking and transportation and warehousing, which were expected to lead the way, has been largely flat lately.  That may be an early sign that the slowdown is gaining steam.  Another concern is that only 53.5% of the industries posted gains.  That was the second lowest percentage in 9.5 years, a further sign that firms are becoming more cautious in their hiring.

As for the unemployment rate, that was unchanged as a surge in workers into the labor force was largely absorbed.  The participation rate moved up, which is nice to see.  But maybe the best data came from the hours worked and wages section of the report.  Hourly wages were up a strong 0.4% and a solid 3.2% over the year.  With hours worked rebounding, weekly earnings surged 0.7% and have risen 2.9% over the year.    

MARKETS AND FED POLICY IMPLICATIONS:  I guess if you forecast something long enough, it will eventually come true and that is the case with the slowdown in job growth.  I, and most of my colleagues, have been expecting the large job gains we saw last year fade into the past. Well, we are adding workers at a slower pace that is more consistent with the expansion.  But it is clearly enough to keep the unemployment rate from rising.  Thus, while this is not a very good report, it is hardly a bad one, especially given the rebound in earnings.  Households still have the income to keep spending and I suspect their level of confidence, which has been shaken by the trade war, will likely either stabilize or slow its decline.  This report also has something for everyone at the Fed.  If you want to cut rates, just cite the more modest payroll rise.  If you want to keep rates stable, point to the strong gain in income.  Indeed, that is the exact conundrum the Fed faces.  The data have moderated and in some cases softened, but they are hardly pointing to a recession.  Yet the Fed’s fearless leader, Jay Powell, seems to be quaking in his wing tips.  And the markets are screaming for a fifty basis point reduction.  The data do not support a half-point rate cut and the disagreements at the Fed are likely to restrain a move greater than a quarter point.  Still, Chair Powell may claim to be data driven but he is flying by the seat of his pants and that may be on fire.  So don’t rule anything out except maybe no move.  The low number of jobs added probably has taken that off the table for the September 17-18 FOMC meeting.   

KEY DATA: ADP: 195,000; ISM (NonMan.):  +2.7 points; Orders: +6.2 points; Employment: -3.1 points/ Layoffs: 53,480/ Claims: +1,000

IN A NUTSHELL:  “While all eyes are on tomorrow’s employment report, today’s data reinforce the view that the economy continues to hold its own.”

WHAT IT MEANS:  The job market will be the key factor if we are to escape a recession created by an extended trade war.  Thus, any report that provides insight into what is happening will be analyzed closely.  Today, the data pointed mostly to continued good gains in jobs.  The ADP reading of August private sector employment gains came in well expectations.  There was a surprisingly decent rise in manufacturing payrolls and less surprising surges in education and health and leisure and hospitality.  Schools are going back earlier and it was a generally strong tourism/vacation year.  Otherwise, there were really no major outliers. 

The rest of the labor market data were mixed.  Supporting the idea that the labor market has not faltered was the modest rise in jobless claims last week.  The level remains near historic lows.  On the other hand, the Challenger, Gray and Christmas report on layoff notices was pretty disturbing.  The number was the highest for an August since 2009.  We don’t want to see any employment data point compared to any 2009 number!  For the first eight months of this year compared to last year, layoff notices are up over 36%.  That is worrisome and might be an early sign of building problems.

While manufacturing may be the first casualty of the trade war, the remainder of the economy remains solid.  The Institute for Supply Management’s NonManufacturing rose sharply in August as new orders surged.  However, hiring looks like it is moderating.

MARKETS AND FED POLICY IMPLICATIONS:  The labor market appears to be in decent shape, but how strong is unclear.  The August employment report, that we get tomorrow, may tell us more.  The consensus is for job gains to be in the 170,000 range, though I think that is high.  I just don’t see manufacturers adding workers as the ADP report indicated.  But I am not looking for a really weak number.  I think something in the 150,000 range looks reasonable.  What I am watching more carefully is the unemployment rate.  It is still extraordinarily low, but it looks like the bottom has been reached and it is slowly inching up.  I don’t rule out it ticking up to 3.8%.  I have to laugh writing that there would be concern with a 3.8% rate since historically, it is really low.  But direction matters and a further rise will be what is reported and what consumers see.  We need household confidence to remain strong and rising unemployment rates, even if they are from a low level, don’t create warm and fuzzy feelings in workers.  As for the markets, it is still all about the trade war and anytime investors hear that there might be an armistice, they celebrate.  But after the celebration, we usually get a hangover driven by the reality that the war is not over and that is likely to be the case once again.  And that means investors should discount the daily wild fluctuations.  Otherwise, we may see more jobs in the health care sector as people get their ulcers treated.