KEY DATA: Sales: +4.4%; Over the Year: +5.9%; Prices (Over-Year): +6.8%; Inventory (Over-Year): -6.6%

IN A NUTSHELL: “Home sales are on the rise despite the rapid rise in prices.”

WHAT IT MEANS: Economic growth during the first part of the year may have been disappointing but the housing market decided not to participate in the slowdown. According to the National Association of Realtors, sales of existing homes rose solidly in March with the pace being the highest since February 2007.   The recession is over, long live the recovery, at least the housing rebound. The March increase was spread across most of the nation, though there was a small decline in the West. It was also fairly evenly distributed between single family and condo purchases. The increase in demand is happening despite a sharp rise in prices. That is the result of limited inventory. The number of homes for sales was down quite a bit from a year ago despite an increase in March. A rising sales pace and a declining supply can only lead to one thing, higher prices and we certainly are getting that.

MARKETS AND FED POLICY IMPLICATIONS: Is the housing market in good shape or is it in trouble? Rising sales are a sure sign that there are lots of people out there who are ready, willing and able to purchase homes. But the problem is that there simply is not enough product for buyers to choose from. Housing starts are starting to come back but probably need to rise about 20% to 25% to reach levels needed to supply the demand. Meanwhile, despite rising prices and a shortening in the time it takes to sell houses, homeowners are just not bringing their units on to the market. Right now, the constraining factor in the market is supply, both new and existing, and as long as that persists, prices will rise sharply. The threat that creates is that mortgage rates might actually start rising again. The combination of higher rates and higher prices should ultimately slow down sales, but that is not likely to happen for quite some time. It’s a sellers market and it is likely to remain that way for much of the rest of the year.  

KEY DATA: ADP: +263,000; Manufacturing: 30,000; Construction: 49,000/ ISM (NonManufacturing): -2.4 points; Employment: -3.6 points/ Ads: +102,000

IN A NUTSHELL: “I guess you don’t need strong economic growth to get strong job growth.”

WHAT IT MEANS: The economy didn’t grow a whole lot during the first quarter but if you believe the ADP estimate of private sector job gains, firms added workers like crazy in March. According to their estimates, private sector companies hired even more people last month than they did in January or February, when payroll gains were really strong. And the increases were in just about every category, from small to large, goods producing and services. Eye-opening were the huge increases in manufacturing, construction and the leisure and hospitality sectors. I get the manufacturing numbers, as the supply managers indicated they upped their hiring. But construction hiring was robust in a month where there was unsettled weather. And were people really out vacationing in a March that didn’t contain Easter? Okay, enough for my uncertainties. Even if this is an overestimate of the increase we will see on Friday, it does point to a clear strengthening in the labor market.

How strong is the labor market? Well, the Conference Board reported that online want ads rose decently in March. But the increase didn’t come close to wiping out the huge decline posted in February, so we cannot say the downward trend in job ads that has been going on for over a year has been stopped. Still, demand did rebound across the nation and in eight of the ten largest occupational categories.

There were also some questions about whether the labor market really is picking up steam that came out of the Institute for Supply Management’s March Non-Manufacturing survey. The overall index fell moderately, with business activity growing at a much less rapid pace. The employment index fell sharply and while it is still showing that firms are hiring, they are not doing so at a robust pace. Given that the non-manufacturing portion of the economy accounts for over 70% of total employment and almost 84% of private sector payrolls, it is hard to get strong job gains without this portion of the economy adding workers like crazy.

MARKETS AND FED POLICY IMPLICATIONS: The robust ADP report is likely to dominate the discussion today as it sets up the possibility of a stronger than expected jobs number on Friday. I am still not confident that we will see another really good payroll increase. While consumer confidence has soared since the election, consumer spending has been disappointing. Rising business optimism is nice, but firms don’t add workers without a real need for them. Hope for the future is one thing. Actually seeing that those prayers are answered is something else. Regardless, investors will likely take today’s data and run with it. As for the Fed, these are the types of reports that provide some reason to think that their expected rate hike strategy makes sense. If employment is surging, it is likely wage gains are accelerating. That would mean more future spending and higher inflation, which is what the Fed wants to see. But let’s wait until Friday before we start patting the Fed members on their backs.

 KEY DATA: Deficit: down $4.6 billion (-9.5%); Exports: +0.2%; Imports: -1.8%/ Home Prices (Monthly): 1%; Over-Year: 7%

IN A NUTSHELL: “It was nice to see the trade deficit shrink so much, especially given all the other factors that seem to have slowed growth early this year.”

WHAT IT MEANS: After the huge rise in the trade deficit was reported for January, it looked like growth would be greatly restrained by the foreign sector. Well, maybe not so much. The trade deficit narrowed sharply in February. Imports were down, led by large drops in demand for foreign vehicles and cell phones. Swings in Chines activity around the Chinese New Year may have been at work here. We did buy more foreign food, capital and consumer goods as well as oil. On the export side, weakness in aircraft shipments and the unwinding of the soybean anomaly was offset by increases in sales of oil, vehicles and pharmaceuticals. Adjusting for prices, it looks like the first quarter trade deficit is pretty much the same as it was in the final quarter of last year. While I wouldn’t be surprised if the deficit widened in March, the total impact on growth should be relatively minor.

Housing prices continued on their inexorable upward trend in February. According to the latest report by CoreLogic, costs soared and are up sharply since February 2016. And that is raising questions about the sustainability of the market since it was indicated that much of the pressure is coming from the lower end of the market. If mortgage rates rise sharply, new-buyer affordability may be hurt. That said, I still believe that we need the “churn” in homes to rebound. With equity rising in most metro areas and many hitting new highs, the ability to sell is improving. Now we just need the desire to find a new home to also make a return appearance. For the price increases to be slowed, the inventory of homes on the market has to rise sharply. Otherwise, we could start seeing new local bubbles forming. Indeed, by CoreLogic’s calculations, in February, 102 markets were considered to be overvalued.

MARKETS AND FED POLICY IMPLICATIONS: Growth in the first quarter is likely to be modest, once again. At least now it looks like it may not be pathetic. Given the January trade numbers, we could have seen something close to 1% but I suspect it will be in the 1.5% to 20% range. In other words, the more things change, the more growth stays the same. Given that expected growth rate, it is hard to see how we can be creating 237,000 jobs per month, as we did in January and February. That does not bode well for Friday’s jobs report. Meanwhile, the accelerating price gains in home prices have yet to bring out the sellers and we are already starting to see the return of some housing bubblets (I am not ready to call them bubbles just yet). Economic uncertainty remains a concern and now there are rumblings of attempts to revive the Republicancare bill. So add political uncertainty to the mix. Nevertheless, investors seem to be confident that everything will turn out just fine.

KEY DATA: Consumption: +0.1%; Disposable Income: +0.3%; Prices: +0.1%/ Confidence: +0.6 point

IN A NUTSHELL: “Despite high levels of confidence, the consumer has become cautious and that does not bode well for growth.”

WHAT IT MEANS: It is hard to grow the economy strongly if people don’t go out and spend and that appears to be the case so far this year. Consumption barely budged in February and when adjusted for price increases, it went nowhere. That comes on top of a decline in price-adjusted spending in January. Demand for both durables and nondurable goods was soft while the increase in spending on services was modest. In other words, we didn’t buy a whole lot of anything. This cautiousness is not being driven by terribly weak income gains. Disposable income, which excludes taxes, increased moderately. Even adjusting for inflation, income was up at an acceptable pace. Wages and salaries are rising decently, which should make people happy.

One thing is certain; the failure to spend is not due to consumers being depressed. While the University of Michigan’s Consumer Sentiment Index rose less than expected, it is still at a pretty high level. Unfortunately, the political divide remains as wide as ever. As the report notes, “Democrats expect an imminent recession, higher unemployment, lower income gains, and more rapid inflation, while Republicans anticipate a new era of robust growth in incomes, job prospects, and lower inflation.”  Either the sky is falling or happy days are here again. The reality is neither and that may be why spending is soft. The point is that with politics driving perceptions, the consumer confidence numbers are not likely to tell us much, if anything, about spending.  

MARKETS AND FED POLICY IMPLICATIONS: People have the money to spend and are confident, but they are just not going out and opening their wallets. So far this quarter, consumption is largely flat and since we are talking about two-thirds of the economy, it is hard to see how growth can be anything but disappointing. The Blue Chip consensus is 1.7%, which is below the 2.1% posted in the final quarter of 2016. And the forecasts are trending downward. Today’s consumption number may make it really hard to even get to that pace. Adding to the uncertainty are the implications of the collapse of the AHCA.  What has been lost in the gloating and recriminations is that optics matter. If there is to be progress on tax reform, the most important elements of the proposals have to pass muster with the public. Otherwise that plan could be doomed to failure as well. And an inability to pass a comprehensive tax reform package would likely have significant implications for the stock markets, the Republican party and, of course, the administration. It might also call into question the ability of the Fed to raise rates as predicted. The Obamacare repeal failure places a lot in jeopardy and ups the stakes to get the tax cuts done. It should be an interesting spring and summer, as the Republican leadership has indicated they hope to get a tax cut plan through by August.

KEY DATA: IP: 0%; Manufacturing: +0.5%/ LEI: +0.6%

IN A NUTSHELL: “With manufacturing taking off, the economy is moving forward solidly even if consumers don’t want to spend.”

WHAT IT MEANS: It looks like the economic laggard, manufacturing, is now the economic leader. Industrial production was flat in February, but that was entirely due to a major decline in utility production. An exceptionally warm month has a tendency to do that. Wait until you see what the March numbers look like for utilities. They will probably be off the charts. But more importantly, the nation’s manufacturers are showing renewed vigor. The Federal Reserve reported that output surged for the second consecutive month, with both durable and nondurable goods production up sharply. The economy is also being helped by the recovery in the oil and gas sector, which was up for the ninth consecutive month. Oil rig counts are still rising, despite the recent softening in prices – or maybe the prices are softening as a consequence of the rising count. Regardless, this sector is doing better.

Will we see further gains in the economy? If you believe the Conference Board’s Leading Economic Index, the answer is absolutely. This measure of future activity has posted three large gains in a row and after six consecutive increases, it is now at its highest level in more than a decade. It was also reported that the gains were spread across the economy, which is pointing to moderate economic growth ahead.

The University of Michigan’s mid-month reading on consumer confidence was up slightly from the end of February. Given all the chaos in Washington, that was a bit surprising.

When the data were broken down by Democrats, Republicans and Independents, it became clear that the political divide is a chasm. Democrats think a recession is coming while Republicans believe that happy days are here again. Independents take the middle ground, which seems to be where we really are: Not hot, not cold but not really just right.

MARKETS AND FED POLICY IMPLICATIONS: As I like to say, as consumers go, so goes the economy. Well, wrong again, or maybe not necessarily. First quarter growth is like to disappoint, as households are just not doing a lot of shopping. But that is not the full economic story. There are other segments that are starting to pick up the slack. Manufacturing is making a major recovery, led in part by renewed activity in the energy sector. When oil prices collapsed and energy companies stopped spending, the companies that supplied goods and services to that segment of the economy got hurt. Turnaround is fair play and that is happening. The huge political divide raises serious questions whether the confidence measures have any economic meaning. I think it is best to simply recognize the rise in confidence but not assume it means anything as far as spending is concerned. And that should concern investors. Inflation-adjusted income is once again flat and if consumers are not going to spend strongly, there is an upper bound to growth. Europe is recovering, but it is hard to believe earnings will soar if domestic consumption is mediocre. That has implications for stock price valuations.

KEY DATA: Starts: +3%; Permits: -6.2%/ Openings: +87,000; Hires: +137,000; Quits: +135,000/ Phila. Fed: -10.5 points

IN A NUTSHELL: “The rising number of people leaving jobs is a further sign that the labor market is really tight.”

WHAT IT MEANS: Yesterday, the Fed made its first of what will likely be several rate hikes this year. A strengthening economy, rising inflation and significant fiscal stimulus could mean a greater total increase than the members seem to indicate. So, it’s time to get back to economic fundamentals, at least until the full details of the spending and tax proposals are released. First, the housing market is getting better. Earlier this week we saw that the homebuilders’ level of confidence was the highest in twelve years. That optimism led to a solid rise in housing starts in February. The single-family portion of the market did all the heavy lifting as multi-family construction eased. There was a warning in the report. Permit requests dropped sharply and are now running behind starts. We could see a modest, short-term slowdown in construction activity.

The huge rise in payrolls over the past two months has raised the specter of a really tight labor market. Yes, that may sound strange since businesses seem to be able to find the workers they need. But given the reality of labor force growth and the likely further decline in the participation rate as we transition from boomers to Millennials, strong job growth doesn’t look sustainable. According the Bureau of Labor Statistics’ closely followed JOLTS report, job openings rose in January, though not greatly. Much more importantly, the quit rate, which is a proxy for the willingness to tell management to take this job and shove it, is back at the high of this recovery and near the peak seen in the 2000s expansion. In other words, workers are starting to believe that they no longer need a new job before they leave their old one. That’s confidence.

The manufacturing sector has really made a turnaround and that appears to be continuing. The Philadelphia Fed’s current activity index did fall sharply in early March, but that was not a surprise given the huge surge posted in February. The level of the index remains extremely high despite the decline and the details were impressive. Orders are booming, backlogs are swelling, hiring is strong and workers are being worker harder and longer because firms cannot find suitable employees. Over sixty percent of the respondents to a special question said they were experiencing labor shortages. Over forty-five percent said they had to raise wages to attract skilled workers. Sounds like a tight labor market to me.

MARKETS AND FED POLICY IMPLICATIONS: Today’s key numbers centered on the labor market. The growing number of people quitting their jobs and the high percent of firms reporting they cannot find skilled workers and are having to pay up for the ones they get point to a labor market that may be hitting the wall. We are still not seeing that in the overall data, as inflation-adjusted wages are going nowhere. Until real wages start rising faster, overall consumer demand will remain moderate and the Fed will be able to sustain a slow upward path of interest rates. But the Philadelphia Fed and JOLTS report are warnings that businesses ability to hold the line on wages may finally be ebbing. As for investors, all eyes are turning toward the budget process. Today’s budget summary release is just the starting point for the discussion. We don’t have any tax changes or any infrastructure spending information. We may not know until May what the administration wants to do and then Congress has to actually pass something. Simply put, fiscal stimulus is months away.