KEY DATA: Deficit: $48.3 billion ($6.5 bil. wider)/ Home Prices (Year-over-Year): 6.9%

IN A NUTSHELL: “The stronger dollar is beginning to bite into exports and the trade deficit is soaring as a result.”

WHAT IT MEANS: When you have the one solid economy in the world and your currency is rising, you start to price your goods out of the market that is precisely what is happening.   U.S. exports fell sharply in August, declining by over 3%. The only category that posted a gain was capital goods, as aircraft shipments surged. Otherwise, we saw declines in sales of food, consumer goods, vehicles and industrial supplies. Oil was down, but that was more a price issue than a demand slowdown. Meanwhile, we bought a lot of goods from the rest of the world. Indeed, demand for almost everything except vehicles and petroleum rose. Looking across the world, it is hard to find a country that bought more of our products. But, lots of countries ramped up their sales to us. Not surprisingly, Chinese exports to the U.S. rose sharply while their purchases of U.S. products continued to decline. This is not a new trend: It has been going on for about a year now. Actually, that is a pattern that has emerged with other major trading partners such as Mexico and Canada.

While the world may be having issues, the U.S. economy, especially the housing market, is not. CoreLogic reported that home prices surged 1.2% in August and were up by nearly 7% over the year. A growing number of metropolitan areas are now considered to be “overvalued”. The strong price increases are lifting a lot of boats from underwater to good condition. That should create increasing numbers of homes on the market and since inventory has been a restraining factor, sales should rise. But as more resales hit the market, housing starts increase and ultimately mortgages rise, the price increases should moderate.

MARKETS AND FED POLICY IMPLICATIONS: The U.S. is the market of last resort and foreign companies are shipping everything they can over here. At the same time, the dollar is creating pain for our exporters. Though trade should restrain third quarter growth, domestic economic conditions are still quite good. When you adjust for prices, exports may be slipping, but they are hardly crashing and burning. Firms are fighting hard to keep their share of the foreign markets. Also, housing remains quite strong. While others bemoan price increases, I keep arguing that people can sell their homes only if they have enough equity to allow them to sell. Nothing helps housing supply more than rising prices, so I am happy to see the increases and see that they are spreading across the nation. As for the markets, isn’t it great that the investors think bad news is good news? Who cares what that really means: All that matters is the Fed may put off raising rates and the liquidity will keep on rolling into the financial markets. Yes, I am being sarcastic. Do these data have any implication for Fed policy? Probably not. Former Fed Chair Ben Bernanke comments this week were taken to imply the Fed is on hold for a long time, or at least until the 2% inflation target is clearly in sight. Mr. Bernanke was a great crisis manager, but clueless about the economy when it was not in trouble. Remember, he claimed the housing bubble was slowly deflating. Enough said.

KEY DATA: ADP: 200,000; Manufacturing: -15,000; Construction: +35,000/ Help Wanted: -138,500

IN A NUTSHELL: “Job growth looks like it is still strong so the softening in want ads is somewhat puzzling.”

WHAT IT MEANS: Friday we get the September employment report and unless there is an outsized number of positions added and the unemployment rate falls below 5%, it will not likely cause anyone to think the Fed members would consider raising rates at the next meeting. That said, it could be solid enough to bolster the belief that the FOMC will actually do something, other than creating confusion, at the December meeting. ADP estimated that the private sector added new positions at a solid but not spectacular pace in September. While the manufacturing sector is being buffeted by the fall in energy prices and the rise in the dollar, construction seems to be taking off. There was an oddity that bears watching: The largest firms are the ones hiring. That had not been the case for quite some time. On the other hand, small business job gains were modest. This segment had been critical to sustaining the solid payroll increases we have been seeing. Why this pattern, which is opposite to the norm, occurred in September is anyone’s guess.

While hiring continues unabated, firms seem to be more cautious in advertising their open positions. The Conference Board reported that online help wanted ads fell in September. The level is still really high, so don’t take the decline as indicating the labor market is weakening. But we seem to have hit a lull in the growth of new ads. Firms may be realizing that if they cannot fill the openings they have already posted, there is no reason to advertise lots of new ones. Where are the new jobs? Not surprisingly, in computers, health care and management.

MARKETS AND FED POLICY IMPLICATIONS: The labor market continues to be strong and we are likely to see that on Friday. The consensus is for about 200,000 new positions being added and the unemployment rate staying at 5.1%. That would signal that conditions are solid, even if payrolls gains are not quite as strong as they were last year. Basically, the report would be the equivalent of “more of the same” which for the Fed means they don’t have to make a decision right away. As for investors, they are probably just glad to see the quarter end and hope that the final quarter will be better. Since the expectations are for a non-market moving report on Friday, other factors, such as oil, commodities and international issues should dominate, at least until 8:30 AM on Friday. The one warning I have is that the jobs data tend to have periodic surprises. We haven’t had an outsized move, be it on the upside or the downside, for a while. If I had to guess, a surprise would be on the upside, but I have been too optimistic for several months so I am not putting my estimate where my fears are.

KEY DATA: Confidence: +1.7 points; Current Conditions: +5.3 points/ Home Prices: +0.4%; Year-over-Year: +4.7%

IN A NUTSHELL: “Despite the volatility in the markets, households are still confident, which means they should keep spending heavily.”

WHAT IT MEANS: When the University of Michigan’s mid-September reading on consumer sentiment was released, we saw a sharp decline. But that may have only been due to the shock of the wildly fluctuating stock markets. The final reading for the month was u from that initial level and that trend was reinforced as the Conference Board’s Consumer Confidence Index rose in September. People tend to spend money when they are comfortable about their current situation, especially their jobs, and they expect their incomes to grow. That is pretty much what the report indicated. The Present Situation Index jumped and the percentage of people saying they expect their incomes to rise in the next few months also was up solidly. There is some concern about the future, though. Whether that is due to the stock market declines or some issues finding jobs is not clear.

The data on the housing market remain solid. The S&P/Case Shiller national home price index rose moderately in July and over the year, it is up at a pace that is not excessive. That is not to say that there aren’t housing price surges occurring in some parts of the nation. Since July 2014, prices rose by double-digits in San Francisco and Denver and by 6% or more in Dallas, Portland, Las Vegas, Los Angeles Miami and Seattle. The national index is now only about 7% below the peak it reached in February 2007.

MARKETS AND FED POLICY IMPLICATIONS: We tend to watch the train wrecks, not the trains that merrily roll along and that seems to be the case right now when it comes to the economy. While some firms that have been battered by weak commodity prices are cutting back, the rest of the business sector is merrily rolling along, adding jobs, expanding output and making money. However, the losers seem to be setting the tone of the discussion. But you don’t get 3.9% GDP growth one quarter and have that followed up by something in the 2.5% range that is the current consensus for the third quarter if most firms are not doing well. And should we really worry about firms that might have had decent foreign sales but because of currency translation issues, their reported earnings are down? I don’t think that really matters, except for some quarterly numbers. Consumers are holding in there and that is driving domestically-oriented business activity. The economy is in good shape, no matter what is happening in Wall Street and I suspect the Fed members recognize that. Indeed, the Gang that Can’t Communicate Straight seems to getting its act together as another FOMC member, San Francisco Fed President Williams, has come out and indicated he thinks rates should rise this year. The ducks are getting in line, even if there are still some who are off on their own. While the markets expect a rate hike next year, most economists are now in the December camp, and that includes me.

KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: 0%; Excluding Food and Energy: 0.1%/ Pending Sales: -1.4%

IN A NUTSHELL: “Consumers are spending their growing incomes and that should help the confused members of the Fed make up their minds about raising rates.”

WHAT IT MEANS: If the Fed members need data that show the economy is in good shape, all they have to do is look at the consumer spending and income numbers. Consumption jumped in August after rising solidly in July, indicating the households are out there doing their part to make sure that the economy is strong. We knew that vehicles were flying out of showrooms, but people also spent heavily on nondurable goods and services. Services, which are two-thirds of spending, had been lagging until this year and the rise we have seen continues unabated. So far this quarter, adjusting for inflation, consumption is growing at a very respectable 3% pace. Can this pace be sustained? Given the income numbers, absolutely. Disposable income, which is what we actually have to spend, not what we earn, rose strongly for the fifth consecutive month. Even adjusting for inflation, household earnings are rising solidly. The key has been a rebound in wages and salaries. They are now growing decently and given largely nonexistent inflation, consumer spending power is up a robust 3.7% since August 2014.

On the housing front, the National Association of Realtors reported that pending home sales fell in August, which was unexpected. Only in the West did contract signings rise. Demand is up solidly over they year, but the rate of increase is slowing, in part because of higher prices but also because there is not much inventory to choose from. Black Knight Financial reported that their National Home Price Index rose moderately in July and is up 5.3% over the year. The Index is only 5.5% below the peak reached during the housing bubble.

MARKETS AND FED POLICY IMPLICATIONS: Fed members, including Chair Yellen and NY Fed President Dudley, are trying to ease the confusion created after the last FOMC meeting. While that may have be an heroic task given the Tower of Babble that the Fed has become, today’s talk by Mr. Dudley did reinforce Chair Yellen’s Thursday’s comments that the suddenly critical international events were really not that important, so never mind. Mr. Dudley also reiterated that he thought rates would rise this year and inflation could actually reach the Fed’s 2% target next year. This is the person who warned that a rate hike was “less compelling” just before the last meeting, so listen carefully to his words. The Fed members, at least those in favor of raising rates soon, look like they got the message to talk with a unified voice. That voice says rates will be increased this year, so maybe we should believe them. Maybe. Clearly, the U.S. economy is growing solidly and if you believe the Blue Chip Forecasters panel, of which I am a part, we should get above-trend growth once again in the third quarter as well as next year. Panelists also expect inflation to exceed 2% soon. Conditions are either already in place, or are expected to be in place in the foreseeable future, for the Fed’s growth and inflation targets to be met. Whether the members act or not this year, though, remains anyone’s guess.

KEY DATA: GDP: +3.9% (from 3.7%)/ Confidence: down 4.7 points

IN A NUTSHELL: “With the economy in good shape, Chair Yellen’s strong hints that hike this year is likely have to be heeded.”

WHAT IT MEANS: Second quarter GDP was revised up again. Consumers spent even more than thought and business construction was actually decent. On the other hand, the inventory build was a little less. There was also an upward revision to profits, which grew a little faster than initial estimated. Overall, this report reminds us that the U.S. Economy is in good shape.

Consumer confidence faded in September as the University of Michigan’s Consumer sentiment index fell fairly solidly. However, this was likely due to the wild volatility in the equity markets early in the month. Indeed, confidence rose from the mid-month reading.

Chair Yellen’s Comments and Fed Policy: Last night, Fed Chair Yellen gave a speech that should be reviewed closely. Yes, she reiterated a lot of what had been said, but there were some clear messages that she was sending. First, She once again stated that she and most other Fed members expect to raise rates this year. As today’s data show, the economy can absorb a rate hike. As for the Chinese wrench that was thrown into the rate hike gears, she noted that “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In other words, never mind. On the inflation front, she is sticking to her view that “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”. We now know that the “medium term”, the phrase used in the FOMC statements, refers to a “few years”.   As for those who argue we should wait until all the uncertainties have dissipated, she noted that “monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”   Finally, she quashed the “one and done” rate hike theory when she noted that after the first increase, there would be a “gradual pace of tightening thereafter.” The Fed is not going to simply stop, look and listen. Once started, the members expect to move in a restrained, but consistent pattern.

With only two meetings left before the end of the year, October 27-28 and December 15-16, it seems that it will take disappointing data to prevent a rate hike. If by December, the unemployment rate is at or below 5% (not a heroic assumption since it is currently 5.1%), job gains are strong enough to point to further unemployment rate declines and there are indications that wage inflation is accelerating even modestly, the FOMC should finally pull the trigger. With only one employment report and no Employment Cost Index number before the October meeting, it looks like December 16 could be H-Day, the day the long-awaited hike occurs.

KEY DATA: Sales: -4.8%; Prices (Year-over-Year): +4.7%

IN A NUTSHELL: “Home sales are still solid, even if they did come off their 8½ year high.”

WHAT IT MEANS: The housing market is being watched closely as it has been a key driver of growth and we know that the Fed is locked into the domestic economy. Okay, I will stop being snarky about the Fed. No, I will not! Anyway, the National Association of Realtors reported that existing home sales dropped more than expected in August. After having reached in July a level not seen since February 2007, a slight come down was forecast, and we got it. Still, let’s not get carried away here. This was the third year in a row that sales fell in August. Is there a seasonal adjustment issue here? Probably not, but it is worth noting. If you chart the monthly difference in existing home sales, there do not appear to be any trends you can find on a monthly basis. Looking at the details, sales were down sharply in the South and West, they fell relatively modestly in the Midwest and were flat in the Northeast. On the costs side, prices rose moderately, but the gain over the year was the smallest in a year. The South and the West continue to post price increases of 6% or more, the Midwest was up 4% while there was a modest 2.4% rise in the Northeast. As for inventories, they rose from July’s level but were still down over the year. The supply of homes remains fairly low.

MARKETS AND FED POLICY IMPLICATIONS: The world is trying to figure out what the FOMC members were thinking when they met last week and decided not to raise rates. Some of the Fed members were out trying to provide some perspective. St. Louis Fed President Bullard, who didn’t vote, said he would have dissented as he is in favor of raising rates, while San Francisco Fed President Williams, who voted, said the decision was close. Chair Yellen speaks on Thursday at UMass Amherst on “Inflation Dynamics and Monetary Policy” and hopefully that will provide some perspective on what she is looking at. We will likely get a lot more comments over the next couple of weeks. But it is still unclear what the key factors are that will shift the close decision from no move to let’s get going, so we really need to wait and listen to the comments from more of the Fed membership. As for the markets, the housing report may be viewed as negative, but I think we can dismiss the decline as being a normal down after several ups. Also, third quarter sales are averaging 2.8% above the second quarter and that translates into a nearly 12% annualized quarterly increase. And that is happening despite the relative dearth of homes on the market. It is likely supply, not demand, that is creating the slowdown in sales, as buyers cannot find that “perfect” home. Fed member comments, economic issues around the world and trends in oil prices will likely overwhelm the economic numbers this week. Next week we get consumer spending on Monday and the September jobs report on Friday, at which point we can start thinking about the domestic economy again.

In a Nutshell: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

The Fed decided that all economic and financial issues in the world are its concern and given the uncertain global economic and financial conditions, the start of rate normalization would have to wait. Boy, what a difference seven weeks make. After the July FOMC meeting, conditions seemed to be in place for a September rate hike. Indeed, fifteen of seventeen participants indicated they expected rates to be increased this year. That number dropped to thirteen and one member even thinks rates will not be increased until 2017.

So, what changed? First, oil and other commodity prices fell. There was a concern that the labor market needed further improvement, though the rate is near the members’ long run rate of 4.9%. Fed Chair Yellen explained that there is some extra slack in the market because of the falling participation rate and the elevated level of part-time workers who want full-time jobs.

But the real shift was the central position of foreign issues. The recent instability in China, the rise in the dollar and the weakness in countries dependent on commodities for growth (e.g., Canada) caused the FOMC to rethink its timing of a rate hike. Adding these worries to the energy declines and supposedly labor market slack. The members’ lowered their inflation outlook for the next couple of years. And since inflation remains well below the Fed’s target, The Committee decided not to go for it on fourth and one, but instead punted.

So, when will the Fed start raising rates? While Chair Yellen said that October is a live meeting, it is unlikely the FOMC will get enough compelling information about China and the financial markets over the next six weeks to make an October hike possible. Indeed, we don’t even know what will constitute enough knowledge of what is happening in China, especially since the Chinese data are questionable, at best, and their policies are hardly transparent.

The Fed, by making China, the dollar and the world financial markets central to its decision process, has muddied the waters. Indeed, investors seem as confused as most economists. On the news, the Dow quickly dropped about 80 points, but then rallied sharply, rising over 200 points. However, once Yellen started explaining things, the index fell over 200 points.

The Fed will eventually start raising rates, but it is no longer clear what benchmarks will have to be met before that decision is made. It could be December, but it could be sometime in 2016 as well. Right now, I don’t think anyone, including Janet Yellen, has any idea.

(The next FOMC meeting is October 27-28, 2015.)