KEY DATA:  CPI: +0.4%; Over-Year: +1.3%; Ex-Food and Energy: +0.4%; Over-Year: +1.7%/ Real Earnings: 0%; Over-Year: +3.3%/ HWOL: +1.7%

IN A NUTSHELL:  “Inflation is making its way back toward the Fed’s target, but it is still not a major risk.”

WHAT IT MEANS:  Once upon a time, inflation was something economists and even central bankers worried about.  Not so much now that the Fed has announced it will allow inflation to run above target for an extended period.  Nevertheless, we do need to follow the numbers.  Consumer prices jumped again in August, led by the continued rebound in energy costs, as well as a surge in used car and clothing prices.  In contrast, shelter expenses remained tame, food prices settled down and health care expenses, which had been exploding, took a breather.  Price gains over the year are moving back toward the two percent level, though they still have a way to go.  But who really cares about food, energy, housing or clothing?  What really matters is the index for cakes, cupcakes and cookies.  Those prices cratered in August and are down from their August 2019 level.  I’m happy. 

Inflation really matters when it starts restraining household spending power significantly.  That is where real earnings, which adjusts for inflation, comes in. For consumers to buy more, their incomes have to rise faster than inflation.  In August, that didn’t happen.  Also, the increase in inflation-adjusted income, over the year, is decelerating as lower-wage workers get pulled back into the economy.  This is a weighted average and the distribution of job gains across industries and professions makes a difference.  Initially, those lower paid workers lost their jobs at a huge pace, raising the weighted average.  Now that they are being rehired, they are lowering the average back towards its pre-pandemic level.  But for the individual worker, not the economy on average, rising inflation is not good news, no matter what the Fed thinks. 

The Conference Board’s Help Wanted OnLine index rose solidly in August after having skyrocketed in July.  It is closing in on its all-time high set in January.  Total payrolls may still be down by 11.5 million employees, but demand for workers is solid, indicating job gains should remain strong.     

IMPLICATIONS: The Fed has made it clear that when it comes to its dual mandate, stable inflation is job three.  First comes the unemployment rate, then comes something else, maybe equity prices, and lagging well behind is inflation.  If it is too hot, so be it.  And that is not a bad approach to take, given we have been in a too-low inflation environment for a long time.  Inflation can ultimately be controlled if it is too high, but too low a rate creates the risk of falling into a deflationary environment.  If that happened, the economy would be in real trouble.  So, while we watch the inflation numbers out of habit, I suspect their value will be limited for a very long time, except for its impact on consumption.  Given that wage gains have been limited for over a decade, it is hard to see why they would accelerate in this still very high unemployment rate environment.  Rising inflation remains a negative indicator, but for consumption not for interest rates.  Right now, workers are making more money, but by working longer, not by getting pay raises.  With the Fed on hold for who knows how long, once the reopening process settles down, the outlook for consumption may not be as bright as many in the markets are currently planning for.  But with the demand for labor still high, we may not see a significant moderation in total household spending until next year.

KEY DATA: ISM (Manufacturing): +1.8 points; Orders: +6.1 points; Backlogs: +2.8 points/ Construction: +0.1%; Private: +0.6%; Residential: +2.1%

IN A NUTSHELL: “The manufacturing sector is picking up some serious steam and could start pushing housing for the number one driver of growth.”

WHAT IT MEANS:  Some of the latest economic numbers are truly amazing.  The housing sector is flat out flying and now it looks like manufacturing is beginning to follow the same path.  The Institute for Supply Management reported that its index of overall activity rose solidly in August to the highest level in two years.  That may not seem like a long time but it was before the pandemic and after the tax cuts, so we are talking real strength.  And the good news was not just the headline number: The details were just as strong.  New orders are jumping as the recovery spreads.  Even with output ramping up, demand is outstripping the added supply and backlogs are building and inventories are falling.  That bodes well for future production.  There was just one negative number in the report: Payrolls continue to be cut, though the rate of decline is moderating.    

Construction spending edged up in July, but the gain was all in residential activity. Spending on lodging, office, commercial, health care, education, religious and amusement and recreational projects were down.  It was worrisome to see that government spending on major infrastructure projects such as health care, education, public safety, highways and transportation declined. State and local governments just don’t have the money to invest in their future.

IMPLICATIONS: Can housing and manufacturing keep it up?  It has been about a month since the enhanced unemployment checks stopped coming, so we haven’t seen the impact that may be having on consumer spending.  Since there is not much chance that exports, which are way down, will pick up sharply, and given that government spending is being reigned in, we need households to spend like crazy if the economy is to keep the V-shaped recovery going.  There are only so many new homes we can build before the market gets out of hand.  We know what that leads to.  But today we saw that the private sector is not doing a lot of building, outside of housing, while state and local governments are strapped for cash and are hardly in the mood to spend what they don’t have.  I have said since early April that the fourth quarter of this year and the first quarter of next will determine the future condition of the economy.  A second quarter collapse and a third quarter rebound were baked into the cake.  I had assume back in the spring that the government’s willingness to keep both households and businesses on welfare would have run out by now, but as usual, I underestimated the willingness of politicians of all stripes to spend when it suits their purposes.  Once we clear the election, it is likely that most of Washington’s handouts to businesses and households will fade away.  That is why the fourth quarter and first quarter of next year are so critical.  Without the federal government’s largesse, and with unemployment still likely to be extremely high, the ability to sustain growth will depend upon household and business confidence in the future.  So, maybe the most important numbers going forward will be the confidence measures.  As for the markets, happy days are still here and as I keep saying, the trend is your friend until it isn’t.    

KEY DATA: Durables: +11.2%; Ex-Transportation: +2.4%; Private (Core) Investment: +1.9% 

IN A NUTSHELL: “The economy is roaring back.”

WHAT IT MEANS: The economy seems to be rebounding at a startlingly robust pace.  The recent economic data have come in above forecasts, especially when it comes to housing, and now we see that businesses are getting back into capital spending mode.  Durable orders soared in July, blasting through expectations.  In a rarity, there was not one major sector that posted a decline in demand.  This report was filled with crazy good numbers.  Orders for vehicles and parts soared to its highest level since this measure was introduced in February 1992.  The government is pitching in as defense capital goods demand jumped 30% and for the first seven months of this year is up over 12% over the same period in 2019. As for businesses, they are spending on capital goods again and the level is back to where it was in February. Interestingly, despite the surge in orders, backlogs are declining, which raises questions about future gains in manufacturing production and hiring.  

IMPLICATIONS: Well, it looks like the National Bureau of Economic Research, the keeper of the business cycle, may have to start thinking about dating the end of the recession.  Yesterday, we got another sign that the housing market is booming when new home sales skyrocketed in Julyand that goes along with other housing data.  Today we saw that investment in big-ticket items is in the stratosphere.  And the stock markets keep hitting new record highs.  It is almost as if there was no pandemic and few firms or households were harmed greatly by the shutdowns and losses of income and demand.  Am I the only one that thinks something strange is going on here? We need to step back from the numbers a little.  Are the reports we are seeing sustainable?  Households don’t seem to think so.  The Conference Board’s August report on consumer confidence fell sharply and the University of Michigan’s Sentiment Index remained at the lowest level in eight years. Optimism about the future is ebbing. Twenty eight million people are still receiving unemployment checks and their payments have been cut sharply. The special hazard pay put in place for critical workers is disappearing, further eroding spending power.  The world economy is weak, at best, and trade is minimal.  And the pandemic is surging along, largely unchecked and with schools and universities reopening, the number of new cases and deaths are likely to start rising again in the new few weeks.  Yet happy days are here again.  So, what is it that businesspeople know that households don’t see?I just don’t get it but as traders like to say, “the trend is your friend”, so just go with it. 

KEY DATA: Sales: +24.7%; Over-Year: +8.7%; Prices (Over-Year): +8.5%/ Pending Sales: +5.3%; Over-Year: +32.7%

IN A NUTSHELL: “Home sales and prices are soaring and the end is nowhere in sight.”

WHAT IT MEANS:  The stock market and California are not the only places on fire: Housing is just as hot. The National Association of Realtors reported that existing home sales skyrocketed in July to the highest level in nearly fourteen years.  The surge in demand was across the nation, with gains in the thirty percent range for The Northeast, Midwest and West and over nineteen percent in the South. Homeowners are seeing the strong market and are listing their houses, but with mortgage rates low and demand jumping, the supply of houses, at 3.1 months at current selling rate, is the lowest on record.  That led to a sharp rise in prices, to its highest level on record. Amazing.

And the new home market looks like it is just as strong.  Meyers Research reported that their New Home Pending Sales Index also jumped in July.  New home demand was up sharply in June and it is likely it will post another major rise when the July data come out next Tuesday.   

IMPLICATIONS: Housing is one of the most important sectors in the economy as home construction and sales touch firms in a variety of industries.  When the housing market booms, sales of products related to homes rise significantly as well.  The low mortgage rates have induced people to buy, buy, buy, but the sharply rising prices are a warning that the market may be getting a little ahead of itself.  Still, I will take any positive data that shows people are willing to spend money, especially on big-ticket items.  Looking forward, we need consumers to keep spending.  While those who can and do work from home are mostly doing fine, the number of people unemployed remains in the double-digits.  That raises questions about consumption of nondurable goods and services.  Services are about two-thirds of all household spending and it has been the weakest link.  Since February, total consumption has declined nearly seven percent.  Almost ninety percent of that drop was due to lower spending on services.  So, if you want to know if the consumer is coming back, you have to pay attention to services demand.  And that requires all income classes picking up the pace.  With everything going on, I am not sure how quickly that will occur, especially since we are just getting into the ugliness of the presidential campaign.  That cannot be good for consumer confidence.       

KEY DATA: Claims: +135,000/ Phila. Fed (Manufacturing): -6.9 points; Orders: -4 points; Employees: -11.1 points/ LEI: +1.4%

IN A NUTSHELL: “The recovery is moving forward, but signs that the pace is moderating are spreading.”

WHAT IT MEANS:  The economy this year has been like the weather in so many areas: If you don’t like it, wait a minute and it will change”.  Are we starting to see another change in the direction of growth?  We just may be.  Consider first the labor markets.  For the first time in five months, the weekly jobless claims number rose. Now let’s not get too crazy about this increase.  In normal times, with normal levels of claims, the numbers bounce around all the time.  And anyone who thinks you can seasonally adjust a data set on a weekly basis without getting some volatility, has not tried to seasonally adjust any number. It really cannot be done.  Still, with the government’s business and household income subsidies running out, it isn’t clear whether those firms that are just hanging on can make it.  It has been expected (at least by me) that by the end of the summer, many firms could throw in the towel, meaning claims rise for while going forward.  It is way too early to say that, but the claims increase is at least a yellow flag.

On the manufacturing front, conditions are still good but they may be moderating.  The Philadelphia Fed’s August manufacturing index declined somewhat more than forecast.  Order growth eased, as did hiring, while backlogs have started to decline.  That said, the sector is still expanding at a decent pace and firms continue to hire more workers.  In addition, firms are able to push through more price increases, though their costs are going up as well.

Looking toward the future, the outlook is good, as long as you put things in perspective.  The Conference Board’s Leading Economic Index increased at a less robust pace in July than it did in May and June.  Notice I said “less robust pace”.  In normal times a 1.4% rise would be viewed as pointing to stronger growth ahead.  But looking out to the fall and winter, it implies that growth will come down from its elevated third quarter pace.  That should surprise no one as the consensus for third quarter GDP is up about twenty percent.  That rate of growth is obviously not sustainable.  Thus, when the report notes that “The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020”, it is not necessarily saying we are headed into a recession – only a slower growth phase.

IMPLICATIONS: I don’t want to make too much of a deal out of the rise in unemployment claims last week. I would normally just chalk it up to the normal ebb and flow of the data and that is likely what happened. But there appear to be many in Washington who seem to think the economy can stand on its own and doesn’t need any additional stimulus or if it does, it should only get enough to get through the November election.  I don’t believe I am alone when I say that is really questionable thinking.  Most economists believe as I do that more help is needed.  Without it, consumer spending, which is likely to set a record for growth this period, could wind up being quite modest in the fourth quarter.  Firms that have used the government largesse to help pay workers will discover they actually have to make money on their own to cover payroll costs and with consumption lagging, those funds just might not be there.  So, while the economy may look red hot right now, the fire could dim pretty quickly. Of course, if we get a sharp drop in claims next week, all this turns into a “never mind”, which is what I suspect most investors are thinking.       

KEY DATA: Starts: +22.6%; 1-Family: +8.2%; Multi-Family: +58.4%; Permits: +18.8%; 1-Family: +17%; Multi-Family: +22.5% 

IN A NUTSHELL: “When it comes to housing, the recession is well in the rear view mirror.”

WHAT IT MEANS:  Another housing report, another sign that this sector is leading the way back toward a more normal economy.  Actually, there is nothing “normal” about the housing sector.  Instead, we are talking boom times.  Housing starts soared in July, led by an enormous rise in multi-family construction.  This segment tends to have large ups and downs, but a nearly sixty percent jump is well beyond large.  Thus, don’t be surprise if there is a drop in multi-family starts in the August or September numbers.  That would not be a sign of weakness.  As for the key single-family segment, it is strong as well, just not out of control. For the first seven months of this year, total housing starts are up nearly five percent compared to the same period in 2019.  Given everything that has happened, that is amazing.  Regionally, there were increases in excess of thirty percent in both the Northeast and the South, while the Midwest and West posted gains in the six percent range.  Looking forward, permit requests skyrocketed as well, with both the single-family and multi-family segments posted robust gains.  Over the past three months, permits have exceeded starts by nearly six percent, indicating that the sector has more room to grow.

IMPLICATIONS:The reopening of the economy may not be going smoothly everywhere, but it is going incredibly well in the housing sector. Low rates and, at least to some extent the desire to live in less dense locations, have helped drive up demand and home construction is growing to meet that demand.  Since banks don’t usually consider most people on unemployment to be good borrowing risks, the mess in Washington over another stimulus bill may not have nearly as big an impact on housing as it might on consumer goods and services spending.  And with the Fed in no hurry to raise rates, the housing market has a chance to continue leading the way.  As for the economy overall, we have to wait until we get not just the August consumer data but more importantly the September ones as well to determine if a lack of stimulus funds made a major difference.  Third quarter growth is likely to be record setting.  The only issue is how big a record is set.  Housing, by itself could add hugely to growth.  It subtracted about 1.75 percentage points in the second quarter but could twice that in the third, a swing of over five percentage points.  Still,we’ve known for months that third quarter growth was going to be amazing, so we have to start focusing on fourth quarter 2020 and 2021 activity.  Where we go after the summer is up in the air. If Washington does the right thing, 2021 could be really solid.  If not, the recovery could fade. My view is that asking Washington to do the right thing is a bridge too far, so I am less optimistic than other economists.  But, as the saying goes, we shall see. 

KEY DATA:Consumption: +5.2%; Disposable Income: -1.8%; Prices: +0.4%; Ex-Food and Energy: +0.2%/ Sentiment: -5.6 points/ ECI (Over-Year): +2.7%; Wages (Over-Year): +2.9% 

IN A NUTSHELL: “Consumers were back out spending in June, but with the virus surging and confidence falling, July’s numbers may not be as strong.”

WHAT IT MEANS: Yesterday’s GDP report told us how bad things were during the spring.  But with the economy reopening, the data were a lot better as we ended the second quarter.  Most impressively, consumer spending soared.All categories of consumption posted sharp increases.  The key services component, which makes up about two-thirds of all consumption, cratered in the early spring.  It has come back with a vengeance.  Can that continue?  It is unclear.  After tax income, adjusted for inflation, fell sharply in June.  The reason is clear from the data.  Just about all the income gain during the quarter came from government transfer payments, i.e., unemployment compensation.  As people come go back to work, those numbers fall.  However, wage and salary gains came nowhere close to making up for the drop in government largesse.  The drop in income and the strong rise in spending led to a sharp reduction in the savings rate, but at 19%, it is clear that most households are still worried about the future and stashing away funds for the next rainy day.  Inflation picked up a touch, but it remains low on a year-over-year basis.

Speaking of being worried, the return of the virus has cratered consumer optimism.  The University of Michigan’s Consumer Sentiment index plummeted again in July.  What the reopenings did for confidence in June, the resurgence took it all away. The expectations index is at its six year low, set in May.  That does not bode well for future spending, as the virus is not going away soon.

Employment costs rose at a moderate pace in the second quarter.  Idon’t really know what to make of this report.  It seems to imply the shutdowns and reopenings basically changed little when it came to compensation.  Wages and salaries did grow more slowly than had been the case but benefits increased.  I am at a loss to figure that out. 

IMPLICATIONS: Household spending rebounded sharply as the economy reopened and we could see consumption growth well into double-digits for the third quarter. Whether that will happen will be determined by the virus, Congress and the president. It is clear from the income numbers that unemployment insurance was the major source of income for households, but the $600 per week add on has expired.  A failure to renew that payment or a reduction in the weekly amount will cut spending power sharply.  Keep in mind, over thirty million people receive unemployment checks, so any reduction will hit consumption hard.  The alternative is allowing the economy to stand on its own.  I suspect that next Friday’s employment report will be telling. My forecast is for job growth to be less than two million, compared to the 4.8 million gain posted in June.  I also expect the unemployment rate to rise. The virus has slowed, halted or in some cases reversed the reopening process and the private sector is nowhere near ready to go it alone.  So, don’t be surprised if we get another round of unemployment add-ons.  How much is unclear, but the negative impact on the economy of cutting the current amount and the simple fact that there is an election in three months, tells me that fiscal conservatism is not the highest priority of even fiscal conservatives.  I went into this process expecting the $600 to turn into $300, but it is likely to be higher – maybe even $600 again through the election. Survival is the mantra of most politicians.  But the political game of chicken (waiting until the last moment to offer a proposal) that caused the payment to lapse is likely to lead to a slowing in consumption until the money starts flowing again.  When you combine the surge in the virus with the stupidity in Washington and the massive divisions in the nation, it is hard to be optimistic about the economy achieving a sustained, rapid recovery.      

KEY DATA: GDP: -32.9%; Consumption: -34.6%; Investment: -49%; Disposable Income: +44.9%; Consumer Prices: -1.9%/ Claims: +12,000; Continuing Claims: +867,000

IN A NUTSHELL: “The record-setting economic decline was pretty much as expected but the more disconcerting news was the deterioration in the labor market.”

WHAT IT MEANS: Yes, the economy crashed and burned in the spring at a pace never before seen, or at least measured.  We (economists) knew it was coming and we warned it was coming, but the numbers were still breathtakingly bad.  Households stopped buyingas few people bought any services.  My local deli owner said her food business was fine but she owns a dry cleaner and no one was bringing in any clothes.  Not a surprise there.  Meanwhile, businesses put their investment plans on hold and spending on equipment and structures collapsed.  In addition, they stripped out all of their inventoriesas it made no sense to keep the warehouses filled if no one was buying.  On the trade front, our overseas sales plummeted but we bought even less from the rest of the world,so the trade deficit actually narrowed a touch.  About the only positive was government, at least the federal government. Spending on nondefense goods and services surged (as did the deficit).  On the other hand, state and local governments felt the pain of the shutdowns and cut back their spending sharply.  Prices fell solidly as well.  If there was a clear indication of the importance of the unemployment payments, it could be seen in the disposable personal income number: It rose at a nearly 45% annualized pace.  The only reason we didn’t have much larger decline in GDP was that we went from a capitalist economy to a social welfare economy with gusto.   

Looking forward, weekly unemployment claims rose for the second consecutive week.  Two is not a trend, but with the virus running rampant across much of the nation and the reopening of the economy largely on pause, we are likely to see that increase continue.  Over the past four weeks, roughly 5.5 million people were forced to file for unemployment insurance and that four-week moving average should to keep rising.  That raises questions about job growth in July.  

IMPLICATIONS/COMMENTARY: There were a number of key issues that were highlighted in today’s reports.  For the economy, it was not just the second quarter debacle but when you add in the decline in the first quarter, total GDP 10.6% below where it was at the end of 2019.  I took a lot of grief in April when I argued that it could take two years to get back to where we were, but I am even more comfortable with that forecast now.  As Fed Chair Powell noted yesterday, the virus will determine the course of the economy. A large portion of the public as well as many politicians simply refuse to deal head-on with the virus.Thus, we reopened too soon in many places and people refuse to make the sacrifices needed to keep the virus at bay.  But the business community is at fault as well.  The mouths that roar whenever they see a threat to their businesses have been silent about the threat the virus creates.  There have been few calls by the business community or their organizations to take the necessary actions to control the virus. And that is hurting, not helping, the recovery and their companies.The second issue is future course of the economy and the next bailout bill.  There are a variety of programs that support unemployed workers and when you add them all together, over thirty million people are receiving unemployment support.  Forget the unemployment rate, look at how money is being earned – it is by handouts.  The only way you have personal income rising in a collapsing economy is if you turn to a massive welfare economy.  That was absolutely necessary and if it didn’t happened, the decline might have been fifty percent or more.  This is the question Congress and the president must ask: How well is the economy capable of standing on its own?  With the virus largely halting the reopening, it is likely job growth will falter and the unemployment rate will rise.  With the government additional unemployment payment support now gone, income will be falling until a new bill is passed.  Yes, we have the largest welfare economy in U.S. history, but it was implemented to pay for current spending and keep us from a total collapse. If you cut that support and the problem facing the economy, the virus, remains out of control, well that V-shaped recovery could disappear.Congress and the president have to face the music and start dealing with the virus.  Otherwise, this welfare economy will be with us for a lot longer than anyone wants to see and the long-term negative impacts will be massive.