KEY DATA:  Confidence: -0.6 points/ New Home Sales: -0.7%/ C-S Home Prices (Month): +0.4%/ Over-Year: +3.2%

IN A NUTSHELL:  “The housing market is showing some life and that is good news for builders and the economy in general.”

WHAT IT MEANS:  The fourth quarter is not looking good, but maybe we shouldn’t give up hope just yet.  We are entering the key shopping season and households may not be irrational exuberant, but they are not depressed either.  The Conference Board’s Consumer Confidence Index fell in November, the fourth consecutive decline.  You would think that would set off warning bells, but the reality is that the level of the index is still quite solid.  In addition, expectations rose, an indication that while current conditions are fading, households still hold out hope that things will turn around.  And hope tends to drive demand at this time of year, especially since people are looking for any reason to spend. 

Another positive sign is coming from the new housing market.  Sales eased back a touch in October but demand is on a clear, upward trend.  And purchases are beginning to close in on what might be considered to be a solid sales level.  So far this year, total sales are up over 9% compared to the same period in 2018.  Unfortunately, the gains are not being shared evenly across the nation.  In October, demand rose in the Midwest and West but dropped in the Northeast and South.  For the first ten months, sales surged in the South and West but were down almost as sharply in the Northeast and Midwest.  As for prices, they were off over the year but much of that had to do with the significant decline in the percentage of high cost homes purchased.  That seems to be turning around, though.

The S&P CoreLogic Case-Shiller National home price index rose in September and it looks like the decline over the year is stabilizing.  There is an interesting pattern that has occurred since the end of the Great Recession.  While the housing price recovery was early and sharp in some of the larger metro areas used in the 20-City index, those gains have faded significantly.  Meanwhile, the National index, which includes metro areas of all sizes, is holding up quite well.   

There were two Federal Reserve regional bank indices released today and they went in opposite directions.  The Philadelphia Fed’s NonManufacturing Index rose sharply but the Richmond Fed’s manufacturing measure softened.  That shows how some sectors and parts of the county are doing well while others are faltering, which is right in line with the belief that the economy is growing, but at a modest to moderate pace.MARKETS AND FED POLICY IMPLICATIONS:The economy is neither a turkey nor a sweet potato pie (I love sweet potato pie!).  It is growing, but it would take a politician to say it is in good, let alone great shape.  GDP growth is likely to have remained below 2% again in the final quarter of the year and for all of 2019, it looks like it will come in at about 2.25%.  So, when I call it the “back to the future economy”, I am simply saying that we are matching the growth that we saw during much of the 2010s. Most people considered that pace to be disappointing, but as I noted then, it is still trend growth.  So, saying things are bad would be too harsh. 

KEY DATA:  Sales: +1.9%; Prices (Over-Year): +6.2%/ LEI: -0.1%/ Phyla. Fed (NonMan.): +4.8 points; Orders: -17.8 points; Hiring: -11.4 points

IN A NUTSHELL:  “Modest housing sales gains, coupled with weakening indications of future growth are a worrisome combination.”

WHAT IT MEANS: The drama that is playing out in Congress is not the only stage where concerns are growing.  On the economic front, the data are just not looking great.  Housing is okay, but just okay.  Existing home demand improved moderately in October.  The gains were concentrated mostly in the South, with a smaller increase in the Midwest. On the other hand, demand fell in the Northeast and the West.  As far as prices go, they are rising strongly again. A combination of firming demand and a paucity of homes for sale is driving up costs to buyers.

It doesn’t appear as if housing is improving enough to offset the weakness in other sectors.  The Conference Board’s Leading Economic Index posted its third consecutive decline in October.  For the first time in nearly three and a half years, the six-month growth rate was negative.  That is not good news and, as the report notes, “the LEI suggests that the economy will end the year on a weak note”. 

The Philadelphia Fed’s survey of nonmanufacturing companies posted a nice gain in early November.  But that was for general economic activity.  When it came to the firm itself, the details were not good.  New orders, backlogs, hiring and hours worked all expanded more slowly.  Optimism remains reasonably high, though.

Weekly jobless claims were flat, but they are still at a five-month high.  I don’t want to read too much into that, but it does need to be watched.         MARKETS AND FED POLICY IMPLICATIONS: And the beat goes on, and the beat goes on.  The current quarter is not setting up to be very good.  Thankfully, we have not only turkey coming up, but the biggest shopping period as well.  Consumers just might save the day, but it is not clear they can turn a mediocre quarter into something satisfying.That the Conference Board’s leading index points clearly to a slowdown (no recession yet) is not to be taken lightly since the other economic numbers support that conclusion.  But, as Mr. Powell has noted, Fed actions take up to a year to have full effect, so maybe the rate cuts will cause the economy to accelerate.  If you believe that, contact me and I will sell you my share of the Broadway play I am producing. So, there is only one thing to do.  Start your Black Friday shopping early and buy, buy, buy and then go out and eat like crazy next Thursday.  At least when it comes to the eating part, I will follow it as best as I can.  As for the shopping, nah, not so much.  Meanwhile, investors seem to be hiding under rocks and not taking any bold positions.  Given the growing uncertainty over the mini-trade deal, that makes sense.  Meanwhile the Fed keeps crowing (or is it gobbling?) about how great they are doing.  It was made clear in the minutes from the October FOMC meeting, which were released yesterday, that the Committee expects to be on hold for an extended period.

KEY DATA:  Starts: +3.8%; 1-Family: +2%; Year-to-Date: -0.6%; Permits: +5%; 1-Family: +3.2%; YTD: +2.4%

IN A NUTSHELL:  “Housing continues to wander around aimlessly, faltering one month, rising the next but essentially going nowhere.”

WHAT IT MEANS:  With the economy decelerating, we need to find some sector that will lead us back toward strong growth.  Well, it doesn’t look like that will be the housing market.  Yes, housing starts rose solidly in October.  There was a modest increase in single-family activity and a more robust gain in the always-volatile multifamily component.  But what caught my eye was the year-to-date numbers.  After ten months, home construction is slightly down compared to the same period in 2018.  The year started out quite slowly but it hasn’t accelerated sharply enough to overcome the early weakness.  Will housing construction pick up?  The data seem to argue that.  Permit requests rose again and hit their highest level since May 2007.  They have been running above starts for most of the year and are nearly seven percent above last year’s 10-month total.  Builders just don’t spend money on permits for the fun of it.  The number of homes permitted but not started is high, we should imply increasing starts going forward.

In addition, The National Association of Home Builders’ Index came out yesterday and while it edged down in November, optimism remains near the level reached in 2005, the high point in the housing bubble.  Current and future sales are expected to be strong.  The combination of rising permit demand and high builder confidence argue for a rise in home construction.  However, I have been saying that for months and the upward trend, if there is one, has been fairly modest.  MARKETS AND FED POLICY IMPLICATIONS:The economy seems to be settling into a trend level growth pattern of something in the 2% range.  An improvement in home construction would help offset what is likely to be a slowdown in consumption to a more sustainable pace.The major unknown remains the trade tensions.  That is affecting business confidence and therefore capital spending as well as trade flows.  The trade “deal” that is being negotiated does not look like it will be much more than an attempt at placating both parties.  Each will get something but it is not being billed as a major agreement and it has to be viewed that way when considering the impact on the economy.  At best, conditions will move back toward where they were before the war started but it is doubtful that trade flows will reach levels we saw previously.  It is, as stated, only an initial, partial deal.  I am sure it will be billed as the greatest trade deal in the history of the nation, but my job is to analyze the real work impacts and from the little we know, that are not likely to be great.  We should see some additional capital spending as some companies decide the worst is behind us, but given the global economic slowdown, there is little reason to expect any extended surge.  In addition, that deal does nothing to the tariffs on European products.  So, a partial deal might lead to higher equity prices but not necessarily move the needle much when it comes to economic growth.  That said, it would bolster the Fed’s new stance that it has won the war on recession and doesn’t need to do anything unless conditions change significantly.

KEY DATA:  Sales: +0.3%; Ex-Vehicles: +0.2%; Gasoline: 1.1%/ IP: -0.8%; Manufacturing: -0.6%/ Import Prices: -0.5%; Nonfuel: -0.2%; Exports: -0.1%; Farm: +1.9%

IN A NUTSHELL:  “With households not shopping that much, there isn’t a whole lot of need for the nation’s factories to keep producing as much.  ”

WHAT IT MEANS:  With the Fed indicating it is on hold for an extended period – unless economic conditions change significantly – we need to determine if those conditions are being met.  Let’s start with consumer spending.  Retail sales were tepid in October.  They were bolstered by a sharp rise in gasoline purchases, but that was driven by a sharp rise in prices.  Vehicle demand was solid, but September’s was so weak that the level of sales in October remained below the August total.  Other big-ticket purchases, such as furniture, electronics and appliances, were off, which is not a great sign.  Online sales, however, were strong, but restaurants saw activity falter.  Basically, there were ups and downs that support the view that consumer demand was mediocre.

Meanwhile, back at the factory, the assembly lines slowed once again.  Manufacturing output fell sharply for the second consecutive month, led by a third consecutive major drop in motor vehicle assemblies.  Seven of the eleven durable goods sectors and six of the eight nondurables sectors posted declines.  In other words, the cut back in production was wide spread.  Over the year, manufacturing output is off by 1.5%, a clear sign that this segment of the economy has hit a rough spot. 

As for inflation, if it is to keep accelerating, the pricing pressures will have to come form someplace other than imports.  Import costs fell sharply and have been up only once in the last five months.  Yes, fuel prices jumped, but nonfuel costs fell and have risen only once this year.  Food, capital goods and consumer goods prices were down while vehicle costs were flat.  As long as the dollar stays strong, import prices will not surge and inflation will likely remain in check.  On the export side, farm prices jumped again, but nonfood export prices were down.  MARKETS AND FED POLICY IMPLICATIONS: Okay, here’s the story: When if comes to the economy, listen to what Fed Chair Powell says and assume the opposite.  Well, maybe I am being too harsh, but this week, Mr. Powell was telling us that when it came to the U.S. economy, we are the stars!  Of course, with Europe barely keeping its head above water and Asia slowing, that may be the case.  But it still doesn’t say much.  Today we found out that maybe the U.S. economy is growing, but not at any great pace.  The consumer is still spending, but not robustly enough to support other sectors, especially business investment, which has been faltering.  And on top of that, manufacturing is contracting.   Even if a phase one mini deal is consummated, it doesn’t get us anywhere near back to where things were before the trade war began nearly twenty months ago.   So why anyone would think the economy would soar as a consequence is beyond me, but I am just looking at this as an economist.  As far as investors are concerned, any good news on the trade front is another excuse to push the market up.  Meanwhile, the Fed members will continue to pat themselves on their backs and claim to be doing a great job.  We shall see about that in 2020. 

KEY DATA:  CPI: +0.4%; Year-over-Year: 1.8%; Ex-Food and Energy: +0.2%; Year-over-Year: 2.3%/ Real Hourly Earnings (Y-o-Y): +1.9%; Real Weekly Earnings (Y-o-Y): +1.6%

IN A NUTSHELL:  “Inflation is firming and with hours worked down and wage increases flattening, household purchasing power gains are slipping. ”

WHAT IT MEANS:  You know all that room the Fed had to cut rates because inflation was going nowhere, well that is no longer the case.  Consumer prices jumped in October, led by large increases in energy, used vehicles and medical services.  There was even a solid rise in food costs, though this month it was food at home more than restaurants. The one component that is not showing signs of rising costs is apparel, which posted another sharp drop.  Imported apparel prices are up modestly over the year and it looks like the Chinese devaluation of their currency has had its intended effect of partially insulating the country from sharp rises in prices due to tariffs.  Excluding the volatile food and energy components, retail prices rose moderately.  But the real information is in the year-over-year numbers.  The overall index remains above the Fed’s 2% target and the core/ex-food and energy component is pushing 2%.  While the Fed prefers the Personal Consumption Expenditure price index to the CPI, this is still an indication that inflation is no longer something the Fed can use as an excuse to do the inexcusable, which is to cut rates again.

With inflation rising, consumer purchasing power is faltering.  Inflation adjusted (real) wages declined in October, as did real weekly earnings.  Once again, the key numbers are the year-over-year changes and the growth in hourly and weekly earnings remains tepid.  It is hard to sustain consumer spending at a 3% pace, which we have seen for most of this year, when purchasing power is increasing at less than 2%.  Something has to give and while savings may be the first casualty of the earnings slowdown, spending will likely be next.

Yesterday, the National Federation of Independent Businesses released its October survey and optimism posted a small increase.  Eight of the ten components were up.  The economy may be slowing, but the early-warning sector, small businesses, is not signaling any major faltering in economic activity.  I guess the Fed doesn’t read the report (just kidding, Dunk). MARKETS AND FED POLICY IMPLICATIONS:There is little reason for the Fed to cut rates again anytime soon.  Inflation is not trending downward, the trade war has moved back, at least for now, to trade skirmishes and longer-term interest rates have risen in response to the easing in tensions.  Indeed, in today’s testimony in front of the Joint Economic Committee of Congress, Chair Powell seemed to take a victory lap, though it probably had little to do with the Fed’s actions.  He noted: “Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2 percent objective as most likely. This favorable baseline partly reflects the policy adjustments that we have made to provide support for the economy.”  His puffery not withstanding, the economy is just where so many of us thought it always was and would be, if and only if the trade war fears were eased or even alleviated.  That is, modest to moderate growth and inflation near the Fed’s target.  Thus, there is little reason to make any additional moves – as long as the trade skirmishes don’t break out into full-fledged war.  Of course, as I have argued repeatedly, lower interest rates do almost nothing to counter the fears created by a political decisions to impose higher tariffs, but that is not likely to resonate in the halls of the Federal Reserve building.  Regardless, the best estimate is that we could see the Fed on hold for an extended period (assuming no trade war).  The Fed Chair made one other major comment in today’s testimony.  He made it clear he was concerned about the growing, seemingly out of control U.S. budget deficit.  And he should be worried.  It is likely that the current fiscal year’s deficit will be well in excess of one trillion dollars and if a recession hit, fiscal policy could be in a straitjacket.  Given the Fed also fitted itself with a straitjacket by lowering rates to a level that gives it minimal room to cut further, a recession could be extremely hard to counter.

KEY DATA:  Jobs: 128,000, Private, 131,000, Revisions: +95,000, Vehicles: -41,600; Unemployment Rate: 4.6% (up from 4.5%); Wages: +0.2%/ ISM (Manufacturing): +0.5 point; Orders: +1.8 points/ Construction: +0.5%

IN A NUTSHELL:  “Remember all those stories about the job growth fading, well never mind.”

WHAT IT MEANS: So much for a slowing job market.  Yes, the total number of net new hires in October was nothing spectacular but that was simply because GM was on strike and those workers were not considered to be employed.  With the strike settled, the November report will reflect their return to work.  Excluding the motor vehicle sector, hiring was good with solid gains posted in health care, construction, wholesale trade, financial activities, retail and especially restaurants. As for the government, cut backs in census workers led to a sharp decline in federal payrolls.  That is just an unwinding of the increases we saw previously.   Those ups and downs will be repeated this spring when we actually take the census.  As for wages, they rose decently and the year-over-year decline was reversed slightly.  Finally, the modest rise in the unemployment rate should not be viewed as a concern.  The labor force grew solidly and the participation edged up and those are signs of a vibrant labor market.

Manufacturing activity continues to moderate, but the decline eased in October.  The Institute for Supply Management’s Index rose, though it remained in negative territory.  Most of the components posted gains, though production did fade further.  All of the components, except for export orders, are still below 50.  In other words, the sector is slowing at a slower pace.

Construction activity picked up in September and the increases were broad based.  Residential, nonresidential, private and public all posted gains.  That said, private activity remains down over the year and it is largely the public sector that is driving construction.MARKETS AND FED POLICY IMPLICATIONS: After several months of reporting decelerating job gains, the Bureau of Labor Statistics discovered a ton of new jobs they missed in August and September and the additional positions changed the tenor of job gains.  When you consider the negative impact that the GM strike had on the October numbers, it is clear that the labor market is stronger than we perceived going into today’s report.  And that raises even more questions about why the FOMC cut rates again this week.  Let’s face it, the Fed is largely out of bullets.  Yes, they have six more quarter-point moves before they get to zero, but the reality is that once the one percent level is hit, any additional cuts could reduce investment rather than increase it.  Households and businesses will likely recognize that the only reason the Fed would be going so low is that the economy is in trouble and really, who borrows money when they are worried about a faltering economy? Lowering rates to feed the market beast while emptying the arsenal needed to fight a recession, especially when cutting rates is not a necessity, is not good monetary policy.  What will the Fed do when we really need rate cuts, such as when the economy actually falters?  Got me.  Maybe that should be the question that is asked of Fed Chair Powell the next time he talks.  So, where will the Fed go from here?  My guess is that it is on hold for quite some time.  This report makes it awfully hard for the FOMC to cut rates again in December. 

KEY DATA:  IP: -0.4%; Manufacturing: -0.5%/ Starts: -9.4%; Permits: -2.7%/ Phil. Fed (Manufacturing): -6.4 points; Expectations: +13 points/ Claims: +4,000

IN A NUTSHELL:  “Another day, another set of disappointing economic numbers.”

WHAT IT MEANS:  “And the beat down goes on, and the beat down goes on.  The data keep pounding the message into my brain” – that the economy is slowing!  Today, two major reports, industrial production and housing starts, were released and to put it simply, they were not very good.   Let’s start with output, which is the Fed’s own data release.  The key number was manufacturing, which declined sharply September.  The GM strike cratered vehicle production and that was the most glaring drop in the index.  However, of the remaining ten components in the durable goods segment, five others were down.  Indeed, excluding vehicles, durable good production still fell, though modestly (0.1%). Also, nondurable goods output declined, so you cannot say the weakness in manufacturing was simply a labor-related issue. 

On the housing front, starts posted a huge decline in September.  Again, the number needs to be viewed in context.  The August number was up over 15%, to the highest in over twelve years.  There didn’t seem to be a logical reason that so high a level would be reached. Consequently, a decline was expected.  But, the September construction pace was pretty much in line with average for the year and below the average for the quarter, so the best you can say is that homebuilding continues, but it is not rising very rapidly.  As for the future, permit requests, while down over the month, are still running well above starts, so we should see a pick up in activity over the next few months. 

The Philadelphia Fed’s October manufacturing index posted a moderate decline.  This index bounces around quite a bit, so what may seem like a large drop was really not that much.  Orders remained solid and hiring picked up, which is good news.  As for expectations, they were up solidly across the board. At least in the Mid-Atlantic region, manufacturing may be slowing, but not by much.

Jobless claims remained quite low as firms continue to scramble for workers.MARKETS AND FED POLICY IMPLICATIONS:Third quarter growth is setting up for a disappointing number.  We get the first estimate of GDP on October 30^th and the FOMC will have the number.  Assuming the growth rate comes in close to expectations, which is between 1.5% and 2%, I don’t think it will change any thinking.  The minutes of the last meeting and comments from members indicate two things: The trade war is the overarching issue facing the Committee and the members are split on how to deal with the potential impacts, given the outcomes are so potentially different.  A full-fledged trade/tariff war likely means recession.  An agreement means more 2% or so growth.  So, doing more or doing nothing both come with real risks.  That is likely to be the debate.  

KEY DATA:  Sales: -0.3%; Over-Year: +4.1%; Ex-Vehicles: -0.1%/ NAHB: +3 points

IN A NUTSHELL:  “The surprisingly weak retail sales may not be telling us the canary is falling over.”

WHAT IT MEANS:  As I noted a couple of months ago, if consumers are driving growth, then consumer spending has to be the canary in the economy.  On the surface, today’s unexpected September drop in retail sales might be taken as a sign that household broad shoulders are drooping.  But I am not that sure.  Yes, the details of the report were pretty awful.  Spending on vehicles, gasoline, building supplies, general merchandise and even the Internet were down.  There was a sharp rise in purchases of furniture and health care products, and we ate out a little more, but that was largely it.  But gasoline prices were down, so we can take that out.  Vehicle demand is still reasonably good and indeed, the annualized pace of salesin September was slightly above the August rate.  If you remove these two categories, as they tend to be affected by either prices (the data are not price-adjusted) or temporary factors, third quarter sales grew at a robust seven percent annualized pace from the second quarter.  And that points out what I always point out: One month’s data don’t necessarily give a good picture of the trend.

On the housing front, the National Association of Home Builders’ Index popped in October.  It hits its highest level in nearly two years. All three components, present conditions, future sales and traffic, were up solidly.  There was one concern in the report: Not all regions are seeing an uptick in activity.  In the West, conditions soared, while they were better in the South.  But the Northeast and Midwest had declines in their overall indices.

MARKETS AND FED POLICY IMPLICATIONS: While it may be clear that consumer spending is slowing, it is not clear the extent to which that is happening.  Just looking at September’s numbers gives the impression that the canary is starting to keel over.  But adjusting for volatility in the data doesn’t confirm that trend.  Consumers are still spending fairly decently, though as is abundantly clear, at a somewhat slower pace than they had been.  We are looking at a moderation not a collapse in demand and that is why third quarter growth will likely come in at roughly two percent.  That said, the outlook is for further deceleration in household spending.  With job growth, wage gains and hours worked easing back, the gains in income needed sustain strong consumption are just not there.  The headline should give investors pause, but they are still focused on the China trade talks.  While a deal was supposed to have been agreed to, it is unclear when or if a mini-agreement will be signed.  So don’t unbuckle those seat belts just yet.

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.