KEY DATA: IP: 0%; Manufacturing: +0.2%/ PPI: 0%; Goods: +0.4%; Services: -0.3%/ NAHB: flat

IN A NUTSHELL: “Inflation is slowly creeping upward and manufacturing is coming back, further reasons for the Fed to move in December.”

WHAT IT MEANS: Day after day, report after report, it is clear the economy is slowly picking up steam and inflation is on the rise and today’s numbers support that view. Industrial production was flat in October as utility production was down, likely because of weather issues. Meanwhile, manufacturing output picked up steam. Almost every component in the durable goods sector increased, something we rarely see. The vehicle and computer and electronic sectors led the way. Nondurables was weak, especially energy and apparel. Interestingly, mining activity rose. Maybe the energy sector is starting to stabilize.

Inflation has been running below the Fed’s target, but the data hint that the days of sub-2% price gains may be coming to an end. Yes the Producer Price Index was flat in October, but goods inflation, which had been the restraining force for quite a while, has turned positive. While there was a sharp decline in services inflation, it looks to be more of an oddity than a trend. This segment of the wholesale costs has led the way for a long time, so a periodic down tick should not be taken as a warning sign, at least not yet. Looking ahead, intermediate goods costs are rising and that portends additional pressures in the months to come.

The National Association of Home Builders reported that its Housing Market Index was flat through the first part of November. Still, the level remains high, nearly matching levels seen during the housing bubble. This sector appears to be growing solidly and the strength is pretty much across all regions.

MARKETS AND FED POLICY IMPLICATIONS: Yesterday we saw that retail sales were strong and today that manufacturing production is picking up. When it comes to inflation, yesterday it was reported that import prices rose and today that wholesale goods prices increased. Estimates of fourth quarter GDP are coming in near the 3% range, which could make it two consecutive quarters of solid economic activity. With 10-year Treasury rates up over 70 basis points in four months, the markets are signaling the Fed that it is time to move. And if you listen to the Fed members’ speeches, the messages are coming in loud and clear that a rate hike in December is likely. There are still four weeks and another employment report before the next FOMC meeting, but barring a major meltdown in something, the funds rate is going up. What does that mean for the economy? Not much, unless it is finally the start of an extended period of rate increases. We thought that would be the case when the Fed finally moved last December, but alas, the gurus of monetary policy forgot to awaken from their winter slumber and did nothing. If Trump’s tax and spending plans are implemented, fiscal policy will shift from negative to strongly positive, accelerating growth. Given we are near or at full employment, inflation should continue to rise and that could put the Fed on a rate hike fast-path. Trump’s statement that he will not reappoint Yellen will not stop her from doing what she needs to do and that is likely give us at least two if not more rate hikes next year.

KEY DATA: Openings: +33,000; Hires: -187,000/ Delinquencies (Over Year): -24.8%/ NFIB Optimism: +0.8 points; Economic Expectations: -7 points

IN A NUTSHELL: “The labor market may be tightening and the housing market healing, but the election is worrying small business owners.”

WHAT IT MEANS: Hooray, it’s Election Day and I just got back from voting. It looks like a record turnout in my area. I live in a swing state, where there is also a critical Senate battle, and a swing county, where there is a key Congressional seat at stake.   In a few hours, I can take off my sound canceling earphones, replace my remote’s mute button and once again start watching network television. The decibel level and nastiness of the political attacks has made me skip television except for On Demand, HBO and stations that are too small to bother with. Today is freedom for my eyes, ears and mind day.

Okay, what about the economy? It is actually pretty good. The Job Openings and Labor Turnover Survey (JOLTS) showed what we all know: There are lots of job openings but not a lot of people to fill those positions, so hiring is lagging. The openings rate, which is openings compared to employment, is slightly below the record high. If firms are not listing openings because they assume they will not be filled, the rate may be artificially depressed. The key quit rate is also moving up to near record highs. This indicates workers are finally feeling confident about moving from one job to another.

The housing market is close to healed. Home prices are nearing previous highs nationally and are above them in a growing number of markets. But more importantly, the number of distressed homes is nearing pre-recession levels. CoreLogic reported that the percent of homes that are seriously delinquent dropped sharply in September and now stands at the lowest level since August 2007. The foreclosure rate is also dropping, which makes sense given the declining number of homes facing action. There are just a few states, such as New Jersey and New York, where the percent of homes in foreclosure remains extremely high. The drop in the number of problem mortgages is reducing supply and helping drive up prices.

The National Federation of Independent Businesses reported that confidence rose minimally in October. However, it was pointed out that key decisions, such as capital spending, are being placed on hold because of uncertainty over the election. Hopes that conditions will improve over the next six months plummeted.

MARKETS AND FED POLICY IMPLICATIONS: Given this campaign, does anyone think that investors will be watching today’s numbers closely? They aren’t trees falling in a forest, but they aren’t going to make any waves either (my mind is fried from this election, so please excuse the mixed metaphors.) But they do add to the growing pile of data the Fed can use to argue for a rate hike.  

KEY DATA: ISM (NonMan.): -2.3 points; Hiring: -4.1 points/ Layoffs: -31%/ Productivity: +3.1%; Labor Costs: +0.3%/ Jobless Claims: +7,000

IN A NUTSHELL: “The economic mixed messages tell us that growth is okay, but that’s about it.”

WHAT IT MEANS: One month things are up, the next they’re not and that seems to be the pattern in almost all the data. For example, the Institute for Supply Management’s Index of NonManufacturing activity fell in October after having surged in September. Interestingly, the index level is precisely the same as the average for the past twelve months. In other words, the services segment of the economy is growing moderately but is not accelerating. New orders grew more slowly, but that is only because they had jumped last month. Export demand eased a touch but imports were up. That makes sense given the U.S. economy is still doing better than any other industrialized nation. Order books continue to fill, so activity should be sustained going forward. Finally, the hiring index dropped sharply, but don’t take that as indicating job growth is faltering. The index was up a lot more in September than it dropped in October, so payroll gains in tomorrow’s employment report should be decent.

The labor market is still quite strong – and tight. Challenger, Gray and Christmas reported that layoff notices declined sharply in October and were down significantly from September 2015 levels. The total was the lowest October number since 1999, the end of the Y2K era. So far this year, layoff announcements are down over 14% and hiring plans are up over 8%, signs that the labor market continues to tighten. That view is supported by the jobless claims numbers. Though they were up last week, the level remains quite low.

Moribund productivity has been a major worry, but that seemed to have changed in the summer. Third quarter nonfarm productivity jumped as output was up sharply but hours worked rose minimally. As a consequence, labor costs were kept under control. Hourly compensation did increase at a solid pace, but so did production. While these numbers were great to see, it should be noted that there might be an issue with the seasonal adjustments. This is the fourth consecutive year that third quarter productivity posted a sharp increase from the second quarter number and the third year in a row that the third quarter number was the strongest for the year. These data do bounce around and a consistent pattern is an oddity.

MARKETS AND FED POLICY IMPLICATIONS: The Fed has spoken, so we can put to bed any rate hike discussions for a few more weeks. Janet Yellen’s term as Fed Chair doesn’t end until February 3, 2018 and she is going nowhere, regardless of the outcome of the election. Thus, expect her to do what she thinks is right, not what she thinks will get her reappointed. Fed Chairs just don’t operate any other way. But if Chair Yellen is hoping to see some really good economic numbers that would support a rate hike, she will have to wait at least another day. Today’s data simply reaffirm the belief that the economy is moving ahead at the pace that we have seen for several years now. With the October jobs report being released tomorrow, there is little reason for investors to go out on the limb.

KEY DATA: GDP: +2.9%; Consumption: +2.1%; Consumer Prices: +1.4%/ ECI (Over Year): +2.3%; Wages: +2.4%

IN A NUTSHELL: “After three tepid quarters of growth, the economy was due for a rebound and it got it.”

WHAT IT MEANS: The economy continues to plod along. Growth expanded solidly in the third quarter. While some may say that 2.9% is nothing special, given that trend growth is about 2.25%, the number posted for the summer increase is quite solid. The details say the same thing. Household spent moderately but not exuberantly. They bought big-ticket items and services, but not soft goods. Businesses invested in structures and intellectual property, but not for machinery. The government essentially got out of the way. There were two surprises, at least to me, in this report. First, housing was down sharply. This sector has been improving steadily and I suspect it will add to growth in the fourth quarter. The second was the narrowing in the trade deficit. Despite the weakness around the world and a still strong dollar, U.S. businesses did quite well shipping products overseas. In contrast, imports hardly increased. The consumer is buying lots of goods, so look for that improvement to fade quickly. Finally, after an actual reduction in inventories in the spring, firms stocked up in the summer, adding significantly to growth. On the inflation front, consumer prices rose modestly. Excluding food and energy, they were up a little faster (1.7%) but still not at the Fed’s 2% target.

The Employment Cost Index was also released and in the third quarter, compensation rose moderately. Wage and salary gains are accelerating, but very slowly. In September 2015, the year over year rise in wages and salaries was 2.1%, compared to 2.4% in September 2016. Those working in finance and hotels and restaurants did a lot better. Benefits are accelerating faster, though. The September 2015 increase was 1.8% compared to the current 2.3% gain. Public sector benefit increases drove that acceleration. Public worker wage gains, though, rose slower than private sector employees. Finally, nonunion compensation gains continue to outpace union increases.

MARKETS AND FED POLICY IMPLICATIONS: Economic growth is neither too hot nor too cold, but it is hardly just right. Weak productivity gains and slow labor force growth are reducing the potential for the economy to expand, so we really need to get realistic about what is possible. Of course, in this environment where all economic numbers are viewed as political talking points, this report will either be called terrible or great. It is neither. It is, however, what we should get used to because it is not likely we will go back to any extended period of 3.5% or 4% or 5% growth that some claim they will create. Janet Yellen might like the economy to run hot, but how you get there is anyone’s guess. Low rates are not doing the job. Which brings us to next week’s FOMC meeting. Nothing that has come out requires the Fed to do anything. With the election less than a week after the statement is released, it is doubtful the Fed will announce a rate hike. But I do expect that the statement will hint quite strongly at a move in December by saying something like “a rate hike by the end of the year is possible (or likely or whatever)”. Given there is only one meeting left, that kind of limits things. Investors might like this report as it hints at continued good profits going forward. Sadly, the election is still looming.

KEY DATA: Imports: +0.1%; Non-Fuel: 0%; Exports: +0.3%; Farm: -1%/ Claims: unchanged

IN A NUTSHELL: “With the labor market tight and inflation soon to reach the Fed’s target, a rate hike is looking likely.”

WHAT IT MEANS: Of the Fed’s two mandates, inflation has been the one that has not been reached. That could change soon. Import prices rose modestly in September, but the big story was a pop in fuel costs. Keep in mind, the energy price decline has reduced the overall inflation gain by roughly 0.5 percentage point. While September energy costs were still about 10% below 2015 levels, by the end of October, that decline could have been totally wiped out. That would put the overall inflation rate closer to 1.5% or a little higher and excluding food and energy, it would be above the Fed’s 2% target. Still, inflation is hardly a scourge that the Fed must meet head on with vigor. Excluding fuel, import prices were flat, so don’t expect domestic prices to rise sharply. Yes, imported food costs moved upward and capital goods prices rose modestly as well. But with imported consumer goods costs flat, inflation excluding energy, is not likely to surge. On the export side, the farm sector is still reeling from weak pricing power, but many of the other export industries are showing some ability to raise prices.

On the labor front, unemployment claims remained at record low levels. The desire to hold on to workers is great and that should keep job gains at solid levels.

MARKETS AND FED POLICY IMPLICATIONS: The Fed released its “minutes” of the September 20-21 meeting yesterday and it is clear that some members are pushing very hard for a rate hike as soon as reasonably possible. Normally, I would say that could occur at the next meeting, but since it ends the Wednesday before Election Day, the FOMC will likely pass but make it clear that an increase in December is quite likely. If I am correct, the Fed could have the cover to move in December as the labor market is clearly tight while inflation should be near if not even above the 2% target. In other words, barring some shocking news and given the dissension on the Fed, a December rate hike should be viewed as highly likely. The weak Chinese trade data, though, is a warning sign that the global economy is not in great shape and the Fed seems to look for any reason to hold back, so an increase isn’t a given.

KEY DATA: Payrolls: 156,000; Private: 167,000; Unemployment Rate: 5% (up 0.1 percentage point)

IN A NUTSHELL: “A lack of qualified applicants is limiting hiring while growing job openings are bringing people back into the market, all signs of a labor market near full employment”

WHAT IT MEANS: If Fed members were hoping for a strong September jobs number, they didn’t get it. Yet the employment report neither put the kibosh on a December rate hike nor provided cover for one. Payrolls increased a little less than expected, but the private sector hired people at a solid pace. It was the government that restrained job growth. Remember, a job is a job, no matter who does the hiring. As for the details, manufacturers continue to slice payrolls. Despite near record sales, the vehicle sector downsized. There was also the usual oddity. This time it was a huge 14,000-worker reduction in the transit and ground transportation sector. Did someone go out of business while I was not looking? Back that out and the number comes in right at expectations. Indeed, there were few other surprises as just about every other sector added workers at a reasonable pace. Hiring may not have boomed but wages and hours worked were up solidly, implying that personal income was up strongly.

As for the tick up in the unemployment rate, it was more a rounding issue than an increase. The rate was 4.92% in August and 4.96% in September. That is well within the margin of error. But more importantly, there was a large rise in the labor force, which led to an increase in the participation rate. That is expected at this point in the cycle. Indeed, I commented yesterday that a tick up in the rate shouldn’t be a surprise if the labor force surged.

The so-called “real” unemployment rate, the U-6, stayed at 9.7%. But let me say once again, this is meaningless number. It includes people who want full-time jobs but can only get part-time jobs. The problem is that businesses have shifted hiring strategies and now prefer more part-timers than in the past. People might want to work full-time, but if businesses don’t want full-timers, there is nothing workers can do. This is a structural shift and comparing today’s U-6 rate with those of the past is pointless. It is not the economy that has caused the rate to be high, but business hiring decisions. So, either blame businesses for profit maximizing by hiring more part-timers or dump the number. I say just dump the number.  

MARKETS AND FED POLICY IMPLICATIONS: I am sure this report will be spun in so many ways that we will all be dizzy by day’s end. My take is simple: The lack of available workers is limiting the ability of firms to hire. It is not that they don’t want to, it is that they cannot find qualified workers at wages they are willing to pay. Thus, moderate job gains are likely to persist and are not a sign of economic weakness but are a sign of a tight labor market. Expect to see the unemployment rate bounce around, but slowly decline. This is also a normal pattern. Most economists thought this would happen a year or even two years ago, but that pattern was delayed. When job openings are high and the amount of “excess” or readily available labor is low, people who have given up come back into the market. That is happening now and is slowing the decline in the unemployment rate. As for the Fed, this report neither screams “hike” nor forces the FOMC to punt again. With the members leaning toward a hike this year, even mediocre reports like this one are still good enough to allow for a rate hike in December. That is what I expect.  

KEY DATA: Layoffs (Over Month): +37.7%; Over Year: -24.7%/ Claims: -5,000

IN A NUTSHELL: “If the September jobs report is lacking, the lack of available workers may be the major reason.”

WHAT IT MEANS: Tomorrow is Employment Friday and today’s data point to a tightening labor market. Whether that shows up in the September data is another story, but regardless, there is every reason to think we are close to or at full employment. First, layoffs are slowing. Yes, Challenger, Gray and Christmas reported that notices were up in September from the August level. But there is no way to seasonally adjust these data as the announcements are largely random. What we do see is that third quarter layoff notices were down from second quarter as well as from 2015 levels. Importantly, the energy sector, where nearly a quarter of the notices have originated, is starting to stabilize. With oil prices breaking $50 per barrel, that trend should continue. I expect the last quarter of the year to show an even better improvement from 2015.

A second indication of how tight a market firms are dealing with comes from the continued decline in unemployment claims. We are at record lows, given the size of the workforce, as the inability to find qualified workers is forcing firms to do almost everything (except is appears, raising wages) to hold on to their current employees.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow’s employment numbers have the potential to create a lot of confusion. First, it is totally unclear what should be considered a strong number. Many economists are coming to the belief that given the low unemployment rate, job gains above 150,000 would be really good, while really strong would be above 200,000. That seems odd since we have averaged about 200,000 per month for the past five years. But if firms cannot find qualified workers and/or are unwilling to pay up to get them, hiring will be sluggish. Gone are the days that you just advertise an opening and presto, a surfeit of qualified applicants show up at your door (or your inbox). While HR heads understand that reality, CEOs and CFOs don’t seem to want to accept it. They still ask why should they pay for new workers. Duh, because you cannot get quality workers these days without getting them to change jobs and they will not do that unless there is a clear financial advantage to move. That said, given the surprisingly soft private sector employment increase in August, we could see businesses adding close to 200,000 new positions. That would be a great number, no matter what the headline says. As for the unemployment rate, it’s a toss up whether there is a decline to 4.8% or the rate remains at 4.9%. The unemployment rate normally falls slowly when we are at or below full employment, as fewer positions are filled but discouraged workers come back into the market. Indeed, it is not unusual for it to rise in any given month if the labor force has one of its periodic surges. As I like to say, the economic reality is in details, so focus on the factors that drove the headline numbers.  

KEY DATA: ADP: 154,000/ ISM (Nonmanufacturing): +5.7 points; Orders: +8.6 points/ HWOL: -93,800 / Trade Deficit: $40.7 billion ($1.2 billion wider)

IN A NUTSHELL: “On this big day for data, it likes like the economy is strengthening even if job gains may not be great.”

WHAT IT MEANS: With Friday being the day we get the September employment numbers, hints at what they may look like are analyzed carefully. ADP’s report on private sector job gains came in a little lighter than expected, as increases in small businesses were soft. That may be due to some volatility in those numbers, but it could also be a warning about some softer economic growth. That said, the numbers don’t imply a weak jobs report. ADP’s average for August and September was about 165,000 per month. With only 126,000 being created in August, the government’s number on private sector gains could be between 175,000 and 200,000, which is where I have it. One warning, government education jobs have been running above trend, so watch for that segment to restrain job growth. Also, the soft manufacturing sector could also lower the September number.

Adding to the uncertainty over Friday’s report was the drop in help wanted ads online. The Conference Board’s measure was down after being largely flat August. Still, the third quarter average was up from the second quarter, a turnaround from the large declines in the spring. That seems to imply the market has firmed, or firms are feeling the pressure, again, to fill all those open positions that they had decided not to bother filling.

On the economic front, The Institute for Supply Management’s NonManufacturing Index surged in September. The report was strong across the board as orders jumped, hiring increased sharply and order books started filling again. This reinforced the gains that were seen in Monday’s manufacturing report, which was also up nicely, led by a major rebound in new orders. The strong rise in services hiring and the almost neutral manufacturing employment index holds out some hope that Friday’s report could be better than expected.

The trade deficit widened slightly in August. The major reason for the increase was payments for the broadcast right of the Summer Olympics, which disappears until the Winter Olympics starts. In other words, that was a temporary issue. Exports rose because of a surge in nonmonetary gold. Meanwhile, overseas sales of food and capital goods (aircraft) were down while the increases in vehicle and consumer goods shipments were relatively modest. We imported more of most things except consumer goods and industrial supplies (mostly nonmonetary gold, again). Adjusting for prices, trade could add to third quarter growth.

MARKETS AND FED POLICY IMPLICATIONS: The recent economic data seem to show that whatever malaise the economy was in during the first half of the year was reversed in the summer. But jobs matter, so watch Friday’s number, which I expect to be around 190,000 – but only because the private sector job gains in August were well below normal. It will be make up time, not a shift to better job gains. With the unemployment likely to decline slightly, there are few people out there looking for jobs who aren’t already employed. Firms need to either poach workers from other companies or move their part-timers into full-time positions. Given the reluctance to pay up to attract workers, it is likely that job growth in the 150,000 range will become normal. That might appear disappointing, but slower job growth is what happens in tight labor markets. How investors read today’s data-dump is unclear, but the numbers point to decent economic growth with job gains about as good as can be expected under the circumstances.

KEY DATA: Spending: 0%; Income: +0.2%; Prices: +0.1%; Excluding Food and Energy: +0.2%/ Confidence: +1.4 points

IN A NUTSHELL: “With incomes still growing slowly, consumers are not overly excited about things so they are not going out and shopping ‘till they drop.”

WHAT IT MEANS: If consumers are driving the economy, they seem to be stuck in traffic. Household spending was flat in August, but that was not really a surprise. Vehicle sales were down and that led to a sharp decline in durable goods demand. But consumption of nondurables was also off, so it is clear people didn’t visit the malls a whole lot either. However, people did purchase all sorts of services, which does make up two-thirds of consumption. So that is a positive sign. When you adjust for inflation, spending actually declined and so far this quarter, consumption is growing at a disappointing 2.3% pace. I suspect that will improve as vehicle sales may have rebounded in September.

The real question is whether spending can accelerate and that depends upon income growth and confidence. Household disposable income did rise a touch in August, but not greatly when you adjust for prices. Worse, wages and salary gains came to a near halt. Why that happened is anyone’s guess, but if workers don’t have more money to spend, businesses will not see spending rise sharply, especially since people are trying to save. The savings rate inched up in August, an indication that households are not totally comfortable about the state of the economy. The University of Michigan’s Consumer Sentiment Index rose in September after having dropped in July and August. The index has gone nowhere this year as it was noted that the average for the nine months was almost exactly the same as the September level.

On the inflation front, prices rose minimally, but a touch faster when food and energy were excluded. Since September 2015, overall consumer costs were up a modest 1%, but excluding food and energy, they rose 1.7%, not that much below the Fed’s 2% target. The energy restraint should be largely disappearing over the next few months, so watch for the top line inflation rate to start approaching 2% by early 2017.

MARKETS AND FED POLICY IMPLICATIONS: I am sure the Fed would like to see wages rising faster and households spending that money vigorously. They will just have to wait longer for that to happen. With concerns about Deutsche Bank overhanging the market, the soft consumer spending number cannot be helpful. Interestingly, eight years ago, the rumors would have created major fear in the markets, which doesn’t seem to be the case right now. It just may be that all the new regulations and demands for additional capital have actually limited what could have been a time of worry. But, of course, regulation is bad, at least that is all I hear from my colleagues in the financial sector. Maybe not so much. Hopefully, the issues with Deutsche Bank will be eased by December. I don’t want the Fed to have another excuse to punt.

KEY DATA: GDP: 1.4% (up from 1.1%)/ Pending Sales: -2.4%/ Claims: +3,000

IN A NUTSHELL: “A strong labor market doesn’t seem to be enough to get the housing market moving strongly forward.”

WHAT IT MEANS: Well, it turns out the economy grew faster in the spring than thought. Of course, the difference between a 1.4% growth rate and a 1.1% pace is minimal as the level is still disappointing – to say the least. However, the second revision to second quarter GDP did provide some hope for the future. Most of the added growth came from business investment, which instead of declining was actually up a touch. That is not to say businesses are out there investing like crazy, they are not, but this report makes it more likely firms are ramping things up even more this quarter as after tax profits were up.

The housing market is just not gaining any momentum. The National Association of Realtors reported that pending home sales eased in August, the third decline in four months. Only the Northeast showed an uptick in activity, but that is the smallest region. Inventory, or the lack thereof, was indicated to be the major issue. That has been a concern for quite some time now and with housing starts improving only slowly and new listings of existing homes barely keeping up with actual sales, it is hard to see that the restraint to sales will be removed anytime soon. The lack of supply will, however, keep pressure on prices.

Can people afford the rising home prices? Only if their incomes keep increasing as well and that has to come from higher wages. Clearly, the labor market is tight as unemployment claims, which rose a touch last week, remain near record lows. But that has been the case for months now and wage gains remain sluggish, so I don’t know when that might change.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports really shouldn’t move markets or Fed members. Yes, the economy is moving forward, but growth is hardly strong enough to force the FOMC to do anything. The key housing market is suffering from a lack of listings and new product and until that is corrected, sales will not rise sharply. And until worker incomes rise faster, their ability to spend lots more money will remain limited. GDP growth this quarter, which ends tomorrow, should be solid enough to provide the Fed with the basis for raising rates in December, but only if the other data are supportive. At least the election will be over and either Janet Yellen will find herself in an untenable situation or she will be free to do what she should be free to do. When politicians attack the Fed, they politicize what almost every economist knows to be non-political decisions. That is dangerous as the last thing we need are politicians dictating monetary policy as well as fiscal policy. We know fiscal policy is a total disaster and the only adults left making economic policy in Washington reside at the Fed. I have been critical of Chair Yellen, but I also support her totally. Attacking her for political purposes is shameful, destructive and should be refuted. There, I have said my piece.