KEY DATA: Consumption: +0.4%; Income: +0.2%/ Home Prices: +1.1%; Year-over-Year: +5.7%

IN A NUTSHELL: “The disconnect between Main Street and the C-Suite continues as the consumer alone continues to shoulder the burden of keeping the economy going.”

WHAT IT MEANS: Leadership can be lonely and the consumer is one lonely leader. While CEOs hunker down and wait for the sky to fall, households continue to spend money quite solidly. Consumption was up in June as sales of soft-goods and services jumped. The only thing holding down spending was a sharp drop in vehicle sales that led to a decline in durable goods demand. On the income side, earnings rose a little less than expected, given the sharp increase in payrolls. Wage and salary reductions in the manufacturing sector restrained the gain as compensation was up decently in services. With incomes expanding slower than spending, the savings rate dropped to one of the lower rates since the Great Recession took hold. As for inflation, it was modest whether you included or excluded food and energy.

As we have seen in the many sales numbers that were recently released, the housing market remains in very good shape. CoreLogic reported its numbers on June home prices and they rose solidly both over the month and over the year. The pace is not so great that it should create worries that a housing bubble is forming. Only two states, New Jersey and Connecticut, posted declines over the year.  

MARKETS AND FED POLICY IMPLICATIONS: The income and spending data were not a major surprise as they could be largely inferred from the second quarter GDP report. But they do remind us that households are more than willing to part with their hard-earned income. They are buying all types of goods and services and investing in housing. Meanwhile, CEOs have hunkered down and are refusing to invest in their businesses. Capital spending is soft and restraining growth. Even if you exclude the energy sector and its related industries, the level of investment growth is nothing special. That raises the question: Why the disconnect between Main Street and the C-Suite? Has the world economy totally taken over thinking at the top of the corporate ladder? If businesses don’t invest, future economic growth and productivity will be lowered and that is what is happening. Earnings may not be great right now, but they will not get a whole lot better if businesses don’t improve their productive capacity – and they are not doing that. Propping up current earnings by limiting capital spending is shortsighted. That failure is something that should concern the Fed, even as the members gain solace from the solid consumer spending and income numbers.

KEY DATA: ISM (Manufacturing): -0.6 point; Orders: -0.1 point; Hiring: -1 point/ Construction: -0.6%

IN A NUTSHELL: “Manufacturing continues to expand and there are signs conditions may be firming.”

WHAT IT MEANS: Manufacturing has been the weakest link over the past year and the softness continues. The Institute for Supply Management’s reading on manufacturing activity eased in July. That said, the sector is growing, not declining. Indeed, the overall activity index was above the average for the past year and was the second highest since last August. Only the June reading was greater. That is good news and may be pointing to a rebound in the sector. The new orders index was off a tick in July, but the level is still quite solid and only 15% of the respondents indicated demand fell. Both import and export orders remain in good shape, even if they are not growing faster. Production is also good and growing. Still, there were warning signs in the report. Backlogs declined and thinning order books don’t point to a future acceleration in activity. Worse, hiring is softening again. The sector has been shedding workers for much of the past year and it may be doing so again.

Construction is another area of concern as spending declined in June for the third consecutive month. That is the first time that has happened in 5½ years. Both public and private construction activity were down, but the real weakness was in nonresidential spending. Manufacturers reduced their spending sharply. Surprisingly, private health care and educational construction was also off a lot. These are areas where we would expect construction to be solid and that it isn’t, is a worry.

MARKETS AND FED POLICY IMPLICATIONS: The headline ISM number was down but the details of the report really don’t point to a softening in manufacturing. Of course, this has not been a sector that is strong, so any easing in momentum has to be watched carefully. For me, a growing manufacturing is the only thing I want to see and it is doing that. Unfortunately, the recent decline in energy prices is not going to help that sector or the manufacturers that supply machinery and equipment to it. Also, the dollar has started to trend upward slowly. That too is a worry for manufacturers. For the Fed and investors, there are some important numbers released this week, such as spending and income, but the big number is, as usual, the employment report. So, while other numbers may cause some optimism or pessimism, don’t expect the markets to move sharply until we get the payroll data. After the June surge, it is expected that the gain will be back toward trend, which is somewhere in the 150,000 to 175,000 range. That is enough for the unemployment rate to decline slowly over time and we could see that happen in this report. Regardless of the data, don’t expect any major reaction from the Fed until they see the job numbers. And then, the members seem to stuck in neutral, so even a second strong jobs report in a row is not likely to cause a sudden discussion about near-term rate hikes.

KEY DATA: GDP: +1.2%; Consumption: +4.2%; Private Investment: -9.7%; Consumer Inflation: +1.9%/ ECI (Over Year): +2.3%; Wages: +2.5%

IN A NUTSHELL: “The consumer is spending, but the failure of the corporate sector to invest is restraining growth.”

WHAT IT MEANS: The economy is moribund – maybe. Second quarter growth was well below expectations, but the details are not as negative. First of all, households went out and spent money like crazy on everything. Energy, even adjusting for prices, was the only major category posting a decline. But then there was the business community. Investment in structures and equipment fell sharply. There was a moderate increase in spending on intellectual capital. But the real killer in the report was a huge reduction in inventories, which cut growth in half. This was the first drop in inventories in nearly five years. In addition, government at all levels throttled back spending. Interestingly, the trade deficit actually narrowed, which helped growth. Exports rose modestly while imports were down a touch. Even with the business sector cutting back for the third consecutive quarter, the key measure of the domestic economy, final sales to private domestic purchasers, was up solidly. That shows the heart of the U.S. economy is still moving ahead decently despite the weak topline number. Consumer inflation rose at the fastest pace in two years but over-the-year, it is still well below the Fed’s target rate.

On the labor compensation front, employment costs rose moderately in the second quarter. Looking at the data over the year, though, there was a sharp acceleration in wages and salaries, especially in the private sector. The government, in contrast, has kept wage gains from accelerating, though it is doing a worse job in controlling benefits. At least on the wage side, the increases are back to what was common in much of the 2000s. In contrast, benefit costs are growing at less than half the previous decade’s pace. And I thought health care costs were surging.

MARKETS AND FED POLICY IMPLICATIONS: Today’s numbers create a real conundrum for the Fed. Overall growth is too low for the members to argue a rate hike is needed or even warranted. But the report’s composition implies there is decent underlying growth as government spending is not faltering and inventories will be rebuilt. Inflation remains low, but has accelerated. Labor costs are also on the rise, which should tell Chair Yellen that the slack is disappearing. But most importantly, the annual revisions to GDP, which came out in this report, show how the Fed’s use of current data is a true mistake. While annual growth rates for the past few years were not change significantly, some of the quarterly numbers were revised sharply. For example, most of us were calling for a rate hike in the first half of 2015, but the Fed backed off because growth was supposedly weak. First quarter growth was 0.6% – at least that is what everyone thought. Wrong! After criticism by Steve Liesman of CNBC that the first quarter numbers seemed to be systematically understated, the government went back and researched the issue. He was right and now the Bureau of Economic Analysis puts first quarter 2015 growth at 2%. Would the Fed have nudged up rates if it knew that was the real growth rate? Possibly. More importantly, in an environment of volatile data and major revisions to numbers (GDP revisions average about 1.2 percentage points!), basing monetary policy on current data is like driving with a broken windshield: Don’t be surprised if you wind up in a ditch. But this Fed doesn’t seem to be overly concerned about using suspect data and this dumb data dependency will likely continue. As for investors, they will probably look at the top line number, say the sky is falling and react accordingly.

KEY DATA: Orders: -4%; Excluding Aircraft: +0.3%; Capital Spending: +0.2%/ Pending Home Sales: +0.2%; Year-over-Year: +1%

IN A NUTSHELL: “Big-ticket demand remains soft and that needs to change if the economy is to pick up steam.”

WHAT IT MEANS: The manufacturing sector has been buffeted by a variety of issues, including the strong dollar and the collapse of energy prices which led to energy-sector capital spending dropping precipitously. The energy-sector cut backs may be stabilizing a bit with the move back up in prices. However, there are still reductions occurring that are restraining overall investment demand. Durable goods orders fell sharply in June, but the major reason was a sharp reduction in the very volatile aircraft segment. Excluding both civilian and defense orders, which don’t lead to a short-term change in activity given the long lead times for these products, orders actually rose. While that sounds good, the increases were not that broadly based. Continued solid vehicle sales led to a jump in vehicle orders and there was an increase in electrical equipment and appliances. But there was a reduction in orders for metals, computers and communications equipment. Demand for machinery was essentially flat. As for business capital spending, if you exclude government and aircraft, it was up modestly. Up is nice, but there doesn’t seem to be a major drive on the part of the companies to invest heavily.

On the housing front, the National Association of Realtors reported that pending home sales moved up a touch in June after falling sharply in May. The index surged in April but came down to more a typical level in May and the June index continues what has been a slow, but steady rise over the past few years. That said, there is little reason to expect a major uptick in sales, if only because there is a dearth of inventory.

MARKETS AND FED POLICY IMPLICATIONS: The Fed’s FOMC meeting statement is expected in a few hours, so investors will not likely react a whole lot to these data. Will they have an impact on what the Committee says? Probably not. The housing market is getting better, but sales are not that great an indicator of the state of the sector since there are a limited number of homes for sale. The limited supply is viewed as the major restraint to sales growth and is the reason we are seeing such solid increases in prices.   Until the energy sector stabilizes, there will be limited growth in durable goods orders. Nothing new there. In any event, the Fed members seem to search every meeting for something to worry about. While most of the issues they were so concerned about at the last meeting have faded, that doesn’t mean they will say conditions have firmed enough to start thinking about normalizing rates. So investors will wait and see and react to the statement. 

KEY DATA: ISM (NonManufacturing): +3.6 points; Orders: +5.7 points; Hiring: +3 points/ HWOL: -226,700; Trade Deficit: $3.8 billion wider

IN A NUTSHELL: “With activity rebounding in services and strengthening in manufacturing, it is unclear why firms are not looking for more workers.”

WHAT IT MEANS: Friday’s employment report is a critical one given the uncertainty created by the Brexit vote. If you believe those at the forefront of business activity, the nation’s supply managers, the June job gain should be a pretty good one. Today, the Institute for Supply Management (ISM) report on the non-manufacturing portion of the economy was much better than forecast. That came after last Friday’s report that manufacturing activity and hiring picked up in June. Orders surged, including both imports and exports, activity jumped and hiring rose solidly. In other words, the sector showed clear signs of accelerating from its more moderate growth pace of the past few months. Indeed, the overall index hit its highest level since last November. The only negative aspect of the report was that backlogs eased, which was odd given the robust rise in new demand. Still, when you are talking about most of the economy, it is good to see that conditions are firming.

Despite the indications that hiring was improving across the economy, at least according to the ISM, the Conference Board reported that online want ads dropped precipitously in June. There has been a major decline in advertising for positions this entire year. I had been assuming that it made no sense to advertise for openings that could not be filled because of the lack of workers. Now, though, the length and breadth of the decline makes me wonder if we are indeed in the middle of a major hiring cut back. We should have a better idea on Friday whether the supply managers or the online want ads better represent what is happening in the labor market.

The trade deficit widened more than expected in May. Much of that had to do with the increase in petroleum prices. In addition, there was a jump in non-monetary gold imports, which doesn’t mean much. However, the large rise in consumer goods imports points to an improving household sector, which bodes well for U.S. growth. Exports were off slightly, with declines reported in most categories. The rest of the world is still buying lots of goods from the U.S., but not at a growing pace. Adjusting for price changes, the average for the first two months of this quarter remains below the first quarter’s average, so trade could add to growth.  

MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape, despite the sturm and drang in the markets. Brexit’s aftershocks are creating uncertainty in the equity markets and a worldwide rush to the security of U.S. Treasuries. Interest rates are cratering as the 10-year note has set new record lows. That is great for those of us, including myself, who are refinancing. But it also shows the Fed has little control over the yield curve. When uncertainty strikes, the safest port is U.S. assets and that means the Fed can only sit and watch. It also points out that movements in the yield curve may have little meaning for the U.S. economy. Until the implications of Brexit are clearer, volatility in the markets is likely to continue. And since market volatility paralyzes the Fed, don’t expect any rate hikes for a while, even if the economy really is solid and job gains rebound.  

KEY DATA: ISM (Manufacturing): +1.9 points; Orders: +1.3 points; Hiring: +1.2 points/ Construction: -0.8%; Private: -0.3%

IN A NUTSHELL: “With manufacturing coming back, it looks like the early year economic swoon is over.”

WHAT IT MEANS: Manufacturing has been battered by the collapse of the energy sector and the strength of the dollar, but those factors may be moderating. The Institute for Supply Management reported that manufacturing activity improved solidly in June. New orders and production increased strongly and that led to hiring to finally kick in again. The employment index had been negative for most of the past year, so this may be a sign that firms are seeing strong enough demand to add to their payrolls. Indeed, with new orders running at a very high level, we payroll gains could accelerate, especially since order books are filling again.

Construction spending fell in May, led by a drop in government spending. Distressingly , construction of key infrastructure items such as transportation, highways and streets, waste and sewer, power and water were all down not just in May but also over the year. It is hard to grow the economy strongly if the government doesn’t invest in future-growth generating infrastructure, and that seems to be happening.

MARKETS AND FED POLICY IMPLICATIONS: The Fed was cautious in June, in part because of the softening job gains, led by contracting manufacturing payrolls. But it looks like manufacturing is coming back and that should stabilize if not lead to rising industrial employment. We will get an idea about that next Friday when the June employment report is released and I do expect a solid increase in manufacturing. Regardless, if manufacturing production really is accelerating, that would indicate the U.S. economy is on the rise and the Fed has to keep its eye on the target, which is U.S. economic growth. Of course, if government doesn’t want to spend money on what just about everyone agrees are necessary infrastructure projects, not only will near-term activity be slowed but long-term growth will be limited as well. Investors should be buoyed by the manufacturing improvement and maybe they will recognize that the U.S. economy can withstand the impacts of Brexit.

KEY DATA: Confidence: +5.6 points: GDP: +1.1% (up from 0.8%); National Home Prices: +0.1%; Year-over-Year: +5%

IN A NUTSHELL: “When the dust settles on Brexit, it will be consumer spending that will determine the course of the U.S. economy and we need to wait a while before we know what consumers are thinking.”

WHAT IT MEANS: The news is all about Brexit and while the uncertainty it has created will likely dominate discussions for a while, ultimately, the U.S, economy will rise and fall on its ability to withstand whatever shocks may come. I don’t think the impact on the real economy will be great, even if the financial economy takes some hits. Where there could be some fallout is with consumer confidence if the equity markets don’t bounce back quickly. The Conference Board’s reading of household confidence jumped sharply in June as expectations of the future as well as views of current conditions increased solidly. Respondents’ views on business conditions were positive and they expect the labor market to get better going forward. This report, though, is in contrast with the University of Michigan’s June Consumer Sentiment Index, which fell. It also came before the Brexit impacts on the markets could be determined. So, let’s wait a little while before we say that consumers are feeling good enough to keep spending.

There wasn’t a lot of growth at the end of last year and the first part of this year. Yes, first quarter GDP was revised upward again, to a more palatable but not very strong 1.1% from the previous 0.8% estimate. There were two good bits of news in the report. Business investment in software and research and development rose rather than declined and despite the strong dollar, exports expanded instead of declining.

Home prices continued to rise in April. The S&P/Case-Shiller seasonally adjusted national index edged upward but the increase over the year moderated. Two of the twenty largest metropolitan areas, San Francisco and Seattle, covered reported declines over the month. However, these areas had experiencing surging prices, so a modest drop is not a major surprise.

MARKETS AND FED POLICY IMPLICATIONS: Until we get some “major” data, such as the June employment numbers on July 8^th, the markets will probably continue to be obsessed with the Brexit issue. Of course, since no one really has a good handle on what will happen, it is the uncertainty, not the reality, that will drive market reactions. In terms of importance, the United Kingdom is the fifth largest national recipient of our exports, or about 3.7%. Thus, what happens to the British economy matters, but not greatly given that our exports to the UK in 2.015 of $56.4 billion represented only 0.3% of total GDP. The real concern is what this means for the European Union. Exports to the EU were five times greater than to the UK and that is why there is uncertainty. No one knows if this is a one-off issue or if other nations will follow. I can’t see that happening, but I didn’t see Brexit either. For the Fed, the whole Brexit issue reinforces the argument that the FOMC needs some weapons in its arsenal if it is to be in position to deal with the periodic shocks that crop up. Right now, the best the Fed can do is nothing. Doesn’t that say it all?  

In a Nutshell: “Slowing job growth seems to have spooked the Fed and the members are becoming less certain about multiple rate hikes this year.”

Rate Decision: Fed funds rate range maintained at 0.25% and 0.50%

Until the May employment numbers were released, there was a feeling that we could get an increase in interest rates either at the June or July FOMC meeting. My, how one weak number can change just about everything. Now, the Fed members seem to be trending toward just one rate hike and who knows when that will be. Of course, it only took a few months to go from two or three hikes to one, so don’t be surprised if the amorphous blob that seems to be the monetary authorities transforms into a two rate increase group by September.

The statement released after the meeting didn’t really provide a clear indication of the thinking of the participants about the economy. Actually, it was hard to figure out what the Committee thought. Consider what was written: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.” Some things were better, some were worse and some were, whatever. In other words, obfuscation rather than clarity seemed to be the main purpose of the statement on growth.

Though the statement reflects the yin and the yang of the recent economic data, the economic projections, which are released every other meeting, were decidedly downbeat. Instead of just one member expecting only one rate hike this year, that number has ballooned to six. Estimates of growth for this year and next were downgraded even as 2016 inflation expectations were increased. And maybe most telling, the median funds rate projection was reduced to 1.6% in 2017 from 1.9% and the to 2.4% from 3% for 2018. Those are large changes.

So what has happened since March 16^th, the last time the projections were released? The only significant change was a slowing in job gains. Do the Fed members really believe that the initial round of job estimates bear any resemblance to what the ultimate numbers will look like? It is hard for me to believe that is the case. Keep in mind, according to BLS, “the confidence interval for the monthly change in total nonfarm employment from the establishment survey is on the order of plus or minus 115,000”. Really, Fed members are making interest rate projections based on employment numbers that have huge variations around the estimates?

I don’t know what to say. Today, producer prices rose faster than expected as goods costs accelerated and the softening in services disappeared. Yesterday, the inflation story was sharper than expected import price increases. While manufacturing production fell, retail sales were solid in May and that came on top of a robust gain in April, indicating the consumer is spending like crazy. In other words, the economy has hardly fallen on hard times, yet the way the Fed members have reacted, you would think a major slowdown is coming.

So, what will the Fed do this year? I still expect two rate hikes. It is looking more like a September one will be the first, followed by one in December. Even a strong June employment report is not likely to get a rise out of the members, given the pretty dovish projections. They need some time to walk back these numbers and there may not be enough solid data for them to do that before the July 26-27 meeting.

(The next FOMC meeting is July 26-27, 2016.)

KEY DATA: Openings: +118,000; Hires: -198,000; Quits: -36,000

IN A NUTSHELL: “Hiring may be slowing, but it is not because the need for workers is declining.”

WHAT IT MEANS: We have had two consecutive disappointing payroll numbers and it is unclear if that is due to a lack of demand or a lack of supply. The April Job Openings, Layoffs and Terminations (JOLTS) report provides some insight into the situation. Firms are simply not bringing on workers nearly as rapidly as their need for new employees is growing. Job openings expanded solidly in April and are now back at their record highs, even as hiring slowed. Trade, transportation and utility companies had large increases in unfilled positions. Manufacturing firms hired more but still couldn’t meet their growing needs. There were a variety of other sectors, including finance, information, health care and education that couldn’t meet the growing demand for workers, but hiring in most of those areas fell. That suggests firms couldn’t find the workers they wanted. In contrast, openings in professional and business services fell sharply, as did hiring. This sector may be softening.

One of the key measures in this report is the quits rate. It indicates the willingness of workers to leave their jobs. The number and rate of quitting eased in April. While the rate is nearing historic highs, it still has a little way to go and the ups and downs in this number points to continued uncertainty on the part of workers as to the strength of the labor market.

 MARKETS AND FED POLICY IMPLICATIONS: The hand wringing over the May jobs report maybe misplaced. Yes, payroll increases are slowing, but it doesn’t look as if it is because the demand for new hires is dropping. Indeed, it looks like the need for workers is rising but for whatever reasons, firms are just not hiring. It may be because prospective employees don’t have the skills, or it could be because firms are unwilling to pay the price to attract the needed people. Most likely it is a combination of the two and that is important in understanding the dynamics of the market and the meaning of the jobs numbers. The slower rate of job creation may not be due to a slowing economy given the rise in job openings. Firms will either have to start paying more or figure out a way to raise productivity. For the past few years, firms have not done a good job of increasing worker efficiency, so it might be time for CEOs to start rethinking their strategies. Piling on more responsibilities and cutting back or limiting compensation gains doesn’t seem to be cutting it. Will they learn that lesson? Got me. As for the Fed, and especially Chair Yellen, this report reinforces her belief that the labor market is “close to eliminating the slack that has weighed on the labor market since the recession”. It’s hard to argue that there is slack in the market when we are at record highs for job openings.

KEY DATA: ADP: +173,000; Layoffs: 30,157; Claims: 10,000

IN A NUTSHELL: “The labor market is in decent shape as firms are holding on to their workers as tightly as they can.”

WHAT IT MEANS: While tomorrow’s employment report will be looked at as the be-all, end-all of labor market data, there are other elements of the market that Fed members watch. Fed Chair Yellen is focusing on labor market tightness, not just job gains or the unemployment rate itself. Thus, we need to look at some of the other numbers that provide the texture of the labor market. Layoffs are one of them. Challenger, Gray and Christmas reported that in May, layoff announcements fell to their lowest level in five months. The energy sector continued to lead the way, though the rate of job cuts is slowing sharply. Rising energy prices is apparently helping, though there aren’t a lot of workers left to cut in this sector (just a joke). The summer education cuts were also announced, but that is normal. Manufacturing was also a major player, confirming that this sector is still wobbling along.

The sharp decline in jobless claims adds to the belief that firms just don’t want to let go of their employees. We are nearing record low territory again as the early spring rise has been unwound.

As for tomorrow’s jobs numbers, ADP estimated that payrolls rose more in May than they did in April. As we saw with the layoff announcements, manufacturing continues to cut back. Large companies hired more people, but it would be nice if they actually did it with some gusto.

 MARKETS AND FED POLICY IMPLICATIONS: The labor market is in good shape, but how good we will not know until tomorrow. Even then, the data may be a confusing until we can exclude the Verizon strikers and temporary fill-ins from the numbers. But I expect the additions to payrolls to be near 200,000, adjusting for the Verizon issues and the unemployment rate to decline to 4.9%. Maybe more importantly, the hourly wage number should be solid. If it rises by 0.3%, the wage acceleration that we have been seeing lately could be viewed as becoming systemic, something that the Fed Chair needs to see before she backs sustained rate hikes. By sustained, I am talking about every other meeting for maybe a year. Then sustained would become every meeting. With the employment report less than a day away, it only makes sense that investors act cautiously. as this report has the potential to surprise in either direction.