KEY DATA: CPI: +0.4%; Over-Year: 2.2%; Less Food and Energy: +0.1% Over-Year: +1.7%/ Real Hourly Earnings: -0.2%; Over-Year: +0.2%

IN A NUTSHELL: “The continuing erosion of consumer spending power raises serious questions about future economic growth.”

WHAT IT MEANS: For the economy to continue to accelerate, consumers must step up to the plate and that is in question. Household spending power can only increase if the gains in income are not offset by the rise in prices. That means we have to look at both wages and inflation. On the inflation front, a jump in energy costs helped power another sharp rise in consumer prices in November. The surge in sales led to a jump in both new and used vehicle prices, while the cost of medical commodities also rose sharply. Food costs, thankfully, are going nowhere, though there continues to be pricing pressure for cakes and cupcakes. I am actually thinking of switching to fresh fruits and vegetables, whose costs are falling. (Not really.) In addition, apparel prices are plummeting, which is helping offset the rise in energy costs as you can put on warm clothes instead of raising the thermostat. Housing prices continue to rise at a moderate pace.

The greater than expected increase in consumer prices took a toll on household spending power. Hourly wages rose half as fast as inflation resulting in a decline in real, or inflation-adjusted income. Over the year, real wages rose minimally. Even if you adjust for the increase in hours worked, weekly earnings increased by less than one percent. In other words, people don’t have a lot more spending power today than they did a year ago. The solid gains in consumption were funded, at least in part, by a decline in the savings rate. That can continue only so long.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC will release its statement soon and it will likely say that there was an increase in the funds rate. Given the direction and level of inflation, there is every reason for the Fed to hike rates. But the real threat to the economy is the continued, almost inexplicable lack of wage increases. As long as that continues, questions have to be raised about the capacity of the economy to grow. Yes, lower tax rates will incent some additional spending by businesses, but it is likely to be on labor-saving capital projects. Firms, if they can help it, are just not willing to pay their workers more. There are lots of anecdotal stories of firms bidding for key workers but the trend is not yet widespread enough to move the data. If we don’t get better wage gains, firms will have to be cautious in spending on capacity-increasing projects, regardless of their improved bottom lines. And companies who sell to the U.S. consumer have to question whether it makes sense to expand capacity in light of the lack of spending power growth. The tax cuts will help to some extent, but with most of the household tax cuts going to upper income households, the impact on overall spending may be disappointing. That, of course, will not derail investors as they know that the bigger companies who are listed on exchanges will, for the most part, make out like bandits.

KEY DATA: ISM (Manufacturing): -0.5 percentage point; Orders: +0.6 percentage point/ Construction: +1.4%; Public: +3.9%

IN A NUTSHELL: “Manufacturing continues to surge and with government construction picking up, it looks like fourth quarter growth will be quite solid.”

WHAT IT MEANS: Can we get another quarter of 3% growth? The recent data point to that possibility. The Institute for Supply Management’s Manufacturing Index edged down in November, but that is hardly a concern. The index level remains high so a modest decline is not anything of consequence. Production soared and with new orders continuing to expand strongly and order books fattening, the output gains should continue. As a result, firms are hiring solidly.   Basically, there was little in this report that would point to a manufacturing slowdown.

Construction activity jumped in October, which really should not have surprised anyone. There is a lot of both public and private rebuilding that has to be done to repair the mess made by the hurricanes that hit Houston and Florida. Just about every component of the report was up strongly but the eye-opener was the surge in public sector activity. That points to a rise in government spending, if as expected, these gains will be sustained. On the private side, a pop in office construction points to growing confidence that the expansion will continue and that firms are willing to build for future employment needs.    

MARKETS AND FED POLICY IMPLICATIONS: Most of the data we have been getting indicate the economy is in really good shape. It looks like November vehicle sales may have been somewhat sluggish, but some issues with some data may delay the final reading. The vehicle numbers are important because they were artificially high in September and October due to hurricane replacements. A slowdown was expected, but given the robust October sales pace, we could still see vehicles add to growth this quarter. But for traders, it is all about the tax bill. Regardless of what is passed and its impact or lack thereof on long-term growth, it will create a 2018 sugar high. And since investors worry about the next quarter, the passage of a tax cut bill should be greeted joyously, even if the likelihood of that happening is already being priced in. The Fed is meeting on December 12,13 and at this point, it would be a shock if there weren’t a rate hike. That would occur even if the November jobs number, which is released next Friday, were weak. I expect that to be the case. If tax cuts hype the economy and inflation starts accelerating, more will be coming next year. Assuming a tax bill is passed, my belief is that new Fed Chair Powell will steer four more hikes through the FOMC if there is any rise in inflation. Without accelerating inflation, we should still expect three more increases next year.

KEY DATA: Real Consumption: +0.1%; Real Disposable Income: +0.3%; Inflation: +0.1%; Prices less Food and Energy: +0.2%/ Claims: -2,000

IN A NUTSHELL: “Consumers may have slowed their drive to empty their wallets in October, but if the Black Weekend is any indicator, they were just saving up for the real deals.”

WHAT IT MEANS: Having just gotten through what looks like a massive Black Friday, Small Business Saturday and Cyber Monday, news that consumers didn’t go out and shop ‘till they dropped in October was not necessarily something to worry about. Yes, households didn’t keep up the pace, but after the huge increase in spending in September, that was not a great surprise. After splurging on vehicles in September, sales ebbed, though not significantly. In contrast, consumption of services was up strongly and demand for nondurable goods rose at a decent pace. Without any additional increase, real, or inflation-adjusted consumption is already rising at a 1.7% pace so far this quarter. It looks like households will add to growth at a moderate, though not spectacular rate this quarter.

Going forward, there remain questions about the ability of households to lead the way. Disposable income was up solidly in October, but it didn’t come from wage gains, which rose only moderately, at best. Most of that increase was largely due to hiring, as hourly wage increases continue to be minimal. Still, after-tax income did increase faster than spending so the savings rate edged upward. At 3.2%, it is still too low.

As for the labor market, firms are not giving out lots of pink slips. Jobless claims declined a touch last week and the level, as usual, is quite low.

MARKETS AND FED POLICY IMPLICATIONS: Solid consumer confidence, massive job openings and little fear of layoffs is likely to translate into a very merry holiday season for retailers of all types. The early data point to a very big weekend of sales and that is good news for the economy. But with Cyber Monday lasting about six weeks and Black Friday starting in September, it is hard to know what the last few weeks of the shopping season will bring. We need the consumer to step up. Some of the good growth we have seen was driven by hurricane replacement and that is just not sustainable. With the savings rate at a level not seen except just before the start of the last two recessions, and with wage gains disappointing, there is only so much the consumer can do to drive growth forward. And if the Accounting Principals survey is any indicator, workers shouldn’t expect end of year bonuses, which firms seem to be doing away with. About the only thing saving consumers is that inflation is still low and it is not accelerating. As for the businesses taking up the slack, that too is open to debate. The tax bills making their way through Congress do little to incentivize productivity enhancing investment, so don’t expect capital spending to surge, no matter what the politicians tell us. So, let’s enjoy all the bargains we got this past week, but keep in mind that growth requires us to spend more and more and more and without the funds to do that, consumers are not likely do that.

KEY DATA: Confidence: +3.3 points/ Case-Shiller Home Prices (Over-Year): +6.2%/ FHFA Home Prices (Over-Year): +6.5%

IN A NUTSHELL: “The sharp increases in home prices and high level of consumer confidence may be something to start worrying about.”

WHAT IT MEANS: The economy is moving ahead solidly in so many ways, but there could be problems forming. According to the Conference Board, Consumer confidence rose again in November. This was the fifth consecutive increase and the last time the index was higher was in November 2000. Both current conditions and expectations were up solidly. But the surge in confidence may not be backed by economic factors. Yes, the labor market is tight, but household spending-power is going nowhere. Maybe people are actually hoping to get the $4,000 to $9,000 income increase the administration has promised, but if so, they are going to be sorely disappointed. They can hope for major tax cuts, but for most, that is just not the case. So, one cloud on the horizon is consumer confidence. Household exuberance may be somewhat irrational.

A second concern comes from the housing market. Housing prices may be rising too rapidly. Both the September S&P/Case Shiller and the third quarter Federal Housing Finance Agency indices were up solidly. Price gains may not be quite as rapid as they were last decade, but they are strong and have persisted for quite some time. Worse, near double-digit increases are being posted in a number of metropolitan area.   We may not be in a new housing bubble just yet, but the jump in prices needs to be watched carefully.

MARKETS AND FED POLICY IMPLICATIONS: When I see economic data this strong, I ask once again, “Why the mad rush to cut taxes?” I keep hearing that we need more jobs, but the problem is workers not job openings. The only time over the past forty-give years the unemployment rate was below the current level was during 2000. I keep hearing that the middle class needs a break, but about 90% of the proposed tax cuts go to businesses and upper income households. Then I hear the economy is not growing fast enough. Fast enough for whom?   The growth rate has matched trend growth for the six years. And now we see that home prices are rising sharply and consumer confidence is at seventeen-year highs. Do we really need the massive tax cuts being debated in Congress? Shouldn’t we be concentrating on productivity-enhancing reform, something the bills don’t do much of? If growth does accelerate, even if for a limited period, don’t we run the risk of bubbles forming, especially in the labor market? When you do something is often as important as what you do and the tax bills contain the wrong things at the wrong time. But tax cuts do make for great political ads.

KEY DATA: Durables: -1.2%; Excluding Transportation: +0.4%; Capital Spending: -0.5%; Sentiment: -2.2 points; Claims: -13,000

IN A NUTSHELL: “Businesses may have paused in their capital spending in October, but they are still investing heavily.”

WHAT IT MEANS: With the passage of a corporate tax cut becoming more possible, the likelihood is that future business capital spending should be strong. While there was a drop in investment in October, the trend this year is still up solidly. A sharp drop in Boeing’s aircraft orders created the decline. In contrast, vehicle orders surged. This sector has been up and down, but with demand really strong the past couple of months, it should continue to help push the economy forward. There were also increases in demand for machinery, electrical equipment, computers and communications equipment. Given the breadth of the gains, I guess you can say that this is another number where the headline was misleading.

Consumer sentiment eased a little in November. The University of Michigan’s index fell as both the current conditions and expectations were down roughly the same amount. Still, consumer confidence is up 5% over the year, a pretty solid gain.

Jobless gains fell back to more normal levels last week after having increased the previous two weeks. That said, it is clear from the level that the labor market remains quite tight.

MARKETS AND FED POLICY IMPLICATIONS: As we go into the Thanksgiving Day weekend, it is clear that the economy is in good shape. Household confidence is up this year as is the stock market. Basically, if you are working and invested, you have a lot to be thankful for, no matter what your political preferences. And with the tax bill cutting taxes so significantly for many large companies, it is likely that after-tax earnings will be better next year and firms will probably be passing that on through increased dividends. However, it is doubtful they will want to lock themselves into higher labor costs by raising wages, as the administration seems to think. That said, there should be decent hiring as well. On that note, to everyone:

Have a happy and healthy Thanksgiving weekend!

KEY DATA: Payrolls: +261,000; Revisions: +90,000 (+51,000 in September); Unemployment Rate: 4.1% (down 0.1 percentage point)/ ISM (NonManufacturing): +0.3 percentage point/ Trade Deficit: $0.7 billion wider

IN A NUTSHELL: “When you smooth out the weather-induced swings in the data, it is clear the labor market is strong and the economy is solid.”

WHAT IT MEANS: We all assumed that the weak September jobs report was the result of weather issues and that turned out to be indeed the case. The economy added a lot of workers in October, largely making up for the now modest September rise in payrolls. The initially reported September decline was revised to show an increase, so the seven-year run of job increases remains intact. The economy has averaged 162,000 new positions for the past three months and that is right on target, or at least my target. What we saw in October was a reversal of some of the weird numbers that were posted in September. For example, restaurants rehired most of the 98,000 workers they supposedly let go. That makes up much of the swing in the jobs numbers. The oddities in the data make it a waste of time to point out the industry strengths and weakness. I will wait until next month for that.

The unemployment rate declined to 4.1% rate, the lowest in nearly seventeen years. But again, the data have to be viewed with caution. There have been unusually large changes in the labor force, employment and the participation rate over the past couple of months. It is really unclear right now what the unemployment rate will settle down at once the temporary factors come out of the numbers.

There was one other number that shows how we need to approach monthly data with caution. The average hourly wage fell a penny after having risen twelve cents in September. Those changes were largely due to the wild swings in restaurant worker employment. But it shows that the use of average hourly wages as an indicator is really questionable.

The Institute for Supply Management reported that non-manufacturing activity improved in October. New orders expanded robustly, though a touch less so than in September. Hiring improved, which showed in the jobs report.

The trade deficit widened in September. Exports were up but the expanding economy did what was expected, which was suck in even more imports. Oil was one factor but we bought more of just about everything but vehicles. Our exports were driven mostly by oil, as prices were up. It is unclear if this report will change third quarter growth significantly.

MARKETS AND FED POLICY IMPLICATIONS: First of all, today’s employment report was as expected. When you smooth the data, firms are hiring about as many people as they can. That said, the report also shows that incomes are going nowhere. Hourly wages are up only 2.4% over the year, which means that inflation-adjusted income rose by less than 1%. You cannot get strong growth when spending power is increasing so modestly. As long as firms are willing and able to operate with large numbers of unfilled positions, wage gains will remain stagnant. But this economy is in good shape and labor demand is exceeding labor supply. If growth accelerates, it is not clear where firms will find the labor to meet their expanding needs. And a surge in growth that could come from tax cuts would tax the labor markets even more. Like so many other economists, I worry that the tax cuts could create imbalances that would ultimately short-circuit what is now the third longest expansion on record.

KEY DATA: Productivity: 3.0%; Labor Costs: +0.5%/ Layoffs: 29,831/ Claims: down 5,000

IN A NUTSHELL: “Despite an extremely tight labor market where companies are not cutting workers, labor costs remain under control.”

WHAT IT MEANS: If the economy is to accelerate, productivity will have to increase faster than the pathetic pace we have seen over the past few years. And it may be doing that. Worker output rose sharply in the third quarter even as hours worked increased modestly. This led to a jump in productivity, which kept labor costs under control. The quarterly rise in productivity was the largest in three years while the 1.5% increase over the year was the best in two years. That said, productivity is still growing too slowly, given the modest rise in the labor force, to sustain growth much above 2.25%. And, it needs to be pointed out that the decline in payrolls in September, which was likely an aberration, hyped the productivity increase. The number of hours worked expanded at the slowest rate in two years. So, let’s enjoy this report while we can but at the same time, we need to be careful assuming it will be sustained.

Tomorrow is employment Friday and it is likely that payrolls rebounded sharply from the first decline in seven years. Reinforcing that belief was the Challenger, Gray and Christmas report on layoffs. The number of job cuts announced was modest in October and the ten-month total was the lowest in twenty years, when the dot.com boom was nearing its peak. Companies are having a tough time filling job openings so they are keeping as many workers as possible. Since job gains are the difference between hiring activity and job reductions for any reason, when cutbacks slow, the net number of new people hired rises.

And if you don’t think the layoff announcement numbers mean anything since they are just announcements not actual cuts, the jobless claims data should erase those beliefs. New claims for unemployment insurance declined last week and are at historic lows.

MARKETS AND FED POLICY IMPLICATIONS: It is good to see that productivity is improving, though as I pointed out, I am not so sure that is sustainable. Nevertheless, labor costs are under control and that has allowed the earnings season to look pretty good. But it also indicates that worker incomes are not growing fast enough to allow spending to surge. Indeed, on a year-over-year basis, real hourly compensation has declined for four consecutive quarters. It is hard to spend more when your spending power is declining. The way you do that is by reducing savings and the savings rate is already too low. So, while the data point to a solid economy, they also reinforce the view that growth is not likely to remain strong for an extended period without improved wage gains. Will investors see it that way? Actually, with the new Fed Chair to be named and the October employment report only a day away, I don’t think today’s reports will change a whole lot of thinking.

KEY DATA: ISM (Manufacturing): -2.1 points; Orders: -1.2 points/ ADP Jobs: 235,000/ HWOL: +81,500/ Construction: +0.3%

IN A NUTSHELL: “The economy did well in September but it looks like it didn’t build on those gains in October.”

WHAT IT MEANS: The September numbers came in pretty strong and that translated into in solid third quarter GDP growth. But as is always the case, all eyes are turning toward the next quarter and so far it looks like growth is solid but not accelerating. The Institute for Supply Management reported that manufacturing activity was really good in October, though it did moderate a touch. Indeed, the index level is consistent with strong manufacturing growth. Orders remained high, even if they increased a little less rapidly, while hiring and production also remained near recent highs. Backlogs continue to build and that implies continued solid activity going forward.

On Friday we get the October employment report and that means on Wednesday, ADP releases its estimate of private sector job gains. The September payroll decline broke a seven-year streak of job gains and it is expected that the drop was an aberration that will be corrected with a strong increase in October. ADP indicated that is likely. Their estimates are that private sector job gains in September and October totaled nearly 350,000. (ADP had payrolls expanding in September.) That seems to make sense to me, though maybe a little high. I expect an upward an upward revision to the September number and an October gain in the 300,000 range.

Reinforcing the belief that the October jobs report will be strong was the sharp increase in the Conference Board’s Help Wanted OnLine Measure. Gains in October were seen in every region and in most occupations. Still, businesses have been cutting back on their advertising for two years now and the level of ads is well below its peak. I suspect that may be more a function of the inability to fill jobs than a lack of openings. Firms may simply be assuming they can fill only so many open positions and are concentrating on the most important ones.

Construction activity rose in September, but all the gain was from government activity. Private nonresidential construction declined while residential building was essentially flat.  

MARKETS AND FED POLICY IMPLICATIONS: Today’s data indicated that the economy didn’t falter much, if at all, in October, but it didn’t speed up either. It looks like vehicle sales were solid in October and that should help, but it still isn’t clear to what extent hurricane replacement is driving the numbers, so be a bit cautious here. Friday’s jobs number should be really good, but don’t be fooled by the headline. To get a better picture of what is happening, average September and October together. I suspect that will look like something closer to about 150,000 per month. But before then, the new Fed Chair will be named and if it is Jerome Powell, as expected, investors will be able to assume that not much will change as far as Fed policy is concerned. They can go back to watching earnings and wondering – or dreaming – about tax cuts. As long as the Republicans embrace massive increases in the national debt, something they have decried for years, the tax bill will pass. But as the details keep dribbling out and the size of the shortfall keeps rising, questions grow about the Freedom Caucus’s willingness to go along with what is shaping up to be a very traditional tax cut bill. As for tax reform, it hardly looks like that is going to happen.

KEY DATA: ECI (Over-Year): +2.5%/ Confidence: +5.3 points/ Jobs Index (Over-Year): -0.51%/ Home Prices (Over-Year): +6.1%

IN A NUTSHELL: “Everything seems to be going up, including wages, home prices and confidence.”

WHAT IT MEANS: Boy have the data looked good lately and today’s numbers are no different. Let’s start with the third quarter Employment Cost Index. This is a more global measure than the average hourly wage number that most people talk about. It considers wages and salaries as well as benefits. Business labor expenses accelerated in the summer, but the rise was nothing major. The pick up was largely due to improving wage and salary gains, especially in the private sector. Public sector costs actually moderated. The wage pressures built in almost all industries and most professions. There has been a slow but steady acceleration in private sector wage costs but they are just now getting to levels we saw in the 2000s. That is, they are rising, but not yet high.

Consumers are becoming ebullient, at least if you believe the Conference Board. The Consumer Confidence Index rose sharply in October as both current conditions and expectations jumped. The index now stands at its highest level since December 2000. People are very upbeat about the labor market, as a rising percentage said it was easier to get a job right now. If there was a cautionary note in the report, it was that respondents were a little less confident about future employment conditions.

Home prices continue to surge. The S&P CoreLogic Case-Shiller national home price index jumped again in August and the rise over the year broke 6%. Since slowing sharply in 2014, the increase in the index has rebounded, accelerating from a low of 4.1% in February 2015 to its August pace. Seattle is leading the way as home prices rose by a huge 13.2% since August 2016. The recovery in Las Vegas is accelerating and prices were up nearly 9% over the year. Over the month there were solid increases in most of the major metropolitan areas except Atlanta, which posted a modest decline.

The only negative number was the Paychex HIS Markit Small Business Index, which declined in October. This index has receded most of this year and is pointing to a job slowdown in the small business segment of the economy. That point was reinforced by the recent deceleration in wage growth.

MARKETS AND FED POLICY IMPLICATIONS: The economy looks like it has accelerated from the sluggish 2% pace it was stuck in for quite a while. But the lack of labor may be keeping firms from hiring and that will likely limit the growth rate, at least until wage gains accelerate. Employment costs may be increasing but they are hardly surging, which is good for business but not for consumers. Given the rate of inflation, income is not rising fast enough to allow consumers to increase their spending pace. Also, the savings rate has fallen to a level that raises questions about the ability of consumers to maintain their current spending growth rate. Something has to change. Either wages need to rise faster or tax cuts have to be provided to lower and middle class families. Those cuts would accelerate spending, but only in the short-term. Longer-term, either wage gains will have to accelerate or the economy will slow. Tax cuts are so enticing because they cover up the fundamental issues and kick the problems down the road. For politicians, that is nirvana.

KEY DATA: Consumption: +1.0%; Disposable Income: +0.4%; Prices: +0.4%; Savings Rate: 3.1%

IN A NUTSHELL: “Consumers spent like crazy in September, but the declining savings rate is a warning sign that they may not be able to keep it up.”

WHAT IT MEANS: Last week, the third quarter GDP report was released and it indicated that September consumer spending was really strong. And it was. Indeed, the rise was the largest in eight years. But before we get too excited, keep in mind that much of the gain was due to a surge in vehicle sales. That was likely the result of many people replacing their hurricane-destroyed vehicles. Thus, we cannot take too much solace in the robust durable goods number. There was also a jump in nondurable goods demand, but much of that may have come from the sharp rise in energy costs that resulted from the temporary supply dislocations. Indeed, when the nondurable goods increase was adjusted for price changes, the increase was solid but nothing great. Finally, spending on services, the largest component, was also decent but nothing that would indicate the consumer has become irrationally exuberant. On the inflation front, prices were up sharply but when food and energy were removed, there was only a modest increase in consumer costs.

As for income, there was a solid increase as wage and salary gains rebounded from a minimal rise in August. Not surprisingly, given the surging stock market, dividend income was up sharply. Still, the gain in incomes did not come close to matching the jump in spending and the savings rate fell again. It is down to 3.1%.  

MARKETS AND FED POLICY IMPLICATIONS: On the surface, this looks like a really strong report and the consumption rise did keep third quarter consumption from faltering significantly. But it is doubtful we will see a repeat of the huge vehicle sales going forward and that means household spending may slow in the coming months. But what really worries me is the steady decline in the savings rate. Since 2010, the savings rate has averaged 5.8%, but while it has bounced around, the trend is down. Lately, that decline has accelerated. In 2015, it averaged 6.1%, fell to 4.9% in 2016 and it looks like it will average about 3.7% this year. That would be the lowest rate since 2007, which was the last year before the Great Recession. On a monthly basis, the rate hit its lowest level since December 2007, when the last expansion ended. Looking at the past few recessions, the savings rate tends to decline until just before a downturn starts and that pattern has started. I am not saying a recession is coming. But consumer incomes are not rising fast enough to sustain solid growth and that is a warning sign of future trouble. However, this red flag is not likely to be viewed as particularly important by investors. They are focusing on the tax plan, which is still undergoing changes and will have to go through a lot more in committee. But the faltering savings rate could give some Fed members pause. At the least, it will provide further ammo for those who want to raise rates very slowly.