KEY DATA:  Sales: +2.4%; Prices: +11.4%; Inventory: 3.0 months/ Phila. Fed (NonMan.): +6.4 points: Expectations: +14 points.

IN A NUTSHELL:  “With existing home sales hitting the highest level in nearly fourteen years, it is clear the housing market is on fire.”

WHAT IT MEANS:  Remember the housing bubble?  Of course you do, even if you wanted to forget it.  Well, housing demand is moving back toward those levels.  The National Association of Realtors reported that existing home purchases rose moderately in August after having surged the previous two months.  The level may still be well below the peak posted during the housing bubble, but it is still historically high.  Sales were up fairly modestly in most regions, but jumped by double-digits in the Northeast.  Interestingly, condo/coop sales rose faster than single-family purchases.  And you thought density was out.  Home prices are skyrocketing, reaching a new high.  That occurred, in no small part, because the number of homes on the market is declining.  It is at a ridiculously low three months and only 2.8 months for single-family homes, about half of what it should be.   

The Philadelphia Fed’s NonManufacturing Index increased solidly in the first half of September.  The details, though, were a bit mixed.   Order growth moderated and backlogs increased sluggishly.  But hiring was on the rise and firms are spending on plant and equipment again.  But maybe the best news in the report was the sharp jump in expectations.  Optimism about the future may not be irrationally exuberant yet, but it is high.     

IMPLICATIONS:  For three months now, the housing market has posted big gains.  With the August home sales numbers at those we saw in 2006, it is fair to raise the issue of whether we are moving into another bubble.  That is not likely the case.  We likely have two factors at work that are temporarily causing the sales level to surge.  The first is that sales cratered in the spring and there is some catch-up going on.  Second, there is the sudden urge to escape high-density living that is adding to the demand.  The catch-up should start fading soon, if it hasn’t already.  Whether the change in location preferences is just a fad or a long-term trend is right now uncertain.  Those who were thinking of moving before the pandemic hit are probably rushing out to do so.  Those who may want out because of a fear of density, but are not in position to move right, away are the ones we need to watch. They represent a level of demand that may not have been there before and could allow the market to stay solid, even as the temporary factors fade.  Add that to the Fed’s intention to keep rates low for an extended period and you have the makings for a solid but not excessively enthusiastic market for a quite a while. As for investors, housing is a plus, but what about the rest of the economy?  The Philadelphia Fed’s report points to good, though not great, growth in the nonmanufacturing portion of the economy as well.  And the Chicago Fed’s National Activity Index, which came out yesterday, indicated that the U.S. economy began its expected growth moderation in August.  Activity was still above trend, but it is also trending downward.  I keep saying that we need to look past the second quarter collapse and the third quarter surge and see what growth may look like for the year starting in the fourth quarter.  Right now, it looks like it will slowly decelerate back toward sustainable growth.  What is not clear is how rapid that deceleration will be.           

KEY DATA:  Starts: -5.1%; 1-Family: +4.1%; Permits: -0.9%; 1-Family: +6%/ Claims: -33,000/ BOS: -2.2 points; Orders: +6.5 points; Expectations: +17.8 points

IN A NUTSHELL:  “Don’t let the decline in home construction fool you, the level is still really good.”

WHAT IT MEANS: Housing has been the star of the recovery, so should we be worried about the decline in housing starts in August?  Not at all!  First, the total level is quite decent.  In addition, the key single-family segment was up again.  Multi-family construction is extremely volatile and that portion of the market fell sharply after having surged in July.  Nothing unusual with that.  The second reason you shouldn’t think this is the start of something bad is that permit requests, while falling slightly, are also at a high level.  More importantly, they are again running above starts, so construction could pick up going forward. 

Jobless claims declined last week.  That is the good news.  The bad news is that they were at 860,000, an extremely high level.  It is likely that over three million more workers will lose their jobs this month.  Another sign the labor market has a way to go before we can say it is in good shape was the total number of people receiving checks from all programs, which remained near thirty million.  New claims for the special Pandemic Unemployment Assistance (PUA) program, which covers those who were traditionally not eligible for assistance, such as small business owners, declined.  While we don’t talk about it much, there are more people receiving checks from the PUA than from the traditional program. 

Manufacturing activity in the Mid-Atlantic area eased a little in early September, but again, that is nothing to worry about.  The Philadelphia Fed’s Business Outlook Survey activity index was down only modestly.  More importantly, the components were pretty good.  Order growth improved, shipments surged, backlogs started to build and employment growth accelerated.  Maybe impressive was the surge in optimism.  Indeed, the level of the expectations index is so high that it seems to indicate that respondents were nearing the exuberant stage.        

IMPLICATIONS:  Housing is fine but the unevenness in the recovery continues.  There are big winners and losers and while the overall economy is getting better, the labor market remains in a state of churn.  You cannot say that conditions are getting a lot better when nearly thirty million people remain on government income support and over three million workers a month are losing their jobs.  The longer this continues, the more the friction in the labor market is likely to keep those losing jobs from readily finding new ones.  Thus, while we have seen a rapid decline in the unemployment rate, that may slow, possibly sharply.  The low hanging fruit for unemployed workers, a return to their old jobs, is beginning to disappear and new/different jobs may be hard to find.  The good news is that the reopening also has a long way to go, so job gains and lower unemployment rates should be the story for the next few months.  As for investors, the bigger story could be comments made by CDC Director Redfield that a vaccine might not be widely available until the second or third quarter of next year.  While the president may be saying he made a mistake, that comment really cannot be walked back. It implies that it could be another nine months or more before we see large-scale vaccination in this country.  The economy will not get back to whatever the “next normal” will be until that happens. While investors may not be assuming a vaccine will be ready by Election Day, they may not be factoring in an extended period before it is.      

In a Nutshell:  “With inflation running persistently below (its) longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time.”

Decision: Fed funds rate target range remains at 0% to 0.25%.

The Federal Open Market Committee, in one of the more extensive statements it has made, attempted to explain in detail what its new monetary policy strategy meant.  And they did a pretty decent job at that.  Boiling it down, the Fed will not raise rates until the economy reaches full employment and if that takes having inflation run above the 2% target for an extended period, not only is that acceptable but it is desirable. 

Why is higher inflation okay?  Because the Fed intends to hit its inflation target over time and on average.  As the Committee noted, inflation has been running persistently below its target and to get back to the target, the economy must get stronger and inflation expectations have to be above 2%.  The way to keep expectations up is to run hot.  And the way to run hot is to keep rates down as long as necessary.

But there is more in this than just inflation.  Indeed, inflation is probably job two or three for the Fed.  The Fed Chair, in his press conference indicated that reaching full employment is a necessary condition before a rate hike could occur.  Just getting to the target inflation is not enough.  Importantly, the Fed is not defining full employment by any single measure, such as the unemployment rate.  Mr. Powell indicated that other factors, such as wages and participation rates, would be taken into account as well.  In other words, full employment is a subjective not an objective measure.  To paraphrase the late Supreme Court Justice Potter Stewart:  “The Fed will know it when it sees it.”

So, what does this all mean?  Actually, not anything different from what I and many other economists have been saying for a while.  The Fed will not be raising rates for quite some time.  The best guess is at least two years, but that assumes the recovery is strong in both 2021 and 2022.  (NOTE: The Fed’s economic projections do assume that.)  If it moves back toward trend growth of roughly 2% sooner, then there may not be a rate hike for three years.  And the Fed will keep doing what it has been doing to support the financial markets.  That means more additions to its balance sheet by purchasing all types of assets. 

So, if you are looking for a loan, especially a shorter-term one, you probably don’t have to worry about rates getting away from you for an extended period.  But if you are a saver rather than an investor, don’t expect any relief soon, as savings rates, which are already at rock bottom, are going nowhere.  As for investors, if you think low rates help the equity markets, well you are going to have low rates for quite a while. 

 (The next FOMC meeting is November 4,5 2020.) 

KEY DATA:  Sales: +0.6%; Over-Year: +2.6%; Ex-Vehicles: +0.7%/ NAHB: +5 points

IN A NUTSHELL:  “Consumers are still spending, but not surprisingly, the pace is slipping a little.”

WHAT IT MEANS:  With the enhanced unemployment insurance payments disappearing in early August, economists have been looking for signs that consumption is fading.  The first report that could signal that is the August retail sales numbers and while they were a little softer than we had been seeing, they were still pretty good.  Overall demand was strong.  Yes, the increase was less than what it was in the late spring and early summer, but those were outsized gains that corrected for the early spring collapse.  There were solid gains in sales of clothing, health care, furniture, electronics, and of course, building materials.  With so many people working from home, fixing up the place has become a major priority.  But the biggest increase was in restaurants.  Inside dining is joining outside service and that is helping this sector improve.  Still, August restaurant sales were down over fifteen percent compared to a year earlier.  In comparison, total retail sales were up, though somewhat modestly.  There was a warning sign in this report.  The measure that most closely mirrors consumption, core retail sales, which exclude autos, gasoline, building materials and food services, declined slightly.  We could be starting to see some pullback due to the loss of income.  It is too early to conclude that, but it is worth watching.

As for the housing market, the NAHB/Wells Fargo National Housing Market Index popped again in early September.  The homebuilders’ measure is out of control.  It is now five points above the previous high and eleven points above the peak that was posted during the housing bubble.  It is hard to understand what the housing market indicators truly indicate.  By that I mean, are we in a bubble, a big bubble, a massive bubble, or just a short-term surge that is overwhelming the measures?  With households looking to escape high-density locations, it is not surprising that homebuilders are seeing greater demand, but this is crazy.  Let’s just say that housing should add greatly to growth in the third quarter and leave it at that.

IMPLICATIONS:  Today’s data show an economy moving forward strongly.  The consumer is consuming and builders are building.  But we also cannot totally dismiss the potential impact of the lack of additional stimulus.  Those buying homes are not likely those who are still on unemployment insurance.  The unemployed are the ones whose spending is most sensitive to income changes.  Many states are gearing up to provide the additional $300 per month that has been temporarily funded by executive order, but that is not universal and is not likely to hit for a while.  The fall economy is pretty much set, but the winter and next spring are up for grabs right now.  Meanwhile, the Fed members are finishing their meeting, which should provide little news.  As for investors, they just keep on keepin’ on. 

KEY DATA:  IP: +0.4%; Manufacturing: +1.0%/ Imports: +0.9%; NonFuel: +0.7%; Exports: +0.5%; Farm: -2.2%

IN A NUTSHELL:  “The manufacturing rebound remains on track and that indicates that consumers are still spending.”

WHAT IT MEANS:  It is clear that despite the end of the enhanced unemployment payments, the economy continued to heal quite well during the summer.  Housing is booming, payrolls are rising and the manufacturing sector keeps getting better.  Manufacturing output surged again in August, the fourth consecutive large rise.  Every industry group posted decent to strong gains except for the vehicle sector, which had come back sharply the previous three months.  A decline in assemblies caused output to fall, but given the continued rise in sales and low level of inventories, that should turn around.  Compared to where we were before the pandemic closed things down (February), production is still off 6.7%.  A number of industries, such as furniture, textiles, computers and electronics, and electrical equipment and appliances are still off double-digits compared to where they were earlier in the year.

Import prices spiked in August, its fourth consecutive large rise.  While energy costs continued to jump, they were not totally out of control.  Other areas also posted decent gains.  Nonpetroleum industrial prices continued to surge and food costs were up solidly.  Consumer, vehicle and capital goods import prices all rose modestly or moderately, indicating that price pressures on consumer costs may not be widespread.  As for exports, they too were up, but the farm sector didn’t benefit.  Agricultural export prices were still down over two percent from August 2019. 

One other report was released this morning.  The New York Fed’s Empire State Manufacturing Index rose sharply in the first part of September.  New York is not a major manufacturing state, so it isn’t clear if this signals a further acceleration in the industrial rebound, but it is still good news. 

IMPLICATIONS:  We should expect to see the economic numbers start settling down over the next few months.  Some states are continuing to reopen, but most states are largely on hold.  As September rolls on and the weather cools off (it’s only 63 at 10 AM where I am right now), the joys of outdoor dining will fade.  So the rebound in employment may not be as great as expected, especially when we get to the last quarter of the year.  And few states are ready to open up at 100% right now.  That has two major implications.  First, job growth is likely to fade while the decline in the unemployment should slow.  However, there is still room to reopen further, so the payroll rise and unemployment rate drop could be larger than normal for a while.  What I am saying is don’t expect the economy to keep adding a million or more jobs each month or the unemployment rate to decline by a percentage point.  Half those changes would be great but that may be asking too much.  And with the next stimulus package possibly never coming, by year’s end, we could be seeing limited improvement in those numbers.  Nevertheless, it looks like the recovery could stay on the fast track for a month or two before reality starts setting in.  That points to a very strong third quarter GDP gain, but a relatively moderate fourth quarter increase.  Investors are likely to keep their eyes strictly glued to the recent past and the markets could keep going up.  As for the Fed, it is meeting today and tomorrow and there is little that is expected to come out of the meeting.  Indeed, barring a major rebound in the virus, little is expected for the next couple of years.  The members could keep phoning, or should I say videoing it in.  It would save time and money.  

KEY DATA: Claims: 881,000/ ISM (Nonman.): -1.2 points; Activity: -4.8 points; Orders: -10.9 points/Trade Deficit: $63.6 billion ($10.1 billion wider); Exports: +8.1%; Imports: +10.9%/ 

IN A NUTSHELL: “The sluggish improvement in the labor market continues, but the number of people receiving assistance is rising again.”

WHAT IT MEANS:  Yes, the economy is getting better, but by how much is quite uncertain.  New unemployment claims fell below one million last week, but let’s not celebrate too soon.  The methodology used in computing the seasonally adjusted numbers was changed, so the new data are not strictly comparable to the old ones. Instead, it is better to use levels for at least this week.  The current number of claims is four times what it was in the same week last year. At the current pace, another 3.5 million workers would need assistance over the next month.  In addition, as of the middle of August, the total number of people receiving unemployment benefits from all the programs rose by over two million to more than twenty-nine million workers.  Finally, Challenger, Gray and Christmas reported today that layoff announcements in August, though down from the huge July number, were still at the highest August level since 2002. It is hard to say that the labor market is improving rapidly when layoffs continue at such a high pace and so many workers remain on the government’s payrolls.

The services and construction portion of the economy continues to expand strongly, though there was some moderation in the growth rate in August.  The Institute for Supply Management’s NonManufacturing Index eased a touch,but the level still points to a decent expansion.  But there were some cracks in the armor.  The percentage of firms indicating that activity (which is quite strong) was lower over the month increased.  That was also true with new orders, causing the index to drop sharply.  As for employment, it is declining, but at a slower pace.  The largest segment of the economy is expanding solidly, but not surprisingly, that pace is moderating.  There is nothing to worry about, though, as the level of growth remains quite solid.

The trade deficit surged in July.  It was good to see that we sold a lot more overseas, but the level of sales is still twenty percent below where we were in February.  Meanwhile, imports surged even faster.  The reopening of the economy has done what was expected, drawn in a lot of goods from the rest of the world.  With exports less than three quarters the level of imports, when you have imports growing a lot faster than exports, then you should expect to see the trade deficit jump.  And it did. Adjusting for prices, the real goods deficit in July was over eleven percent wider than the second quarter average.   I expect the deficit to widen a little more over the next two months, so look for trade to greatly restrain third quarter growth.

IMPLICATIONS: Tomorrow we get the August employment report and the estimates are all over the map. They range from a slight decline to a gain of 2.25 million.  A similar difference exists in the forecasts for the unemployment rate.  The July rate is 10.2% and the estimates range from about 8.5% to 10.5%.  Basically, economists really don’t have a handle on what is really going on in the labor market, largely because the data have been so outsized that it is hard to fit any past model to the numbers.  The U.S. Department of Labor changed its unemployment claims seasonal factor methodology because the one it had been using was better suited to more stable periods than volatile periods.  You can expect almost anything to print tomorrow, though I am on the side of the numbers being disappointing.  Indeed, not only do I expect the job gain to be less than half a million, I would not be surprised if the unemployment rate ticks up a touch.  The labor market is getting better, but with the reopening slowing during August in most places and being reversed in some, we could see that change in pattern reflected the report.  So buckle up, tomorrow morning could be very interesting, especially since the equity markets are having none of this talk about the V-shaped recovery showing any signs of faltering.

KEY DATA: Consumption: +1.9%; Disposable Income: 0.2%; Wages and Salaries: +1.4%; Prices: +0.3%; Ex-Food and Energy: +0.3%/ Sentiment: +1.6 points

IN A NUTSHELL: “Consumers just keep on consuming and that is great news for growth.”

WHAT IT MEANS:  Households may have hunkered down in early spring, but that started changing dramatically in May and the spending spree continues largely unabated.  Consumption jumped in July, led by strong gains in demand for durables, nondurables and services.  Yes, the spending surge is moderating, but that is only a matter of perspective.  The May and June increases were record highs and the July one turns out to be the tenth largest in the last sixty years.  That’s not too shabby.  Comparing the inflation-adjusted second quarter level of spending to the July level, consumption is rising at a nearly 37% rate this quarter.  We could see a massive GDP growth rate, even if consumption is flat the rest of the quarter.  Can households keep it up?  If you believe the income numbers, that is unclear.  Income rose solidly, led by a surge in wage and salary income.  When you add 1.8 million workers, that is going to happen.  On the other hand, government transfers, i.e., unemployment payments, were down sharply. But the August numbers could be a lot different, as the supplemental unemployment payments disappeared.  We could see incomes fall as a consequence. As for inflation, prices are rising faster, though the gains over the year are still quite modest.  Given the Fed’s new monetary policy strategy, the members would like to see inflation accelerate for quite a few more months as the overall index stands at 1% and excluding food and energy, prices were up only 1.3% over the year.

A second reason that consumption may not keep surging is confidence, or a lack thereof. The University of Michigan’s Consumer Sentiment Index rose modestly in August.  The view of current conditions barely budged, while there was a limited rise in expectations.  The overall index is, as noted in the report, remained “depressed”.   You need both growing income and improving confidence to keep the economy going and right now, that is just not in the cards. As the report notes, “Although strong gains in consumer spending from the 2nd quarter lows can be anticipated, those gains will significantly slow by year-end without some additional fiscal spending programs to diminish the hardships faced by unemployed workers, small businesses, as well as support for state and local governments.”

IMPLICATIONS: We are set up for a really strong third quarter growth number, even though Washington is doing its best to limit that gain.  The makeshift unemployment add-on has limited funding and the failure to come up with an extended supplement program is likely to lower income gains, confidence and spending.  It is an interesting calculus that those politicians up for reelection are using.  They seem to think that reducing government payments of over twenty-six million people is good politics.  That is the number of workers receiving unemployment checks.  In other words, let’s wait another month and see what spending and job gains look like before we declare the V-shaped recovery forecast a winner.  Next Friday we get the August employment report and most economists expect another great one.  I hope that is the case, but either the August or September one is likely to be very disappointing. Since some of the government payments to businesses required limited or no layoffs until October, we could see the bad numbers pushed out a little.  But they are coming. 

KEY DATA: NAHB: +6 points/ Empire State: -13.5 points; Orders: -15.6 points; Expectations: -4.1 points

IN A NUTSHELL: “The housing market is going gangbusters, but the factory recovery may be flattening.”

WHAT IT MEANS:  The data today are in the category of some good news and some questionable news.  We are starting to transition from reopening to recovery and that means some sectors that were soaring will start to settle down to more normal or supportable growth.  Others will continue to pick up steam.  Housing is steaming.  The National Association of Home Builders overall index of market conditions jumped again in August and hit one of the highest levels on record.  Actually, that was true for the sub-indices, including present conditions, future conditions and traffic.  These results support the findings of Realtor.com that the market is strong as prices continue to rise, while listings are coming back, though they are still down from last year.   Both the new and existing housing markets are doing well and that is good news for economic growth going forward.

But then there is manufacturing.  The New York Fed’s Empire State Index of manufacturing activity did a U-turn in early August as all the major indices were down sharply from their July readings. That said, this is a perfect time to revisit my discussion about diffusion indices.  These measure direction, not magnitude and even the directional information can be problematic.  The overall index of activity fell sharply, but it is still positive.  What it is indicating is that the manufacturing sector is consolidating its gains, not necessarily giving them up.  That has kept respondents fairly confident as the expectations index, though down from July’s level, is still pretty solid.  Nevertheless, there were some worrisome signs in this report.  There was a sharp rise in the percent of respondents saying orders declined. It is one thing to stabilize, it is another to lose ground and falling demand, even if the reduction was not great, is not a good sign.   

IMPLICATIONS: Today’s numbers don’t change the economic picture and indeed, the current data may not be a whole lot helpful in understanding where the economy is going if the gridlock in Washington over a new stimulus package continues. The president’s proposals aren’t likely to do much as they are well below what the unemployed had been receiving and they could run out by the end of September.  The payroll tax cuts simply do little. As most economists have argued, like it or not, the stimulus programs have kept large numbers of households and businesses afloat and with the funds being cut or running out, the recovery could start running out of steam.  The longer this goes on, the smaller the third quarter increase will be and the sooner firms that have been hanging on start laying off workers or simply go out of business.  Some firms are doing their best to retain their workers for as long as possible (like until after the election), but the layoffs are coming and a failure to find a way out of the quagmire will only make the ultimately breaking point more devastating.  But this is an election year when playing to the base is the only thing that matters. How cutting unemployment and business payments plays to anyone’s base is beyond my understanding, but politicians have their own bizarre way of thinking.  What I am saying is that the risks to the recovery are to the downside and I am not convinced investors understand that.  Eventually, they just may.         

KEY DATA: Sales: +1.2%; Ex-Vehicles: +1.9%/ IP: +3%; Manufacturing: +3.4%/ Productivity: +7.3%; Labor Costs: +12.2%

IN A NUTSHELL: “Retail sales gains are moderating and without the massive influx of government welfare payments, it is likely they will continue to flatten.”

WHAT IT MEANS:  The economic data continue to behave like SuperBalls, bouncing around like crazy.  After huge gains in May and June, retail sales settled back to a somewhat more normal level in July.  Sales were less than expected, but the June report was upgraded, so the two months together were close to projections.  Despite a sizeable rise in units sold, the dollar value of vehicle purchases were down. (I assume that was due to a larger percentage of lower-priced vehicles being purchased.)  The change in what we buy was seen in outsized changes in a number of components, especially electronics and appliance stores, which posted a nearly 23% increase.  Work at home is shifting business investment in working environments to household spending on all sorts of things.  As an aside, Amazon Days didn’t happen this year.  The bump normally gotten in July from Amazon’s huge numbers was not in the data.  However, online purchases were still up, implying the Amazon Days effect may not be as important as many believe.  Instead we seem to now have Always Amazon Days

Industrial production jumped again in July as the manufacturing sector continues to recover. Manufacturing activity is up over fifteen percent since the April bottom, but it is still down eight percent from the February level.  Since last July, manufacturing output is off nearly eight percent andyou have to go back to September 2011 to see a level of production this low.The one bright spot was consumer goods output, which is back to where it was in spring 2017.  

Productivity skyrocketed in the second quarter, as firms cut hours worked even faster than they reduced production.  That is hardly anything positive, as the declines which were -38.9% for output and -43% for hours worked, which reflect the massive collapse of the economy.  With companies unable to cut wages (they were actually up sharply), labor costs skyrocketed.  These huge changes are fascinating, but hopefully we will not see them again for a very long time.  But they are not reflective of anything normal, so use them as a measure of the downturn, not a trend in fundamental economic factors.   

IMPLICATIONS: Consumers were happy to get out in the world once the economy started to reopen and they have done that.  The July level of retail sales points to a massive rise in third quarter consumption, assuming households can keep it up.  But our “friends” in Washington seem to be doing everything possible to kill the recovery.  As I have said numerous times and will keep saying until something changes, it has been the governments household and business welfare programs that have supported household and business spending.  With the Senate on vacation (clearly, there isn’t any important work to be done so why not get out of town?), the funds flowing to unemployed workers and supporting businesses are disappearing. The president’s executive orders are not likely to add much to income and the PPP money is being used up.  So, where are the funds to keep retail sales rising going to come from?  Got me. We could begin to see that in the August spending data and if nothing gets done in September, don’t be surprised if there is a weakening not only in consumer demand but in hiring as well.But hey, investors have pixie dust and “I believe” on their side, so don’t fret too much for the markets.  And if something happens, there is always the Fed to step in and insure that our “ free-markets” work well.  By that I mean not go down too much.  Isn’t capitalism great?