KEY DATA: PPI: +0.2%; Less Food and Energy: +0.2%; Energy: +13.4%

IN A NUTSHELL: “The winds of change hit the energy sector in August, driving up prices sharply.”

WHAT IT MEANS: The Fed meets next week and good luck to the members as they try to figure out where we go from here. The best they can do is determine where things were BH (before hurricanes) and as we have seen, economic growth was running pretty much at a normal pace. As for their inflation concerns, wholesale costs rose in August, but most of that had to do with energy dislocations that drove up the prices of most products. Excluding energy, producer prices increased modestly. Food costs were down fairly sharply with a variety of products posting declines. The other sectors where prices jumped were transportation, warehousing and construction. Services costs, which had been leading the way toward higher inflation, rose again but not by much. Over the year, finished goods costs have surged 2.9%.   Though there is a wide variation across the categories, the increases were widespread enough to point to some increased producer costs. Looking into the future, the major source of pressure is the energy sector. Once the problems created by the hurricanes dissipate, those will likely fade as well.

MARKETS AND FED POLICY IMPLICATIONS: Another day, another number that tells us where we were but not where we are going. Inflation is picking up and had this been the case without the weather, everyone would be saying that the Fed was going to hike rates soon. While energy prices are already starting to come down, other costs will likely rise and some of them sharply. Somewhere between one-half and a million vehicles may have to be replaced and that will put pressure on new and especially used vehicle prices. Home reconstruction in both Texas and Florida will put major price pressures on building supplies while labor is likely to be in short supply. Good luck trying to repair a roof. In other words, over the next six months we should see a whole slew of prices rise, at both the consumer and producer level. That will likely give the Fed some cover to raise rates and reduce its balance sheet. So we are only dickering over timing. I still believe there will be one more rate hike and the start of balance sheet normalization by year’s end. The members will likely look past any short-term negative numbers and that includes the surge in energy costs. They know the economy is moving forward and that ultimately, there will have to be an awful lot of private and public spending on goods and services that would not have happened without the massive losses created by Harvey and Irma. Let’s hope this is it for the hurricane season.

KEY DATA: ISM (NonMan.): +1.4 points; Orders: +2 points; Employment: +2.6 points/ Trade Deficit: up $0.1 billion

IN A NUTSHELL: “The economy was doing fine before Harvey hit and if Irma causes major damage, it could be many months before we know the actual trend growth rate.”

WHAT IT MEANS: Well, coming into the worst phase of the hurricane season, the economy was doing fine. How we will come out of it is anyone’s guess right now. In August, the Institute for Supply Management reported that non-manufacturing activity rebounded from the downdraft it hit in July. Orders increased, production rose and backlogs built, all pointing continued good growth in the months ahead. This report mirrored the manufacturing numbers that were released last Friday. About the only negative in the report was that the level of the index was below the average for the past twelve months. It is still solid, but we may not see any major acceleration in growth going forward.

The U.S. trade deficit widened a teensy bit in July as both imports and exports declined. That is not good news. We want to see both expand as it would indicate both the U.S. and world economies are growing faster. On the export side, we sold a lot more food and aircraft, but fewer cell phones and motor vehicles. We imported more food, cell phones and computer products, but our demand for foreign oil, steel, vehicles and pharmaceutical products dropped. The trade deficit with most countries and regions widened, which should not make the president happy. It hit an eleven-month high with China even though exports expanded.

MARKETS AND FED POLICY IMPLICATIONS: The climate may not be changing, but in the span of two weeks, a hurricane dropped the most amount of rain on the continental U.S. in recorded history and the strongest Atlantic storm on record is bearing down on Florida. These extreme climate events will have real impacts on the pattern and level of growth and will modify trends in the data. The great losses in Texas and potentially Florida would slow growth in the third quarter and into the fourth. But as rebuilding efforts kick into high gear, spending in a variety of sectors will expand at unusually high levels. Going forward, it will be important to dismiss the headline number and figure out what is real and what is fake news, I mean, temporary factors. That complicates the Fed’s decision-making process as it will be hard for the members to have a good handle on growth. And the uncertainty could last through the fall as some of the data are lagged a month. This will be especially true if Irma or any of the remaining storms hit the mainland and cause major damage. All we can say right now is going into September, the economy was moving ahead moderately. Investors should use data for the next few months only to understand where things are, not necessarily to forecast what will happen going forward.

KEY DATA: GDP: 3.0% (Up from 2.6%); After Tax Profits (Over-Quarter): +1.3%/ ADP: +237,000; Large: 115,000/ HWOL: down 125,900

IN A NUTSHELL: “Solid growth in the spring has led to better job gains this summer.”

WHAT IT MEANS: The economy grew a little faster this spring than initially thought. GDP hit the 3% pace, led by a major upward revision to consumer spending. Households really did spend money; the government just didn’t count all of it. Unfortunately, income gains were sluggish and the declining savings rate raises questions whether people can continue shopping at the solid pace we saw in the spring. There were also some decent improvements in most categories of business investment, but the government slowed things down more than thought. After tax corporate profits grew moderately over the quarter, but were up a strong 8.6% from second quarter 2016. Companies are doing just fine and an additional moderate gain in the third quarter could lead to record profit levels.

The solid economy has created better than expected job gains and that may have continued in August. ADP estimates that firms added employees at a robust pace as large corporations went on a hiring binge. The large-firm gain was one of the largest on record, so don’t get too carried away with the forecast. The increases were in just about every industry, so this was a strong report.

Looking forward, even if we get a strong August jobs report, the increases may not to be sustainable. The Conference Board reported that online job ads continued to drop sharply in August. The declines were across all regions and in most occupations. In other words, firms everywhere are turning away from advertising job openings. That may be due to slowing demand or firms giving up trying to fill all the openings they have because of the labor shortage. Either way, it is hard to see how the economy can keep adding more than 200,000 jobs each month that the ADP numbers indicate.

MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape and firms are making plenty of money, so what is the problem? It is slow wage growth. And that raises the question: Do we need tax cuts or tax reform? Clearly, we don’t need tax cuts, which does little or nothing to long-term growth. Reform is needed, but it has to be directed in ways that improves efficiency, not adds simply to corporate profits. Firms have the money to spend and credit is readily available for firms of all sizes, so we don’t need “reform” that hypes short-term investment, especially since there is no reason to think it will lead to faster wage gains. Instead, reform needs to be structured in a way to provide the firms with the incentive to plan for the long-term. These decisions must be based on economic not tax gain factors. Will that happen? I doubt it. Instead, tax cuts will likely be sold as tax reform and that is not good for the economy or the budget. Meanwhile, investors will be focused on shorter-term issues, such as Friday’s jobs number. I still don’t see how firms are actually hiring so many workers, so I think Friday’s payroll gain number will disappoint. We shall see.

KEY DATA: Confidence: +2.9 points; Current Conditions: +5.8 points/ Jobs Index: -0.02%/ National Home Prices (Over-Year): +5.8%

IN A NUTSHELL: “Despite the chaos in Washington, consumers remain upbeat and that holds out hope that spending will be solid this quarter.”

WHAT IT MEANS: Washington is a mess and nothing is getting done on anything, while Houston is in the midst of a massive disaster that will require months if not years to overcome (given my experience with super storm Sandy), but consumers remain upbeat. The Conference Board’s Consumer Confidence Index rose in August as respondents’ perception of current conditions picked up sharply. The current conditions index is near its all-time high. Business conditions and the labor market are both seen as having gotten better. However, looking outward, impressions were more mixed as to the availability of jobs and the likelihood that economic activity will accelerate. The cut off point for the survey was August 16^th, so any impact of Charlottesville and Houston may not have been fully factored into the numbers.

Friday we get the August jobs numbers and today Paychex released its index of small business employment. The measure declined for the sixth consecutive month, though the decline in August will modest. That raises questions about how many new jobs will be reported on Friday, as it is hard for the solid payroll gains we have seen to be sustained if the small business sector isn’t adding workers.

The housing data, including sales and construction, have been bouncing around, but one number has been on a fairly steady upward trend: Prices. That pattern was reinforced as the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose solidly in June and over the year. Sixteen of twenty major metro areas reported prices increases over the month. Only Atlanta, Chicago, Cleveland and New York were down, on a seasonally adjusted basis. The national index is now 4.3% above the prior, housing bubble peak.

MARKETS AND FED POLICY IMPLICATIONS: All thoughts are with Houston, but as is the case with investors and economists, the catastrophe is being looked at in terms of the impact on the markets and growth. As is usually the case with natural disasters, the short-term impact is likely to be negative. But the rebuilding will create massive amounts of new activity. It is also likely that Congress will pass a major recovery bill. (It is doubtful the Texas Congressional delegation will require the increases in spending be met by spending cuts elsewhere, as many did with Sandy. Those of us who were flooded out and had to live through that debate have not forgotten those no votes.) So the fourth quarter should see a lot of activity that would not have happened without the storm. Thus, we could see a slight reduction in third quarter growth but a faster fourth quarter and a little better first half of 2018. Investors will parse that as to who will be the winners and losers, especially since there will likely be a lot of home and infrastructure-rebuilding occurring paid for by a lot of insurance claims and government assistance.

KEY DATA: Sales: +0.6%; Non-Vehicle: +0.5%/ Imports: +0.1%; Nonfuel: -0.1%; Exports: +0.4%; Nonfarm: +0.3%/ NAHB: 68 (Up 4 points)

IN A NUTSHELL: “The economy seems to be picking up steam, finally.”

WHAT IT MEANS: Economists have been saying, thinking and basically hoping that growth would improve during the second half of the year and that might be happening. Retail sales, which had been sluggish for much of the first half of 2017, rose solidly in July. Better vehicle sales were just one of the reasons. Online retailers as well as furniture, supermarkets, home improvement, sporting goods and health care stores reported strong gains. People even ate out more, though they didn’t stuff themselves. Amazingly, department stores showed a robust increase and these were supposed to be ghost towns. There was some weakness, as sales of gasoline and electronics and appliances were off. Still, the breadth of the increases was impressive. When you ad that to upward revisions to previous months, it is clear that households are emptying their wallets at an expanding pace.

On the inflation front, there still is very little. Import prices ticked up a touch in July, but largely because energy costs jumped. Excluding fuel, the cost of foreign products was off a little. Food prices are on a steady upward climb and that does not bode well for supermarket prices going forward. Vehicle prices were down again and nonvehicle consumer goods costs were flat. In other words, there is minimal price pressure coming from imports. On the export side, we did see a nice rise in not only farm sales but for many other products sold to the rest of the world.

The housing market looks like it is rebounding. The National Association of Home Builders’ index jumped in August. Sales are rising and that has improved builders’ confidence. That said, the index seemed to be artificially low in June and July and the gap up didn’t even get us back to the May level.

MARKETS AND FED POLICY IMPLICATIONS: The economy is on the rise. Even the New York Fed’s manufacturing index pointed to stronger summer growth, though one would hardly point to this region as a key player in the nation’s industrial revitalization (if there really is one). Also, as I have pointed out several times before, wage gains just aren’t keeping up with spending and that is forcing households to cut back on their savings. So how long the economy can grow at a faster pace without better income increases is unclear. Still, investors should really like the data. As for the Fed, that is a different story. Yes, import prices did rise, but not for most goods. The dollar has weakened and we could see some pick up in import costs, but it is unlikely to be enough, by themselves, to drive inflation much higher. The Fed members would love to see inflation above 2% for an extended period so they can go about their business of normalizing rates and the balance sheet. But for now, they will have to be content with saying that inflation will reach the target in the medium term, however long that may be.  

KEY DATA: PPI: -0.1%; Goods: -0.1%; Services: -0.2%/ Claims: +3,000

IN A NUTSHELL: “The Fed keeps saying inflation will rebound, but right now, there is little hard data to think that will happen soon.”

WHAT IT MEANS: The members of the Fed are convinced inflation will rebound in the months ahead. Even today, New York Fed President William Dudley repeated that refrain. And I agree that should happen. But it would be nice if there were some data to support that belief. Producer costs went nowhere in July. The weakness in goods costs continued. Yes, food and energy prices declined over the month, but excluding those volatile components, finished goods costs were up only modestly. The big surprise in the report was the drop in services prices. Transportation, warehousing, government, you name it, services costs were down. This decline was so widespread and so odd, given that services had been leading the inflation push, that I am just not certain what is going on. Looking outward, there is not a whole lot of pressure at the intermediate or crude goods levels.

Jobless claims edged up last week, but the level is still quite low, reflecting the tightness in the labor market. This is important because yesterday, the second quarter productivity and labor costs report was released. Labor costs rose only moderately in the second quarter after having surged in the first. Adjusting for inflation, hourly wages, while up in the second quarter, are still down compared to last year. While the Fed members think that some temporary factors will unwind that will start the upward trend in inflation, to sustain the higher rate, wages will have to rise faster. The latest data just don’t say that is happening.

MARKETS AND FED POLICY IMPLICATIONS: Inflation pressures are modest, whether they be producer costs or labor compensation. Job openings are soaring but that hasn’t forced businesses to either raise wages or even increase their recruiting intensity, which DHI reported. Firms are hiring, despite their complaints that they cannot find qualified workers, but they are not paying more for either their new employees or upping the wages of their current workers. That is showing up in the generally decent earnings numbers. But how long that can continue given productivity growth is modest is anyone’s guess. I have been wrong on the wage issue for so long, I no longer say that compensation is about to surge. (Of course, whenever I back off from a forecast, it usually comes true, so don’t be surprised if wages rise faster in the third quarter.) Regardless, inflation, consumer spending and Fed policy all are dependent on wage increases and if they stay low, the Fed will be pressured to go very slowly as it hikes rates and shrinks its balance sheet. As for investors, if earnings stay good, that is all that is needed to keep up the euphoria.

KEY DATA: ISM (NonMan.): -3.5 points; Orders: -5.4 points; Employment: -2.2 points/ Layoffs: 28,307; Claims: -5,000

IN A NUTSHELL: “Growth is still decent, but it is hard to see how it could be accelerating given the moderation in both manufacturing and nonmanufacturing activity.”

WHAT IT MEANS: If you believe the equity markets, the economy is on a role. Well, it is expanding, but if you the people at the forefront of businesses, the supply managers, see conditions may be softening a touch. Tuesday, the Institute for Supply Management’s manufacturing index posted a decline across most components and today’s non-manufacturing survey was off broadly as well. Let’s be clear, the levels are still fairly high, but they are not in the strong growth atmosphere anymore. Activity decelerated sharply led by a major easing in new order growth. While order books continue to fill, they are doing so more slowly. And hiring has eased. On the other hand, input prices are rising faster and for more products. That was true for manufacturers as well. Maybe the Fed’s hoped for higher inflation could be coming soon.

Firms are holding on to their workers as if it means their survival, which given the labor shortages, that just might be the case. Challenger, Gray and Christmas report that layoffs were extremely low in July. Actually, only three times n the past ten years has the level been below 30,000, which was the case last month. So far this year, layoff announcements are off nearly 30%. Of course, the energy sector is expanding not imploding and that portion of the economy accounted for over 80% of the drop. The layoffs being announced are not due to the economy. “Demand downturn” accounted for only about 4% of the layoff explanations.

Jobless claims eased last week. The level has been in range that continues to point to tight labor markets, something firms know all too well.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow is the all-important, at least for tomorrow, employment report, so today’s data should not move markets a whole lot. But the supply managers’ numbers and the layoff data point to different things for the report. Both the manufacturing and nonmanufacturing employment indices moderated, implying job gains should slow. And given the outsized hiring in June, that would hardly be a surprise. Monthly payroll increases averaged over 190,000 in the second quarter but the moderate economic growth rate and the lack of workers implies that pace is just not sustainable. The consensus is for 180,000 and I think that is way too high. If there is a risk, I think it is that the number will disappoint. As for the unemployment rate, the rate was 4.36% in June, which was rounded up to 4.4%. It is not hard to get back to 4.3%. As for the markets, do investors really care about economic fundamentals? First there was the Trump Bump. Then when it finally became clear that tax cuts and infrastructure spending were not going to improve growth this year, the explanation turned to earnings, or Europe or whatever was the reason du jour. So it is hard for an economist to have any idea how the markets will react on a given day. But there is one thing that really should be watched: The wage data. It has been way too low for way too long. Without any solid wage increases, this economy cannot accelerate. Rising wages would also give the Fed the green light to raise rates further as well as shrink its balance sheet. It would take more than one month of faster wage gains, though, to provide that cover.

KEY DATA: ISM (NonManufacturing): -0.6 point; Orders: -5.5 points; Hiring: +6.4 points/ Employment Trends: +0.7%; Productivity: 0% (up from -0.6%)

IN A NUTSHELL: “The economy is neither accelerating nor slowing, but the labor market is looking up.”

WHAT IT MEANS: The Fed is meeting next week and since the members continue to say they are data driven, we need to look closely at the last set of numbers that will be released before the decision is released on June 14^th. One of the more important private sector numbers is the Institute for Supply Management’s (ISM) reports on manufacturing and nonmanufacturing. Last week, ISM found that manufacturing production moderated in May. Today the supply managers indicated that the remainder of the economy, which is most of the economy, also slowed. The details of the report, however, seemed to point to continue decent growth in this sector. Orders grew much more slowly, but they had surged in April, so the level is still quite solid. Indeed, they were up enough to cause backlogs to expand and firms to hire a lot more workers.

While the May jobs report was less than many expected, realistically, it was what should have been expected. The huge ADP payroll gain forecast created a bullish view of the number that dominated the discussion. But as noted on Friday, the report still points to a solid labor market and today’s numbers reinforce that view. Not only did the ISM hiring index jump in May but so did the Conference Board’s Employment Trends Index. The Chief Economist said it best: “Employment will likely grow fast enough to continue tightening the labor market.”

If the economy is to accelerate to the 3% or more growth that the administration projects, productivity will have to surge. While the government revised upward the first quarter number, on a year-over-year basis, the 1.2% rise is half as fast as it needs to be to reach the growth target.

MARKETS AND FED POLICY IMPLICATIONS: With the employment report behind us, the next two big ones before the FOMC announcement are retail sales and consumer prices. They will be released the morning of the 14^th and it is not likely they will be so disturbing that the Fed will not raise rates. For those at the Fed who may have been concerned about the jobs report, today’s data should calm the weak kneed. The labor market is just fine. In addition, the economy is growing at a pace enough to create more jobs and reduce the unemployment rate further. The only “worry” is the decline in energy costs, which is pushing inflation further away from the target. Thankfully, we haven’t seen cut backs in the energy patch and it was that sector’s downturn that slowed growth significantly. But the real question is when will the next rate hike occur? Consumers are becoming debt burdened but wage gains remained stubbornly low. Uncertainty about government policy is hardly helping businesses make expansionary long-term plans and that too is likely slowing things. And finally, the magic of sequestration is keeping government spending in line and the next budget is a huge question mark, so it is hard to see where fiscal policy will help out. Put that together and 2017 looks like it will come in at trend, maybe 2¼%, enough to support at least one more increase after next week’s likely hike. Rate hikes don’t seem to worry investors. Actually nothing seems to worry investors and today’s data should not do anything to cause concern to suddenly appear.

KEY DATA: Jobs: +138,000; Private: +147,000; Revisions: -66,000; Unemployment Rate: 4.3% (down -0.1 percentage point); Wages: +0.2%/ Trade Deficit: $2.3 billion wider

IN A NUTSHELL: “The lack of workers and modest economic growth are holding back job gains.”

WHAT IT MEANS: This week, I warned that the payroll report could be well below expectations and it turns out that was indeed the case. Job gains In May were significantly below consensus and almost half what the closely followed ADP report estimated. Nevertheless, the report was not weak. Yes, there were some real issues we saw in the data. The brick and mortar retail sector is reeling from Internet competition and jobs are disappearing. The slowdown in vehicle sales has led to manufacturers cutting back payrolls. Meanwhile, construction, health care, finance and restaurants are still adding workers at a very solid pace. So far this year, the economy has created an average of 162,000 per month, which is more than enough to keep the unemployment rate falling. And, it is more than enough to allow the Fed to raise rates on June 14^th.

On the unemployment front, the headline rate fell to the lowest level in sixteen years, while the really stupid unemployment rate hit its lowest level since November 2007, just before the Great Recession officially hit. In other words, no matter how you measure it, the labor market is tight. While the participation rate fell, it is still at the average over the last three years. Similarly, nothing should be read into the decline in the labor force since it had been surging at an unsustainable pace for several months. It is now growing at a more trend level. While the low level of available workers should be leading to higher wage gains, that was not the case in May. Average hourly earnings rose modestly – only 1.8% on an annualized basis.

The tree that fell in the forest today was the April trade deficit. It widened as exports fell but imports rose. That is not something we want to see. Even adjusting for inflation, it looks like trade could slow growth this quarter.

MARKETS AND FED POLICY IMPLICATIONS: I cannot to brag that I said this week that the employment number should be in the 140,000-range. I didn’t estimate that lower number because of some great model I developed. I made that estimate because the lack of qualified workers due to the low unemployment rate simply didn’t support the high job gains that had been previously reported. The reality is that the May payroll increase should simply be viewed as bringing us in line with firms should be adding given the overall state of the economy. With the downward revisions to March and April, we now are where we should be. Yes, the three-month average fell to 121,000 but the data have been hugely volatile lately, so let’s wait a while before saying hiring has slowed dramatically. The decelerating job gain trend is something investors and the Fed will watch as it could also be signaling a moderation in growth. Indeed, if the trade deficit does widen and vehicle sales stay as soft as they were in April and May, second quarter growth may not be snapping back as solidly as expected. But with investors essentially giving the Fed a free ride in two weeks, I would be surprised if the FOMC doesn’t move in two weeks.

KEY DATA: HWOL: +195,600/ Pending Sales (Over-Month): -1.3%; Over-Year: -3.3%

IN A NUTSHELL: “The decline in pending home sales is another sign that the housing market is slowing.”

WHAT IT MEANS: For well over a year, firms cut back on their advertising for open positions. That pattern changed in February and the Conference Board’s measure of online want ads has now increased for three consecutive months. The increases were spread across the entire country with forty-eight of the fifty-two metro areas surveyed posting gains. All twenty of the largest areas were up. Similarly, the rising demand for labor was seen in most occupations as all ten of the largest categories experienced increases. If the job gains are slowing down, and we will know better about that on Friday, it is likely because of a shortage of qualified workers rather than weakening demand.

Another day, another sign of issues in the housing market. Pending home sales, which are signed contracts, fell in April. That was the second consecutive month that the National Association of Realtors leading indicator of sales declined. The pace of purchases has also dropped from one year ago, not a positive sign for the market. Looking across the nation, three of the four regions were down in April, with only the West showing a rise. Over the year, every region was in the red.

MARKETS AND FED POLICY IMPLICATIONS: Friday we get the employment report and today’s data, which are really second level numbers, shouldn’t make much of difference to investors or even the Fed. It is interesting that my estimate of about 140,000 new jobs being created in May (consensus is 185,000) is viewed as being disappointing. In reality, it is enough, over time, to keep the unemployment rate declining slowly. The 225,000 per month level that so many are clamoring for would create real problems for the economy. At that pace, given the growth in the labor force, the unemployment rate would be at or below 4% by the end of next year. Since 1980, the rate has been that low just five times and all came in 2000. There hasn’t been an unemployment rate below 3.8% in nearly fifty years – during the Viet Nam War era. We would be entering uncharted waters for the modern economy and anyone who thinks that a labor market bubble couldn’t form is well, probably is a former Fed Chair (Greenspan and Bernanke failed to understand the implications of the tech and housing booms). So let’s hope that we get moderate job gains, even if they disappoint some, because there is only so far the unemployment rate can drop before big problems start appearing. And by the time we see the whites of the problems’ eyes, it will be too late.