KEY DATA: Sales: +0.6%; Excluding Vehicles: +0.5%/PPI: +0.3%; Less Energy: +0.2%; Goods: +0.7%

IN A NUTSHELL: “The summer lull in spending is over and with inflation moving upward, the argument against a rate hike is getting weaker and weaker.”

WHAT IT MEANS: Remember how people feared households had decided to stop spending? Well, it’s time to chill. Retail sales rebounded in September, led only in part by stronger vehicle demand. Indeed, excluding vehicles, sales were up almost as solidly. There were strong increases in spending on furniture, home building supplies and sporting goods. People ate out, ate in and shopped online. There was also a rise in gasoline purchases, but that may have been due to a jump in prices. The were some weaknesses in this report. Sales of appliances and electronics were soft, people didn’t visit department stores and despite the political campaign, they cut back on their health care purchases.

On the inflation front, the news keeps getting better for the Fed, at least for those pushing to raise rates. Wholesale costs rose solidly in September and the increases were broadly based. The real eye-opener was the jump in goods prices. Yes, energy costs were up, but it wasn’t just oil or even food, which also increased sharply. Almost every major category of wholesale goods posted at least a small gain. Goods price declines had been keeping inflation well in check, but that is no longer the case. On the services side, costs rose more modestly, the pattern most of the year. But with services price increases over-the-year in the 1.5% range and goods prices closing in on the zero mark, overall producer costs have a chance of turning positive for the first time in two years. Looking down the road, business cost pressures are slowly building. Intermediate product prices rose solidly and the year-over-year decline is the smallest in two years.

MARKETS AND FED POLICY IMPLICATIONS: The consumer is spending and cost pressures are slowly building. Sounds pretty good to me. We are not out of the woods on either the consumption or inflation front, but we are moving in the right direction. The September 20-21 FOMC minutes show that members are getting antsy about keeping rates so low. There were worries that future rate hikes might have to be faster than expected if a move upward was not done soon. On the other side, members still believe there is some slack left in the labor market and that trend growth has slow sharply, so a move right away wasn’t necessary. But what the FOMC really needs if it is to raise rates is inflation to move to its target rate of 2%. Then it can say that it is just about at full employment and inflation is at its desired level. A Fed tethered to data would have every reason to hike. That world is just about here. As for investors, it is earnings season and while today’s data should buoy confidence that the economy is not heading downhill, the supposedly forward-looking indices will be adjusting for the results of the backward-looking profit numbers.

KEY DATA: Home Sales: -0.9%; Over-Year: +0.8%/ LEI: -0.2%/ Claims: -8,000

IN A NUTSHELL: “It’s tough to buy something that is not for sale and that may be the biggest problem with the housing market.”

WHAT IT MEANS: The housing market cannot get out of its own way and once again we got a not so great sales report. Existing home sales fell modestly in August, the second consecutive decline. The sales pace is the lowest since February. The Northeast did pretty well but the rest of the nation posted declines. What was most disconcerting in the report was another drop in inventory. The number of homes on the market fell by over 3% from July and by over 10% from August 2015. After bottoming last December, the supply of homes for sales moved upward nicely until May. It is now back into a declining trend. This has to frustrate buyers, as the pickings appear to be slim. Of course, home prices are rising nicely, so sellers are not so troubled by the lack of competitors.

The Index of Leading Indicators declined after being up solidly over the previous two months. The trend is still up, but it looks like the rate of growth may be slowing.

One number that remains strong is the number of people applying for unemployment insurance. The jobless claims number dropped again last week and it keeps telling the world that the labor market is tight and getting even tighter, no matter what the Feed Chair says.

MARKETS AND FED POLICY IMPLICATIONS: If you just looked at the headline existing home sales number, you would conclude that the housing market is soft. But that is not necessarily the case. If there aren’t a lot of goods on the shelves, there is not likely to be a lot of goods sold, and that is true with housing as well. Rates are low, household income is rising solidly and the number of homes with minimal or negative equity is declining sharply. That implies the demand for homes should be rising. I can accept a decline in any given month, but when you have a drop over the month and the year-over-year increase is minimal, that says the market is going nowhere. But does this softness imply overall economic weakness? Not if it was due to the lack of supply, and that brings me back to the Fed.

FOMC Decision Commentary: Yesterday, the FOMC kept rates stable, which wasn’t a surprise. But there was a lot of dissension at the meeting. Three voting members voiced their displeasure by voting no. Three out of ten is not a small number. Fed Chairs don’t like to see that level of unhappiness made public, so the three negative votes has to be wake up call for Chair Yellen. Her problem is that she is sticking to the incoming data foolishness. With the world economy dealing with negative interest rates, it is not likely we will see three months of consistently good data between now and the December meeting. (With the Fed Chair reading a prepared statement on the Fed and the election in response to a question, it is clear the members want to stay totally away from any action in November that may appear political, though I have no idea how a rate hike would help either candidate.) We should get some good one and some weak ones. This Fed has shrunk from action when data or markets were less than hoped for. And the election adds some more uncertainty to a move. Basically, there are just too many parts that are moving in too many directions to get a consistent reading on the economy. Thus, if the Fed remains tethered to the near-term data, and if the members want to make a move in December, they better come up with good excuses to do so, because the numbers are not likely to provide the cover. And with three members already screaming out loud that a move is necessary, it is very likely that one will happen in December.  

KEY DATA: Openings: +228,000; Hires: +55,000; Layoffs: -27,000; Quits: +1,000

IN A NUTSHELL: “With job openings running well above hiring, we should see continued solid job gains in the future.”

WHAT IT MEANS: The August employment report was less than hoped for, though as I noted, about as good as could be expected given the outsized increases in June and July. The question going forward is whether there will be more strong reports or will we move back toward what most economists think is the trend of about 150,000 to 175,000. My guess is that the trend will be out friend, but it could be toward the upper end of the range. The biggest reason for my optimism is that firms still have huge, and I mean huge, numbers of unfilled positions. The Bureau of Labor Statistic reported that job openings rose sharply in July and the rate of openings is at its record high. At the same time, the increase in hiring was not as great*. For sixteen of the last eighteen months, openings have grown more than hires, indicating that firms are having a massive problem filling positions. As that need for new workers grows, demand will continue to be solid. One big issue facing companies hiring is the relative unwillingness of workers to quit their jobs. The number of people quitting is still not near the level reached ten years ago. Firms are trying to deal with their inability to find new people by holding on to their workers as tightly as possible, so separations are relatively low.

 MARKETS AND FED POLICY IMPLICATIONS: Headline numbers, when they are not given any context, can be meaningless. The headline August job growth number was precisely that. Yes, job gains in August were well below what we had seen in June and July, but those two months were aberrations and not sustainable. Today’s JOLTS report shows that the labor market remains tight. Indeed, the greatest impediment to hiring may be the low unemployment rate. There just is not that many people who are either available, meet qualifications, are not too old or too young (yes, there is age discrimination in this economy), or are willing to move to a new job given the wage offers. As long as firms don’t make offers that prospective employees cannot refuse, the number of job openings will continue to rise and likely outstrip hiring. That will increase the number of unfilled positions and ultimately put more upward pressure on wages. This relative lack of hiring is costing firms in many ways, including reducing productivity. Firms may think it is better to keep a position open than to pay up to attract a more productive workers from another firm, but if you look at the collapse in productivity in this country, one of the explanations has to be that there just is not enough people working with the available capital. Interestingly, this implies that investing in labor-saving capital will not necessarily reduce payrolls – but it will raise productivity. But firms are failing to do that as well. It is more fun to merge or buy back stock than to spend money on machinery and equipment. That has to change if this economy is to grow more quickly.

*(Note: Changes in the number hired and job gains are not the same thing. Job gains are a net of hiring, firing, births and deaths of firms, etc. Hires are just hires. The difference between total hires and total separations, though, closely mirrors the monthly payroll change numbers.)

KEY DATA: Sales: -3.2%; Inventories (Over Year): -5.8%/ Home Prices (Over Year): +5.6%

IN A NUTSHELL: “It’s hard to buy something when it isn’t for sale.”

WHAT IT MEANS: I am not a big supporter of supply-side economics, but sometimes supply really matters. Without a large choice, it is hard for people looking for homes to find something they want and that seems to be the problem facing the housing market. The National Association of Realtors reported that existing home sales fell moderately in July. Expectations were for a small decline, but the drop was greater than forecast. Demand was off in three of the four regions, with only the West experiencing an increase. In the Northeast, sales were off by double-digits and accounted for 55.6% of the national decline. This region, which has been improving steadily, makes up only about 13% of total sales. The huge fall off makes no sense and I suspect it will unwind in August. Prices continue to rise solidly and that may be due to the lack of inventory, which has declined sharply over the year.

Home prices are one area where costs are running hot and the Federal Housing Finance Agency reported that they were once again up solidly in the spring. However, the rate of increase did decelerate. Still, since January 2012, housing prices have risen at a 6% annualized pace, which is quite nice if you own a home in the parts of the country where prices are rising. And prices are about 4% above the previous peak seen in March 2007. However, the gains are not well distributed. New England, Middle Atlantic and East North Central regions saw gains at about 4% or less over the year. Meanwhile, prices surged by about 7% or more in the South Atlantic, Pacific and Mountain regions. In Vermont, prices actually fell.

MARKETS AND FED POLICY IMPLICATIONS: The existing home sales numbers were a disappointment, but I am not that disappointed. The strange huge decline in the Northeast tells me that this is not a trend, just a periodic oddity in the data. But the real issue facing both the new and existing home markets is the lack of inventory. There simply are not enough homes for sale. People are starting to give up looking as they know the pickings are slim. And those that are hanging in there are not finding what they want and they are not settling. So, this is a case where supply would likely help increase sales, and possibly sharply. The downside of a lack of supply is that prices are rising and reducing affordability. And that raises the question about why people are not offering their homes for sale. Rising values have reduced the number of home underwater or with minimal positive equity significantly, so something else may be at work. Here are two ideas: First, job mobility has been reduced so people don’t move to find a job, especially with jobs being more available. Second, while prices may be rising now, people no longer view homes as an investment and while they may want to move (and sell their current homes), the cost and pain of changing locations, especially if you have been in a house a long time, is not worth the move. I am sure there are other explanations, so if you have them please let me know. This report is not likely to do much to the thinking of investors or the Fed members as it doesn’t change the perception about the state of the economy. And with Fed Chair Yellen talking on Friday, it is best to wait and hear what she is thinking. Hopefully, we will get some idea from the talk.

KEY DATA: Home Sales: +12.4%/ Phila. Fed: -4 points; Orders: -14.9 points

IN A NUTSHELL: “With housing and hiring looking really good, where is this economic disaster I keep hearing about?”

WHAT IT MEANS: I know, I know, politicians never let facts get in the way of a good political speech, but the idea that the economy is nearing recession is also coming from mainline business commentators and even a few economists. Well, it is hard to believe all the doom and gloom when you look at what is happening in the housing market. New home sales surged in July to the highest level since November 2007. But before we get carried away, it should be noted the jump in demand was concentrated in two regions, the Northeast and South. The West was flat and the Midwest rose modestly. The Northeast has been in the dumps since the recession began and it is still not great. However, the South, which is the biggest region, has been steadily recovering. That is important for overall market health. On the price side, the median price went down in July and was off over the year. The growing number of lower price level sales may reflect the growing importance of new-entry Millennials as well as builders recognizing the need to downsize homes to actually sell them.

Nonmanufacturing activity was largely flat in the Philadelphia region, despite a softening in new orders. Interestingly, sales/revenues were pretty much at their July levels, which seems to indicate that firms have yet to see much of a decline in demand. Special questions asked of the respondents pointed to solid increases in wages (3%), as well as inflation (2.5%) over the next year, which is above the Fed’s target. Both manufacturers and nonmanufacturers expect inflation to average 2.5% over the next ten years. That should open some eyes at the Fed.  

MARKETS AND FED POLICY IMPLICATIONS: I will never argue this economy is strong, but it is also hardly on its deathbed. I don’t know how many times I have seen a headline saying the economy is either already in recession or spiraling into one. Maybe I am looking at different data, but the labor market is solid and so is the housing market. The Atlanta Fed’s GDP Now third quarter forecast remains in the 3.5% range, which is my estimate. Of course, I also thought second quarter growth would be in the 3% range, so what do I know. The second quarter decline in inventories, rather than the usual smaller increase, should reverse, implying a sharp rebound in growth is possible. In the second quarter, the inventory swing took 1.2 percentage points out of growth, with total business investment reducing GDP 1.7 percentage point. Modest investment gains, coupled with decent consumer demand, get us to 3%. In other words, the sky is not falling. Existing home sales come out tomorrow morning and a modest July decline is expected. But new home sales were also expected to ease. If existing home demand is largely flat or even up, given the recent steady improvement, we can conclude the housing market is solid. And with jobs being created decently, can anyone who is not a politician or who works for one say the economy is a disaster?

KEY DATA: Orders: -1.5%; Excluding Aircraft: +0.7%/ Layoffs: 45,346/ Claims: +3,000

IN A NUTSHELL: “The labor market data look good going into tomorrow’s employment report.”

WHAT IT MEANS: Today was the relative calm before tomorrow’s employment storm. The data released were not biggies, but they do indicate the economy and the labor market are improving. On the industrial side, factory orders fell sharply in June, which we knew was the case because of the previously reported sharp drop in durable goods demand. But the fall off was due to a large drop in aircraft orders. The remaining industries posted increases, led by solid gains in vehicles, appliances and machinery. It appears that the collapse in the energy sector is ending. For two months now, new orders for mining and oil and gas field equipment were up. Of course, the level is now barely measureable, but up is still better than down.

The employment data continue to point to further tightening in the market. Challenger, Gray and Christmas reported that layoffs rose in July from June levels, but were down from the July 2015 numbers. Despite the firming in oil prices, energy companies continue to announce more cut backs in their workforces. Job announcement are down nearly 9% this year despite a huge increase in energy layoffs.

Weekly claims for unemployment insurance rose modestly but remain at near record low levels. This is a tight labor market and firms are just not cutting people.

MARKETS AND FED POLICY IMPLICATIONS: The markets are likely in watch and wait mode, even given the Bank of England’s decision to go all-in on monetary stimulus by cutting rates and buying bonds. Bond rates in the U.S. are down sharply again, which is good since I am waiting for my final reading on my remortgage rate. While even a huge jobs report would not likely cause the Fed to start talking up a September rate hike, it would change the thinking of the markets, which is still not convinced the monetary authorities will pull the trigger by the end of the year. But we don’t need a number that is anywhere near what we got in June to indicate the labor market is really tight. Indeed, a moderate one would be good enough.

Interpreting Tomorrow’s Jobs Report: Here are some things to think about when you try to understand the employment report. First, don’t look at the total, as the details always matter. But if you are fixated on the top line number, as so many are, keep in mind that given demographics and labor force growth, it only takes about 100,000 jobs (+/- 25,000) to keep the unemployment rate stable. Anything over 150,000 is enough for it to decline. We have averaged 185,000 this year, which is why the unemployment rate is falling slowly. Don’t expect job gains to match the previous few years increases because the low number of unemployed and the declining supply of those not in the market makes it hard to hire lots of people. The consensus is for about 180,000 new jobs and a 4.8% unemployment rate, which would indicate the labor market is solid. Also, don’t worry about the participation rate: It goes up and down on a monthly basis. A continuation of the rise over the year would show workers feel the market is strong. As for the wage number, it is hard to interpret because the data are less than ten years old. But the year-over-year increase is accelerating and a continuation of that trend would be a warning the labor market is nearing full employment.

KEY DATA: Home Sales: +1.1%; Prices: +4.8%/ Leading Indicators: +0.3%/ Phila. Fed: down 7.6 points/ Claims: -1,000

IN A NUTSHELL: “With the housing market improving and the labor market firming, it will be interesting to see what the Fed says after next week’s FOMC meeting.”

WHAT IT MEANS: Apparently, what happens in May, stays in May. The sharp slowdown in hiring has disappeared and the softening in other areas looks like it was transitory. We see that once again in the plethora of data released today. Take housing, which is a key segment of the economy. The National Association of Realtors reported that existing home sales rose modestly in June. However, that was the fourth consecutive month of gains. The sales pace was the strongest in over nine years. So far this year, sales are up by 4.6% compared to the first six months of 2015, which is not too shabby. Prices are also up solidly. That prices are continued to increase at a decent pace was reinforced by the latest Federal Housing Finance Agency’s House Price Index, which rose by 0.2% in May and was up by 5.6% over the year. There are a variety of price measures created from a number of different sources and they tend to differ a bit on magnitude.   They all seem to show a firming in prices, though.

The May malaise led to a decline in the Conference Board’s Leading Economic Indicators Index. But that didn’t last long as it turned around in June. The index doesn’t say robust growth will follow, but it does indicate that we should expect moderate to solid gains in activity in the months ahead.

On the Manufacturing front, the Philadelphia Federal Reserve Bank’s July measure of manufacturing activity fell. However, the details were actually decent. Orders are now increasing moderately after having been down. Employment has stabilized and optimism about the future improved. So why respondents thought that business conditions softened in late June and early July is a mystery.

Finally, there was another decline in the weekly jobless claims number. It is hard to see that it could go much lower given the size of the economy and the normal worker turnover that occurs. Basically, firms are not letting anyone go except for exceptional circumstances.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC meets next week and the members get a chance to once again backtrack from their comments about the economy they made in the previous meeting. This seems to be a pattern. The economy is good, then there are risks, then those risks have faded and the economy is getting better, then there are new risks, and so on. Isn’t it great that the Fed is data dependent in a world of volatile data? There is little (likely no) chance the members will do anything about rates next week. But I do expect them to put their feet in their mouths again, as conditions will likely change between July and the September meeting. But it is fun to watch the waffling every six or seven weeks. Actually, it is not. I love waffles, but only for breakfast, not in my central bankers. I would like some thinking that is not so impacted by short-term issues. Yes, inflation is still below target, but it is accelerating. Critically, the economy is in good shape and capable of handling another rate hike, when or if this group of turtles ever get out of their shells.

KEY DATA: Starts: +4.8%; 1-Family: +4.4%; Permits: +1.5%: 1-Family: +1%

IN A NUTSHELL: “Housing is wandering along, but progress continues nonetheless.”

WHAT IT MEANS: Home construction may not be a booming business, but it is hardly soft either. Housing starts rose solidly in June, though the large gain came only after the May numbers were revised downward. There were increases in both the single-family and multi-family segments, which was nice to see. Looking across the nation, however, it is hard to find any clear pattern to what is happening in this sector. The Northeast continues to roller coaster along, posting a 46% increase in starts. Of course, that came after a 33% drop in May, so you can see how it is hard to come to any judgment about the state of affairs there. There was also a double-digit increase in construction in the West, the second consecutive solid gain. But that was after two large declines. More moderate declines in the Midwest and South kept the national increase down. As for future construction, permit requests were up modestly, but have lagged construction since January. That does not point to any major future acceleration in activity. Builders are using their permits and the number of homes under construction and the number of homes completed is up sharply from June 2015.

MARKETS AND FED POLICY IMPLICATIONS: Builders are building, it just may be that they are not selling as many as fast as they have hoped. Housing starts this year have increased by over 7% compared to the first half of last year. That is a pretty solid gain. But we have seemingly hit a lull and permit requests and construction activity is no longer accelerating sharply. We see that in the attitudes of homebuilders. The National Association of Home Builders’ Index eased in June and has largely wandered aimlessly since peaking last October. Builders’ optimism is solid but not rising and that is seen in the construction numbers. The level of starts could stand to rise at least 25% before the market would start looking simply strong. It would take a 50% increase before it was getting too hot. Thus, there is a lot of room to run and it holds out hope that the construction sector can keep adding to growth. However, with Millennials more interested in renting than owning, the upside potential may be limited and we may have to go through a more modest growth cycle before enough decide they really do want to buy. Until then, with mortgage rates low and expected to stay pretty low for an extended period, the outlook is for housing to growth moderately for the next few quarters. This steady growth forecast, though, puts no pressure on the Fed to do anything. As for investors, it’s the start of the silliest of seasons, where the wives of candidates can suddenly develop the exact same life story with the exact same world views. Amazing how that happens. Do we really have to go through this election campaign?