KEY DATA: LEI: -0.2%/ Phila. Fed (Manufacturing): +4.1 points; Orders: -9.9 points/ Claims: -22,000

IN A NUTSHELL: “There are no indications the economy will break out to the upside after hitting a bump due to the hurricanes.”

WHAT IT MEANS: In August and September, Mother Nature ruled. The weather made a mess of large parts of Texas, Florida and Puerto Rico. But we are expecting an economic rebound as households replace lost vehicles and damaged homes while businesses fix up their operations that were set back by the storms. Will that upturn occur? It is way too early to know, but one measure, the Conference Board’s Leading Economic Index, usually provides some insight and it didn’t say conditions were going to improve quickly. Indeed, the index fell in September, the first decline in a year. Should we worry? Not really. The biggest issues were the labor market and residential construction components and those were likely temporarily depressed. Unemployment claims have already fallen to if not below where they were BH (before hurricanes) and don’t be surprised if the October employment report is a biggie. Since it is hard to build during a hurricane and in flooded areas, I suspect that we will soon see a pick up in building permits. So, don’t conclude that the economic data are flashing a slowdown ahead.

One indication that economic conditions have remained solid is the Philadelphia Fed’s Manufacturing Survey. The Index rose moderately in early October, though the details really don’t support any real improvement in activity. New orders and backlogs continued to grow, but less rapidly. Hiring improved yet optimism faded. Businesses are still positive about the future, but not quite as exuberant. And of more concern, their costs are rising and respondents believe they will rise even faster going forward.

Jobless claims pretty much bottomed last week. The sharp decline took us to a level not seen in nearly forty-five years. Then, the labor force then was only about 55% of what it is now. Adjusting for the size of the labor force, the level of claims is at an historic low.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data don’t really change a whole lot as far as the outlook for growth is concerned. But we need to pay attention to the labor market numbers. Undoubtedly, the ups and downs in jobless claims created by the hurricanes caused some strange doings in the data, so the historically low claims number has to be seen in that light. But there were other reports released yesterday that indicate the labor shortages are beginning to bite. The ADP Job Vitality Report indicated that “job holders” are seeing better wage gains. In many sectors, the increases between third quarter 2016 and 2017 exceeded 4%. The information, leisure and hospitality and construction industries are all under intense pressure as shortages persist and workers are moving to the highest bidders. Also, the Labor Department reported that median weekly earnings rose 4% in the third quarter. The trend in wages is up and it is hard to see that it will do anything but accelerate going forward. There are lots of different measures of wage gains and most have issues. The ADP numbers try to “individualize” and there are clear signs that in a lot of sectors and in many parts of the nation, wage pressures are building.