KEY DATA: ISM (NonManufacturing): -2.7 points; Orders: -4.1 points/ Trade Deficit: $3.8 billion wider/ Exports: down 0.1 bil.; Imports: up $3.8 bil./ Home Prices (Over-Year): +7.0%

IN A NUTSHELL: “All segments of the economy are doing just fine, though the surge in housing prices is a concern.”

WHAT IT MEANS: In the week where we get the employment data, most other numbers don’t usually create a stir. Still, there are some critical data being released this week. The Institute for Supply Management’s Non-Manufacturing Index is one of them. This follows the services sector, agriculture, mining and construction, so it is most of the economy. Activity did decelerate a touch in November but the October level was the highest ever. The November number can be characterized as really, really strong. Orders are still growing solidly, even if somewhat slowly, order books are filling and hiring is still pretty good. When you combine the nonmanufacturing report with the previously released manufacturing numbers, it is clear the economy is moving ahead quite strongly.      

A growing economy tends to suck in goods from around the world and that is the case with the U.S. economy. Imports rose solidly in October, led by a surge in demand for oil, consumer goods and vehicles. Softness in capital goods imports raises questions about the strength of business investment. Meanwhile, exports were essentially flat. The burgeoning energy export sector was the one bright spot as sales of food products, vehicles, capital and consumer goods were all down. Adjusting for prices, the fourth quarter started off with a pretty big deficit that could restrain growth.

If you are looking to buy a home you probably know that prices are rising and CoreLogic’s October Home Price Index report confirmed that reality.  Prices were up 7% over the year, the fourth consecutive month of above 6% growth. You have to go back to June 2014, during the tail end of the post-recession surge, to find the last time prices have risen so fast for so long. With mortgage rates still very low, homes on the market in short supply and the economy in good shape, the sharp rise in prices is not surprising. As long as people simply don’t want to sell their homes, the number of listings will be limited and these price increases will not only be sustained but we will probably see them accelerate. That raises questions about a bubble forming. It hasn’t yet, but it is something to watch.

MARKETS AND FED POLICY IMPLICATIONS: Businesses are doing quite well. Activity is strong, profits are solid and optimism is high. Clearly, if we do not cut taxes right away, we are going to fall right into a recession. Okay, I am a cynic. I don’t think you cut taxes just to hype the stock market. I believe you reform the tax structure to make the economy more efficient. I will continue to argue that point especially since the tax bills that have been passed do little for efficiency and lots of big company stock prices. As Jim Cramer, of CNBC fame noted, “…it may not be good for the workers, but boy is it good for the stock market“. Worse, as most economists are pointing out, it may generate faster growth in 2018, but coming when there are labor shortages, the likelihood is that inflation will accelerate as will market rates and Fed rate hikes. So I will keep raising the warning. As for investors, it is all about the tax bills. That may change with Friday’s employment report. The consensus is for another strong number in the 200,000-range. I don’t think we will get anything near that. I have it more in the 160,000-range. We have a few days to debate that number.