KEY DATA: Sales: +0.8%; Ex-Vehicles: +0.7%/ Imports: 0.5%; Nonfuel: +0.2%/ Philly Fed BOS: -9.3 points; Orders: -10.2 points

IN A NUTSHELL: “Despite October’s strong consumer spending, there are some signs that the economy may be slowing.”

WHAT IT MEANS: The consumer has to keep spending if growth is to remain anywhere near 3% and households did just that in October. Retails sales rose more than expected, but before we start expecting another quarter of great growth, it should be recognized that rebuilding from the hurricanes and replacement of lost vehicles might have played a major role in the strong increase. We saw a surprising pick up in vehicle sales and that showed up in the retail sales data. In addition, there was a surge in spending on building materials. Finally, the gain was hyped by a surge in gasoline purchases that was likely price related. The measure that closely aligns with GDP consumption, which is retail sales excluding the above listed components, as well as food, rose more modestly. Still, sales of electronics and appliances were strong, so there is some underlying strength in the data.

As long as the Fed continues its march to neutral, inflation will remain a key issue. If it stays moderate, the FOMC may not have to go above neutral, as the Committee indicated is possible. Well, import prices rose solidly in October but much of that came from a jump in energy costs. Removing fuel, the rise was moderate. And since oil costs have cratered, much of the gain in the overall index will be backed out in November. For consumers, though, there is a warning as food prices jumped for the second consecutive month. That should show up in retail prices soon.

 While the focus has been on the consumer and inflation, a possible softening in the manufacturing sector may be seen in the below the radar data. The Philadelphia Fed’s manufacturing index dropped sharply in early November. Order growth decelerated significantly as well. The sector is still expanding, but more moderately. And expectations are starting to falter as well.

Jobless claims edged upward, but remain low. There are no signs that the labor market is cooling.

MARKETS AND FED POLICY IMPLICATIONS: Economists always warn that after the initial slowdown created by disasters, there is usually a sharp rebound. It looks like that happened in October. Hurricanes come, hurricanes go but it is the fundamentals of growth matter the most in the long run. Right now, consumer spending looks good but wage gains are still barely outpacing inflation, while the savings rate is declining. In addition, while solid, the manufacturing sector may be throttling back as well. And finally, we are still waiting for the surge in capital expenditure that was supposed to be triggered by the tax cuts. Early this year I suggested we wait until the fall to make any determinations on the success or failure of the tax bill to induce businesses to invest. It’s almost winter (actually, it’s snowing outside, so maybe it is winter) and the stronger investment is not yet here. Thus, the comments I made about the second quarter likely being the high water mark seem to be coming true. Will the slower growth restrain the Fed? Not for a while, as the economy is moderating not faltering. But with investors soon having to deal with earnings comparisons that are already tax hyped and with uncertainties about trade, tariffs and rising interest rates having an impact on corporate spending decisions, volatility in the markets is likely to be with us for quite some time.