KEY DATA: Claims: 881,000/ ISM (Nonman.): -1.2 points; Activity: -4.8 points; Orders: -10.9 points/Trade Deficit: $63.6 billion ($10.1 billion wider); Exports: +8.1%; Imports: +10.9%/ 

IN A NUTSHELL: “The sluggish improvement in the labor market continues, but the number of people receiving assistance is rising again.”

WHAT IT MEANS:  Yes, the economy is getting better, but by how much is quite uncertain.  New unemployment claims fell below one million last week, but let’s not celebrate too soon.  The methodology used in computing the seasonally adjusted numbers was changed, so the new data are not strictly comparable to the old ones. Instead, it is better to use levels for at least this week.  The current number of claims is four times what it was in the same week last year. At the current pace, another 3.5 million workers would need assistance over the next month.  In addition, as of the middle of August, the total number of people receiving unemployment benefits from all the programs rose by over two million to more than twenty-nine million workers.  Finally, Challenger, Gray and Christmas reported today that layoff announcements in August, though down from the huge July number, were still at the highest August level since 2002. It is hard to say that the labor market is improving rapidly when layoffs continue at such a high pace and so many workers remain on the government’s payrolls.

The services and construction portion of the economy continues to expand strongly, though there was some moderation in the growth rate in August.  The Institute for Supply Management’s NonManufacturing Index eased a touch,but the level still points to a decent expansion.  But there were some cracks in the armor.  The percentage of firms indicating that activity (which is quite strong) was lower over the month increased.  That was also true with new orders, causing the index to drop sharply.  As for employment, it is declining, but at a slower pace.  The largest segment of the economy is expanding solidly, but not surprisingly, that pace is moderating.  There is nothing to worry about, though, as the level of growth remains quite solid.

The trade deficit surged in July.  It was good to see that we sold a lot more overseas, but the level of sales is still twenty percent below where we were in February.  Meanwhile, imports surged even faster.  The reopening of the economy has done what was expected, drawn in a lot of goods from the rest of the world.  With exports less than three quarters the level of imports, when you have imports growing a lot faster than exports, then you should expect to see the trade deficit jump.  And it did. Adjusting for prices, the real goods deficit in July was over eleven percent wider than the second quarter average.   I expect the deficit to widen a little more over the next two months, so look for trade to greatly restrain third quarter growth.

IMPLICATIONS: Tomorrow we get the August employment report and the estimates are all over the map. They range from a slight decline to a gain of 2.25 million.  A similar difference exists in the forecasts for the unemployment rate.  The July rate is 10.2% and the estimates range from about 8.5% to 10.5%.  Basically, economists really don’t have a handle on what is really going on in the labor market, largely because the data have been so outsized that it is hard to fit any past model to the numbers.  The U.S. Department of Labor changed its unemployment claims seasonal factor methodology because the one it had been using was better suited to more stable periods than volatile periods.  You can expect almost anything to print tomorrow, though I am on the side of the numbers being disappointing.  Indeed, not only do I expect the job gain to be less than half a million, I would not be surprised if the unemployment rate ticks up a touch.  The labor market is getting better, but with the reopening slowing during August in most places and being reversed in some, we could see that change in pattern reflected the report.  So buckle up, tomorrow morning could be very interesting, especially since the equity markets are having none of this talk about the V-shaped recovery showing any signs of faltering.