KEY DATA: Deficit: $42.6 billion ($6.4 billion wider); Exports: -1.8%; Imports: +1.4%/ Productivity: +3.1%; Labor Costs: +0.7%/ Home Prices (Over-Year): +6.7%

IN A NUTSHELL: “Continuing the improvement in productivity will be key if growth is to accelerate.”

WHAT IT MEANS: Despite the economy expanding a little faster than initially estimated, productivity growth didn’t increase as well, though it was still solid. The rise in output per hour was the strongest in two years. However, we need to see more gains like this to have any confidence that the long period of weak productivity increases is behind us. Indeed, even with the solid increase in the summer, productivity was still flat over the year. It looks like that may be the gain for the year as well. Rising wage costs were largely offset by the gains in output and production adjusted labor costs rose modestly, though more than had been previously estimated. Labor compensation is accelerating, which does not bode well for inflation.

The trade deficit widened in October, which was not a major surprise. The surprise had been declining deficits posted during the first half of the year. Exports fell, but largely because the surge in soybean sales that powered the second quarter trade narrowing eased. There were also large declines in nonmonetary gold and artwork, neither of which point to a weakening economy. On the import side, increases in purchases of computer accessories, telecommunications equipment and consumer goods offset a drop in vehicle demand. Even adjusting for inflation, it looks like trade will restrain growth modestly in the fourth quarter.

Home prices just keep rising and rising and rising. CoreLogic’s Home Price Index jumped in October and is up sharply over the year. Texas, Florida and California powered the increase. However, the gains are not widespread as only nine states had gains at or above the national average.

MARKETS AND FED POLICY IMPLICATIONS: Business can expand by either working more efficiently or by using more workers. It is hard to get strong growth when hiring is constrained by labor availability and productivity gains are largely nonexistent. That is the growth trap that we have been in and unless something changes, don’t expect those rosy predictions of years of 3.5% to 4% growth to come true. And if companies don’t start investing more, they will be faced with increases in labor costs that are likely to require prices higher than we have seen in quite a while. The Fed worries quite a lot about productivity and while this report will be well received, the data do bounce around a lot. With compensation accelerating faster than output per worker, either earnings or prices have to give, raising questions about equity prices. The markets have been euphoric lately, but extensive fiscal stimulus in an economy nearing full employment is not a recipe for the Fed standing pat and that reality has yet to set in.