September Private Sector Jobs, August Pending Home Sales and 2nd Quarter GDP (3rd Estimate)

KEY DATA:  ADP: 749,000; Manufacturing: +130,000/ Pending Sales: +8.8%; Over-Year: +24.2%/ GDP: -31.4% (up 0.3 percentage point)

IN A NUTSHELL:  “Employment keeps rising and the housing market keeps soaring, additional signs that the recovery remains on track.”

WHAT IT MEANS:  Stimulus?  Who needs more stimulus?  (I will answer that in a little while.)  With the employment report coming out on Friday, Wednesday means the ADP estimate of private sector payroll gains.  They will likely look really good.  The ADP numbers have not been matching up very well with the Labor Department’s reports, they were only about one-third the official increase in August, but the estimate for September is still pretty strong.  And the gains are distributed across all sizes of companies and all industrial sectors.  Surprisingly, the report found that manufacturing could lead the way.  BLS reported that this sector added a total of seventy thousand new positions in July and August.  ADP says that the gain in September might be nearly twice that number.  That seems a bit high.

On the housing front, smoke jumpers may be called in soon to help slow the fires.  The National Association of Realtors reported that pending home sales continued to surge in August and the index hit a record high.  It is now almost twenty-five percent above where it was last year.  Either the market in August 2019 was a mess or this is a really crazy market that is beginning to get out of control.  With inventory almost nonexistent, I don’t know how realtors are selling so many homes, but apparently they are. 

The third and final (at least for a while) estimate of second quarter GDP was released and the revisions were modest.  Consumption, residential investment, and state and local government spending were revised upward. Those increases were almost completely offset by downward revisions to exports and investment in intellectual property.  Given the record overall decline, the change was not really worth noting.   

IMPLICATIONS:  The good data keep coming in and at least when it comes to the labor market, that should be the case for a while.  States continue to reopen further and Florida even appears to believe the virus threat is over as it is now largely open for business.  Good luck with that. Other states are easing restrictions more slowly, but the more they reopen, the more people who return to work.  Thus, the September employment report should be strong, though I would not be surprised if it is a lot less than the nearly 1.4 million increase we had in August.  Indeed, it should be closer to ADP number, which is pretty much the consensus.  With job losses (derived from the claims data) running at the same pace in September as they were in August, don’t be shocked if we don’t get the expected decline in the unemployment rate.  Indeed, a modest rise would not be out of the question.  Regardless, Friday’s numbers should be really good.  As for investors, they seem to understand what I have been arguing for months: The economy is not able to stand on its own.  Stories that another stimulus package could happen were greeted with cheers.  Or, maybe its just what I have noted about the markets, also for months, that bad news is no news, modest news is good news and good news is great news.  Despite the recent declines, the trend still looks to be up, as long as the stimulus package remains on the table (and we don’t have to go through another horror show like last night).  If prospects of more free money for everyone disappear, then as the saying goes, that will be when the rubber meets the road.  And it just might be icy.        

August Durable Goods Orders and New Home Sales

KEY DATA:  Durable Orders: +0.4%; Ex-Aircraft: -0.8%; Capital Spending: +1.8%/ New Home Sales: +4.8%; Inventories: -8.3%

IN A NUTSHELL:  “Business investment activity remained strong, a sign that confidence may be improving.”

WHAT IT MEANS:  Orders for big-ticket items are a key indicator of the willingness of companies to bet on the future and the overall rise in demand in August was less than expected.  Indeed, if you remove the aircraft sector, which is weird right now as it adjusts to the long-term implications of the pandemic, orders were down sharply.  But the details were not that bad.  Demand increased for machinery, computers and communications equipment.  Boeing’s aircraft order cancellations were down, which helped the numbers even though they were still high.  The weakness was in electrical equipment and vehicles.  Motor vehicle orders had skyrocketed the previous couple of months so it was not surprising to see a moderate pullback.  There was really good news in the measure that represents business capital spending.  Nondefense capital goods orders excluding aircraft posted another sharp rise.  The level was the highest in two years and second highest in six years.  That is a really strong indication that companies think this is a good time to start investing again. 

Yesterday, the August new home sales report was released and it was another big one.  Demand jumped above one million units annualized for the first time in nearly fourteen years.  That is amazing, as is the sector.  That said, the details weren’t quite as great.  Sales were off in the Midwest and West, and rose moderately in the Northeast.  It took a double-digit increase in the South, where about sixty percent of the sales are recorded, to get the total into positive territory.  Inventories, or the lack thereof, remain the major concern.  They are at about half of what they should be, and the sales rate adjusted 3.3 months of supply is the lowest on record.  That’s why there are bidding wars for homes and they are selling above asking price in some areas. 

IMPLICATIONS:The August durable good release was one of those skip the headline, examine the details report.  Economists were expected a better number and the more modest overall rise was a little disappointing.  But the sharp rise in the key indicator of business spending points to continued growth, though maybe not nearly at the level we had been seeing.  And that should not be surprising as we are closing out what will likely be the strongest growth in GDP in history.  So, decelerating from the reopening-induced, artificially high pace is something everyone is expecting.  Indeed, the massive rise in home sales is setting the sector up for a let down over the remainder of the year.  And that raises the real question: How fast do we slow?  The September numbers will start providing some answers, but we are not likely to have a good handle on things until the end of the year.  For now, let’s enjoy the reopening of the economy and we can start worrying about next year in a month or two.

August Existing Home Sales and September Philadelphia Fed NonManufacturing Survey

KEY DATA:  Sales: +2.4%; Prices: +11.4%; Inventory: 3.0 months/ Phila. Fed (NonMan.): +6.4 points: Expectations: +14 points.

IN A NUTSHELL:  “With existing home sales hitting the highest level in nearly fourteen years, it is clear the housing market is on fire.”

WHAT IT MEANS:  Remember the housing bubble?  Of course you do, even if you wanted to forget it.  Well, housing demand is moving back toward those levels.  The National Association of Realtors reported that existing home purchases rose moderately in August after having surged the previous two months.  The level may still be well below the peak posted during the housing bubble, but it is still historically high.  Sales were up fairly modestly in most regions, but jumped by double-digits in the Northeast.  Interestingly, condo/coop sales rose faster than single-family purchases.  And you thought density was out.  Home prices are skyrocketing, reaching a new high.  That occurred, in no small part, because the number of homes on the market is declining.  It is at a ridiculously low three months and only 2.8 months for single-family homes, about half of what it should be.   

The Philadelphia Fed’s NonManufacturing Index increased solidly in the first half of September.  The details, though, were a bit mixed.   Order growth moderated and backlogs increased sluggishly.  But hiring was on the rise and firms are spending on plant and equipment again.  But maybe the best news in the report was the sharp jump in expectations.  Optimism about the future may not be irrationally exuberant yet, but it is high.     

IMPLICATIONS:  For three months now, the housing market has posted big gains.  With the August home sales numbers at those we saw in 2006, it is fair to raise the issue of whether we are moving into another bubble.  That is not likely the case.  We likely have two factors at work that are temporarily causing the sales level to surge.  The first is that sales cratered in the spring and there is some catch-up going on.  Second, there is the sudden urge to escape high-density living that is adding to the demand.  The catch-up should start fading soon, if it hasn’t already.  Whether the change in location preferences is just a fad or a long-term trend is right now uncertain.  Those who were thinking of moving before the pandemic hit are probably rushing out to do so.  Those who may want out because of a fear of density, but are not in position to move right, away are the ones we need to watch. They represent a level of demand that may not have been there before and could allow the market to stay solid, even as the temporary factors fade.  Add that to the Fed’s intention to keep rates low for an extended period and you have the makings for a solid but not excessively enthusiastic market for a quite a while. As for investors, housing is a plus, but what about the rest of the economy?  The Philadelphia Fed’s report points to good, though not great, growth in the nonmanufacturing portion of the economy as well.  And the Chicago Fed’s National Activity Index, which came out yesterday, indicated that the U.S. economy began its expected growth moderation in August.  Activity was still above trend, but it is also trending downward.  I keep saying that we need to look past the second quarter collapse and the third quarter surge and see what growth may look like for the year starting in the fourth quarter.  Right now, it looks like it will slowly decelerate back toward sustainable growth.  What is not clear is how rapid that deceleration will be.           

August Housing Starts, Weekly Jobless Claims and September Philadelphia Fed Manufacturing Survey

KEY DATA:  Starts: -5.1%; 1-Family: +4.1%; Permits: -0.9%; 1-Family: +6%/ Claims: -33,000/ BOS: -2.2 points; Orders: +6.5 points; Expectations: +17.8 points

IN A NUTSHELL:  “Don’t let the decline in home construction fool you, the level is still really good.”

WHAT IT MEANS: Housing has been the star of the recovery, so should we be worried about the decline in housing starts in August?  Not at all!  First, the total level is quite decent.  In addition, the key single-family segment was up again.  Multi-family construction is extremely volatile and that portion of the market fell sharply after having surged in July.  Nothing unusual with that.  The second reason you shouldn’t think this is the start of something bad is that permit requests, while falling slightly, are also at a high level.  More importantly, they are again running above starts, so construction could pick up going forward. 

Jobless claims declined last week.  That is the good news.  The bad news is that they were at 860,000, an extremely high level.  It is likely that over three million more workers will lose their jobs this month.  Another sign the labor market has a way to go before we can say it is in good shape was the total number of people receiving checks from all programs, which remained near thirty million.  New claims for the special Pandemic Unemployment Assistance (PUA) program, which covers those who were traditionally not eligible for assistance, such as small business owners, declined.  While we don’t talk about it much, there are more people receiving checks from the PUA than from the traditional program. 

Manufacturing activity in the Mid-Atlantic area eased a little in early September, but again, that is nothing to worry about.  The Philadelphia Fed’s Business Outlook Survey activity index was down only modestly.  More importantly, the components were pretty good.  Order growth improved, shipments surged, backlogs started to build and employment growth accelerated.  Maybe impressive was the surge in optimism.  Indeed, the level of the expectations index is so high that it seems to indicate that respondents were nearing the exuberant stage.        

IMPLICATIONS:  Housing is fine but the unevenness in the recovery continues.  There are big winners and losers and while the overall economy is getting better, the labor market remains in a state of churn.  You cannot say that conditions are getting a lot better when nearly thirty million people remain on government income support and over three million workers a month are losing their jobs.  The longer this continues, the more the friction in the labor market is likely to keep those losing jobs from readily finding new ones.  Thus, while we have seen a rapid decline in the unemployment rate, that may slow, possibly sharply.  The low hanging fruit for unemployed workers, a return to their old jobs, is beginning to disappear and new/different jobs may be hard to find.  The good news is that the reopening also has a long way to go, so job gains and lower unemployment rates should be the story for the next few months.  As for investors, the bigger story could be comments made by CDC Director Redfield that a vaccine might not be widely available until the second or third quarter of next year.  While the president may be saying he made a mistake, that comment really cannot be walked back. It implies that it could be another nine months or more before we see large-scale vaccination in this country.  The economy will not get back to whatever the “next normal” will be until that happens. While investors may not be assuming a vaccine will be ready by Election Day, they may not be factoring in an extended period before it is.      

September 15,16 ‘20 FOMC Meeting

In a Nutshell:  “With inflation running persistently below (its) longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time.”

Decision: Fed funds rate target range remains at 0% to 0.25%.

The Federal Open Market Committee, in one of the more extensive statements it has made, attempted to explain in detail what its new monetary policy strategy meant.  And they did a pretty decent job at that.  Boiling it down, the Fed will not raise rates until the economy reaches full employment and if that takes having inflation run above the 2% target for an extended period, not only is that acceptable but it is desirable. 

Why is higher inflation okay?  Because the Fed intends to hit its inflation target over time and on average.  As the Committee noted, inflation has been running persistently below its target and to get back to the target, the economy must get stronger and inflation expectations have to be above 2%.  The way to keep expectations up is to run hot.  And the way to run hot is to keep rates down as long as necessary.

But there is more in this than just inflation.  Indeed, inflation is probably job two or three for the Fed.  The Fed Chair, in his press conference indicated that reaching full employment is a necessary condition before a rate hike could occur.  Just getting to the target inflation is not enough.  Importantly, the Fed is not defining full employment by any single measure, such as the unemployment rate.  Mr. Powell indicated that other factors, such as wages and participation rates, would be taken into account as well.  In other words, full employment is a subjective not an objective measure.  To paraphrase the late Supreme Court Justice Potter Stewart:  “The Fed will know it when it sees it.”

So, what does this all mean?  Actually, not anything different from what I and many other economists have been saying for a while.  The Fed will not be raising rates for quite some time.  The best guess is at least two years, but that assumes the recovery is strong in both 2021 and 2022.  (NOTE: The Fed’s economic projections do assume that.)  If it moves back toward trend growth of roughly 2% sooner, then there may not be a rate hike for three years.  And the Fed will keep doing what it has been doing to support the financial markets.  That means more additions to its balance sheet by purchasing all types of assets. 

So, if you are looking for a loan, especially a shorter-term one, you probably don’t have to worry about rates getting away from you for an extended period.  But if you are a saver rather than an investor, don’t expect any relief soon, as savings rates, which are already at rock bottom, are going nowhere.  As for investors, if you think low rates help the equity markets, well you are going to have low rates for quite a while. 

 (The next FOMC meeting is November 4,5 2020.) 

August Retail Sales and September Housing Market Index

KEY DATA:  Sales: +0.6%; Over-Year: +2.6%; Ex-Vehicles: +0.7%/ NAHB: +5 points

IN A NUTSHELL:  “Consumers are still spending, but not surprisingly, the pace is slipping a little.”

WHAT IT MEANS:  With the enhanced unemployment insurance payments disappearing in early August, economists have been looking for signs that consumption is fading.  The first report that could signal that is the August retail sales numbers and while they were a little softer than we had been seeing, they were still pretty good.  Overall demand was strong.  Yes, the increase was less than what it was in the late spring and early summer, but those were outsized gains that corrected for the early spring collapse.  There were solid gains in sales of clothing, health care, furniture, electronics, and of course, building materials.  With so many people working from home, fixing up the place has become a major priority.  But the biggest increase was in restaurants.  Inside dining is joining outside service and that is helping this sector improve.  Still, August restaurant sales were down over fifteen percent compared to a year earlier.  In comparison, total retail sales were up, though somewhat modestly.  There was a warning sign in this report.  The measure that most closely mirrors consumption, core retail sales, which exclude autos, gasoline, building materials and food services, declined slightly.  We could be starting to see some pullback due to the loss of income.  It is too early to conclude that, but it is worth watching.

As for the housing market, the NAHB/Wells Fargo National Housing Market Index popped again in early September.  The homebuilders’ measure is out of control.  It is now five points above the previous high and eleven points above the peak that was posted during the housing bubble.  It is hard to understand what the housing market indicators truly indicate.  By that I mean, are we in a bubble, a big bubble, a massive bubble, or just a short-term surge that is overwhelming the measures?  With households looking to escape high-density locations, it is not surprising that homebuilders are seeing greater demand, but this is crazy.  Let’s just say that housing should add greatly to growth in the third quarter and leave it at that.

IMPLICATIONS:  Today’s data show an economy moving forward strongly.  The consumer is consuming and builders are building.  But we also cannot totally dismiss the potential impact of the lack of additional stimulus.  Those buying homes are not likely those who are still on unemployment insurance.  The unemployed are the ones whose spending is most sensitive to income changes.  Many states are gearing up to provide the additional $300 per month that has been temporarily funded by executive order, but that is not universal and is not likely to hit for a while.  The fall economy is pretty much set, but the winter and next spring are up for grabs right now.  Meanwhile, the Fed members are finishing their meeting, which should provide little news.  As for investors, they just keep on keepin’ on. 

August Industrial Production and Import and Export Prices

KEY DATA:  IP: +0.4%; Manufacturing: +1.0%/ Imports: +0.9%; NonFuel: +0.7%; Exports: +0.5%; Farm: -2.2%

IN A NUTSHELL:  “The manufacturing rebound remains on track and that indicates that consumers are still spending.”

WHAT IT MEANS:  It is clear that despite the end of the enhanced unemployment payments, the economy continued to heal quite well during the summer.  Housing is booming, payrolls are rising and the manufacturing sector keeps getting better.  Manufacturing output surged again in August, the fourth consecutive large rise.  Every industry group posted decent to strong gains except for the vehicle sector, which had come back sharply the previous three months.  A decline in assemblies caused output to fall, but given the continued rise in sales and low level of inventories, that should turn around.  Compared to where we were before the pandemic closed things down (February), production is still off 6.7%.  A number of industries, such as furniture, textiles, computers and electronics, and electrical equipment and appliances are still off double-digits compared to where they were earlier in the year.

Import prices spiked in August, its fourth consecutive large rise.  While energy costs continued to jump, they were not totally out of control.  Other areas also posted decent gains.  Nonpetroleum industrial prices continued to surge and food costs were up solidly.  Consumer, vehicle and capital goods import prices all rose modestly or moderately, indicating that price pressures on consumer costs may not be widespread.  As for exports, they too were up, but the farm sector didn’t benefit.  Agricultural export prices were still down over two percent from August 2019. 

One other report was released this morning.  The New York Fed’s Empire State Manufacturing Index rose sharply in the first part of September.  New York is not a major manufacturing state, so it isn’t clear if this signals a further acceleration in the industrial rebound, but it is still good news. 

IMPLICATIONS:  We should expect to see the economic numbers start settling down over the next few months.  Some states are continuing to reopen, but most states are largely on hold.  As September rolls on and the weather cools off (it’s only 63 at 10 AM where I am right now), the joys of outdoor dining will fade.  So the rebound in employment may not be as great as expected, especially when we get to the last quarter of the year.  And few states are ready to open up at 100% right now.  That has two major implications.  First, job growth is likely to fade while the decline in the unemployment should slow.  However, there is still room to reopen further, so the payroll rise and unemployment rate drop could be larger than normal for a while.  What I am saying is don’t expect the economy to keep adding a million or more jobs each month or the unemployment rate to decline by a percentage point.  Half those changes would be great but that may be asking too much.  And with the next stimulus package possibly never coming, by year’s end, we could be seeing limited improvement in those numbers.  Nevertheless, it looks like the recovery could stay on the fast track for a month or two before reality starts setting in.  That points to a very strong third quarter GDP gain, but a relatively moderate fourth quarter increase.  Investors are likely to keep their eyes strictly glued to the recent past and the markets could keep going up.  As for the Fed, it is meeting today and tomorrow and there is little that is expected to come out of the meeting.  Indeed, barring a major rebound in the virus, little is expected for the next couple of years.  The members could keep phoning, or should I say videoing it in.  It would save time and money.  

August Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA:  CPI: +0.4%; Over-Year: +1.3%; Ex-Food and Energy: +0.4%; Over-Year: +1.7%/ Real Earnings: 0%; Over-Year: +3.3%/ HWOL: +1.7%

IN A NUTSHELL:  “Inflation is making its way back toward the Fed’s target, but it is still not a major risk.”

WHAT IT MEANS:  Once upon a time, inflation was something economists and even central bankers worried about.  Not so much now that the Fed has announced it will allow inflation to run above target for an extended period.  Nevertheless, we do need to follow the numbers.  Consumer prices jumped again in August, led by the continued rebound in energy costs, as well as a surge in used car and clothing prices.  In contrast, shelter expenses remained tame, food prices settled down and health care expenses, which had been exploding, took a breather.  Price gains over the year are moving back toward the two percent level, though they still have a way to go.  But who really cares about food, energy, housing or clothing?  What really matters is the index for cakes, cupcakes and cookies.  Those prices cratered in August and are down from their August 2019 level.  I’m happy. 

Inflation really matters when it starts restraining household spending power significantly.  That is where real earnings, which adjusts for inflation, comes in. For consumers to buy more, their incomes have to rise faster than inflation.  In August, that didn’t happen.  Also, the increase in inflation-adjusted income, over the year, is decelerating as lower-wage workers get pulled back into the economy.  This is a weighted average and the distribution of job gains across industries and professions makes a difference.  Initially, those lower paid workers lost their jobs at a huge pace, raising the weighted average.  Now that they are being rehired, they are lowering the average back towards its pre-pandemic level.  But for the individual worker, not the economy on average, rising inflation is not good news, no matter what the Fed thinks. 

The Conference Board’s Help Wanted OnLine index rose solidly in August after having skyrocketed in July.  It is closing in on its all-time high set in January.  Total payrolls may still be down by 11.5 million employees, but demand for workers is solid, indicating job gains should remain strong.     

IMPLICATIONS: The Fed has made it clear that when it comes to its dual mandate, stable inflation is job three.  First comes the unemployment rate, then comes something else, maybe equity prices, and lagging well behind is inflation.  If it is too hot, so be it.  And that is not a bad approach to take, given we have been in a too-low inflation environment for a long time.  Inflation can ultimately be controlled if it is too high, but too low a rate creates the risk of falling into a deflationary environment.  If that happened, the economy would be in real trouble.  So, while we watch the inflation numbers out of habit, I suspect their value will be limited for a very long time, except for its impact on consumption.  Given that wage gains have been limited for over a decade, it is hard to see why they would accelerate in this still very high unemployment rate environment.  Rising inflation remains a negative indicator, but for consumption not for interest rates.  Right now, workers are making more money, but by working longer, not by getting pay raises.  With the Fed on hold for who knows how long, once the reopening process settles down, the outlook for consumption may not be as bright as many in the markets are currently planning for.  But with the demand for labor still high, we may not see a significant moderation in total household spending until next year.

August Employment Report

KEY DATA: Payrolls: +1.371million; Private: +1.027 million; Federal Government: +251,000; Retail: +249,000; Unemployment Rate: 8.4% (-1.8 percentage points); Wages: +0.4%

IN A NUTSHELL: “The labor market continues to heal extremely rapidly.”

WHAT IT MEANS:  The continued reopening of the economy is working its magic in the labor market. In August, job gains were robust and the increases were spread across the economy.  Indeed, an extremely high 69% of the 258 industries measured saw payrolls rise.  And the details were quite strong as well.  There were huge job gains in general merchandise stores, restaurants and temporary help companies.  All three added over one hundred thousand workers.  Health care payrolls boomed as doctors’ offices reopened.  But the largest gain was in the public sector. The federal government hired 238,000 temporary census workers to try to complete the census, which is behind schedule.  In contrast, sectors such as construction and manufacturing added more moderate numbers of employees.  Given the ramping up of vehicle assemblies and the surge in home construction, that could change soon.  

On the unemployment front, there was a surge in the number of people employed, over 3.7 million, and the number of people unemployed dropped by 2.8 million, leading to a surprisingly large decline in the unemployment rate.  This occurred despite a rise of nearly a million in the labor force and a solid increase in the participation rate.  In other words, all the metrics were great.    

Finally, there was good news in the report for workers.  Hourly wages rose solidly and the workweek was up, meaning that weekly earnings rose strongly.  

IMPLICATIONS:This was a strong report that shows the recovery remains on track.  The labor market has come back faster than expected and we are seeing improvement in all segments of the economy and the workforce.  But as usual, the question of whether these gains are sustainable remains.  The unemployment rate is still about five percentage points above where it was in February and payrolls are down by 11.5 million workers.  There is still a lot of work to do.One thing this report does is complicate the negotiations over another stimulus package.  For those who, after having voted to explode the budget deficit, have suddenly remembered that they don’t like government welfare payments, this report could strengthen their resolve to deny another package gets passed, since the need is not nearly as great as it had been.  But it also undercuts the arguments of those who support additional massive government stimulus, that the economy is a disaster.  It is, when looked at on an absolute basis, but relatively speaking, it is not as big a disaster as it had been.  In politics, what passes for reality is, well I have no idea, so any and all economic views are likely to be presented.  Consequently, it is unclear where we go from here in those discussions.  As I noted yesterday, it is uncertain which month we might start seeing the negative effects of the ending/running out of the stimulus payments.  There were no signs of that in the August employment report.  But if we have to wait for October to get the negative numbers that might trigger an agreement, and given it takes time to get any further stimulus into the system, the risks to growth remain to the downside.  Nevertheless, the markets are likely to see in this report the improvement in the economy and given that good news is great news, mediocre news is very good news and bad news is good news, don’t be surprised if investors continue to party.

Weekly Jobless Claims, August NonManufacturing Activity and July Trade Deficit

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.

Linking the Economic Environment to Your Business Strategy