KEY DATA:  ADP: +174,000; Manufacturing: +1,000/ ISM (NonMan.): +1 point; Orders: +3.2 points; Employment: +6.5 points

IN A NUTSHELL: “The labor market isn’t falling apart, but it isn’t booming either.”

WHAT IT MEANS:  With Congress trying to figure out what to do about the next stimulus bill, the economy will have to make do with what is already in the pipeline.  Given the bill passed in December contained over $900 billion in aid, that is a lot of help.  And it may need it.  On Friday, we get the government’s reading on January payroll gains and today we received an indication of what it might look like.  The ADP estimate of the private sector changes points to a decent, though not great job gain.  Of course, there was a decline posted in December, so up is good, at least when it comes to jobs.  Almost half of that rise was in health care, which should surprise no one given the virus surge and the vaccine rollout, as well as leisure/hospitality, which benefitted from some relaxing of restrictions.  Yes, it seems dumb to reopen when the virus is surging, but who said politicians are rational?  The strong housing market helped drive up construction hiring strongly.  The only really weak sectors were manufacturing and information, which were basically flat.  Manufacturing had been adding workers at a pretty solid pace, so any falloff there could slow overall job gains.   Looking across company size, it looks like large firms are moving cautiously on the job front, while small and medium size companies are adding workers at a moderate pace.

The service sector continues to rebound.  The Institute for Supply Management’s index of nonmanufacturing activity rose in January to a level not seen in almost two years.  That is impressive.  Of course, that is not to say the sector is booming.  This is a diffusion index and if you just stop falling, that is, move from declining to stable, the index rises.  That was the case with the rise in orders and especially hiring, where the number of firms cutting their workforces fell sharply while the share increasing payrolls was largely flat.  Nonetheless, this was a good report that points to growing strength in the services and construction components of the economy.     

IMPLICATIONS:  Today’s reports don’t really tell us much, other than the economy is still expanding.  On Friday, we get an important employment report.  Payrolls fell by 140,000 in December and it will be interesting to see the extent of the snap back.  I think it could be larger than ADP estimates.  I am closer to 300,000 than 200,000.  But I also think that we are due for a rise in the unemployment rate.  That would confuse the situation, especially if my job gain estimate, which is strong, turns out to be in the ballpark.  A strong job increase coupled with a rise in the unemployment is not what we want to see.  Regardless, given how fast the economy has rebounded from the spring collapse, a slower, but still decent growth rate is likely.  And that likelihood is what is creating some of the political differences in Washington.  One side asks if we really need a massive stimulus bill if the economy continues to expand moderately.  The other asks if we can risk not doing enough, given the pain being felt by so many households and businesses.  But the Democrats have control and a stimulus bill of some size, most likely larger than the one passed in December, could get signed into law by the end of the month.  That should cement growth for the rest of the year.  How strong it will be is uncertain, as we don’t know how much of the stimulus will go to households and businesses that don’t really need it and therefore will disappear into the abyss.  Regardless, by the end of the year, the economy could return to the level it was at before the pandemic hit.   

KEY DATA:  ISM (Manufacturing): -1.8 points; Orders: -6.4 points; Employment: +0.9 point/ Construction: +1%; Private: +1.2%; Residential: +3.1%; Nonresidential: -1.7%

IN A NUTSHELL: “The unevenness in the economic expansion can be seen in the continued strength in manufacturing, while business construction keeps fading.”

WHAT IT MEANS:  The economy is in good shape, but that does not mean every component is doing well.  On the positive side, there’s manufacturing.  The Institute for Supply Management’s index of the manufacturing activity fell in January.  So, is this segment of the economy starting to fade?  Hardly.  The index level remains high.  The report noted that “Of the six biggest manufacturing industries, five … registered moderate to strong growth in January.”  Orders grew strongly, though not as robustly had they had been.  Nonetheless, backlogs built even faster and hiring picked up.  In other words, the sector kept expanding solidly, but maybe the robust growth should now be categorized as strong.

The construction sector has been the star of the economy, but that is due to the housing market.  While private residential activity soared in December, nonresidential construction spending continued the slowdown that we have seen since November 2019.  Not surprisingly, lodging led the decline, but it was not the only category to report either declines over the month or over the year.  Seven of the eleven components saw construction spending fall in December and all eleven were down when compared to the December 2019 pace.  Meanwhile, private residential activity was up almost twenty-one percent over the year. 

IMPLICATIONS:  If it’s all about the virus, actually the vaccines, then there is good news for the economy.  Two more vaccines may become available in the relative near future and that should help reduce greatly the bottleneck caused by a lack of supply and an inefficient distribution system.  I keep hearing that there is a lack of health care professionals qualified to give the shots, but that is hard to believe.  In the county I live in, none of the pharmacies listed as giving the shots are in chain pharmacies such as CVS, Walgreens or Rite Aid.  There are plenty of pharmacists trained to give shots at the chain stores as all of them offer most other common vaccinations.  The problem, it seems to me, is that the supply is so limited that it cannot be efficiently distributed to a larger number of locations.  Thus, once the supply increases, the rate of distribution should accelerate sharply.  The major question then becomes: How many people will not get vaccinated even when the supply is readily available?  And if that number is significant, what does it mean for the safety of the population? That ultimately makes a difference as to how fast the economy can return to what will be the next normal.  We are moving forward, but it will still take time to get through this, so some additional government support will be necessary.  How much we will need is unclear, but as this is likely a situation where if you have to make a mistake, you probably want to overdo it, not do too little.  Large numbers of zombie companies would fail and too many families would continue going without if the government winds up not doing enough.  But politics and economics operate in parallel universes, so who knows what kind of stimulus bill will be passed.  There is likely to be a fairly aggressive spending bill pushed through by the Democrats, and when you add in an aggressive Fed, the probability growth will falter significantly this year is low.   

KEY DATA:  GDP: +4.0%; Annual: -3.5%; Consumption: +2.5%; Housing: +33.5%/ New Homes: +1.6%; Prices (Over-Year): +8%/ LEI: +0.3%/ Claims: -67,000

IN A NUTSHELL: “Economic growth is moderating, not weakening, a crucial difference.”

WHAT IT MEANS:  After expanding by a record rate in the third quarter, it was clearly not a surprise when fourth quarter growth came in way lower. But it is hard to argue that the pace was anything but strong.  When trend growth is a little over two percent, a four percent increase is really good.  For all of 2020, the economy posted its first annual negative growth rate since the Great Recession. It was also the largest annual decline in the last seventy years!  The details, though, were somewhat mixed.  Consumption expanded moderately, but the gains was entirely in the reopening of service companies.  Spending on goods was down.  Business investment was robust and the sharp rises in both equipment and intellectual property point to some improvement in productivity down the road.  There was a huge increase in housing.  Indeed, roughly one-third of the overall increase came from residential investment, a pace that is not sustainable.  On the trade front, exports surged but imports rose even more rapidly.  The widening trade deficit restrained growth even more than housing aided it.  Finally, all levels of government purchases were down.  As for inflation, it remains quite tame, with consumer prices increasing roughly 1.5% whether you included or excluded food and energy. 

New home sales rose moderately in December, but that came after a sharp decline in November.  The increase came from a robust rise in the Midwest and a solid increase in the West, but home purchases fell in the Northeast and the South.  More importantly, the level of sales has come down to something more reasonable, after having skyrocketed in the late summer and fall.  The panic buying may be coming to an end.  Prices, though, continue to surge, as the supply of homes is still quite tight.

The Conference Board’s Leading Economic Index rose moderately in December after having jumped in October and November.  That points to good growth as we move through the spring.

Initial jobless claims fell sharply last week, but let’s not think the report was anything but troubling.  The monthly level of 847,000 is indicative of a weakening not a strengthening labor market.  Even more troubling is the four-week moving average, which smooths out the ups and downs of this volatile measure, continues the slow but steady rise we have seen since it hit bottom at the end of November.   IMPLICATIONS:It is not likely that the economy can continue to expand at the strong rate we saw in the fourth quarter. If you look at the details, consumption was driven by people actually starting to purchase services once again. Meanwhile, household demand for both durables and nondurables was limited.  It doesn’t appear as if the vehicle sales are surging and if that is the case, the moderate consumption growth could continue.  Investment was great, but much of that came from housing, which is already moderating and should continue to do so.On the business side, while spending on equipment should remain strong, the huge increases posted over the last two quarters of the year are not sustainable.  And there is little reason to think that firms will be expanding their footprints anytime soon by building new plants or offices.  The trade deficit surfed and if the U.S. remains the strongest industrialized economy, import growth will likely continue to exceed exports.  That means the trade deficit should widen, restraining growth going forward.   And finally, there is the government spending on goods and services.  The financial reckoning that state and local governments are facing is coming soon.  Meanwhile, there are those in Washington who would rather fund an administrative assistance in a law firm than a teacher, so aid to those hurting entities remains uncertain. This implies a further moderation in growth during the first half of this year.  But I don’t expect that to trouble investors, as nothing seems to bother them.  And finally, there is the Fed, which yesterday told us that they are on cruise control – low rates and lots of investment in assets for a very long time.  Put it all together and you get moderate overall economic growth and the likelihood of more stock market gains.

In a Nutshell: “The pace of the recovery in economic activity and employment has moderated in recent months.”

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

The Federal Open Market Committee, and in particular Chair Jerome Powell, wants to make one thing very clear: The economy cannot get back to normal until the virus is licked.  If there was a theme in today’s statement and press conference, that was it.  Yes, the statement noted that the recovery has weakened, but the key points was that the “… weakness (was) concentrated in the sectors most adversely affected by the pandemic.” 

The statement then went on to note that: “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”  During his press conference, Chair Powell reiterated those points. 

And there was one other key bit of information from his press conference that needs to be highlighted.  He made it clear that the Fed was prepared to overdo it rather than risk not staying accommodative long enough.  He said the costs of not getting back to full employment are much greater than the possibility of getting high inflation, something he said was not very likely.  That’s another way of saying rates will be kept low and asset purchases will continue for a very, very long time. 

So, barring an unforeseen crisis, when it comes to the Fed, what you see now is what you are going to get for probably two or more years. 

(The next FOMC meeting is March 16,17 2021.) 

KEY DATA:  Confidence: +2.2 points; Present: -2.8 points; Expectations: +5.5 points/ Phila. Fed (NonMan.): +9.1 points; Orders: +9.7 points; Employment: +8.9 points/ FHFA: +1%; Over-Year: 11%/ Case-Shiller: +1.4%; Over-Year: +9.5%

IN A NUTSHELL: “Housing remains strong and confidence is holding up, so the economy should continue growing decently.”

WHAT IT MEANS:  The January 6^th attack on the Capitol raised questions about where consumer confidence would go.  It is not as if it was booming.  Early signs are that households have shrugged off the violence.  The Conference Board’s Consumer Confidence Index rose in January.  However, the details were mixed.  While household expectations improved solidly, possibly due to prospects of even more government money flowing their way, the view on current conditions took a hit.  As I have noted before, changes in confidence that are largely due to non-economic factors tend to have minimal impact on consumer behavior. That respondents believe both business conditions and the labor markets will firm over the next six months reinforces that view.

The Philadelphia Fed’s index of regional nonmanufacturing activity rose solidly in mid-January.  While that sound nice, the reality is that conditions in the region are not very good.  The overall index remained negative, meaning that perceptions are that the economy continues to decline.  That was also true of business activity for individual firms.  And while the orders measure improved, it went from declining to largely flat.  Product and labor cost increases accelerated, while pricing power faded.  About the only good news in the report was that full-time hiring picked up. 

On the home price front, there were two reports released and both showed that the surge continued in November.  The Federal Housing Finance Agency’s national index jumped again and over the year it was up double-digits.  Similarly, the Case-Shiller national index increased sharply in November and the rise over the year is pushing ten percent.  We might be seeing the beginnings of a moderation in price gains. The FHFA November increase was the smallest since June 2020, while the Case-Shiller rise, though still quite high, was also down a touch. 

IMPLICATIONS:Economists have been saying for months now that the economy would moderate as we ended 2020 and especially as we moved through the first half of 2021. The key question was whether the consumer could hold up.  Part of that concern came from the simple fact that the government’s income policies have kept spending going.  The second stimulus package did include additional funding and that should help, but only until the early summer at the most.  President Biden’s $1.9 trillion plan is already running into roadblocks.  It is not likely we will see any household and business subsidy plan passed before March or April.  That should be early enough to get us through the year, even if there are significant cuts to the subsidies.  So, while growth should moderate from what is likely to be a strong fourth quarter number (that will be released on Thursday), it should not falter significantly.  Meanwhile, the FOMC began its two-day meeting today and we get the statement tomorrow afternoon.  That the Committee will continue to commit to keeping rates low for an extended period is a foregone conclusion. What I am looking for is what Fed Chair Powell might say about fiscal policy.  He has been arguing that more is needed, and President Biden is proposing a lot more, but it is not clear if he will weigh in again on the issue.  Regardless, as long as more stimulus is expected, and it is, investors should remain upbeat. 

KEY DATA:  Orders: +0.2%; Ex-Aircraft: +0.7%; Capital Spending: +0.6%; 2019-2020: -7%; Ex-Transportation: -0.1%; Capital Spending: +1.8%

IN A NUTSHELL: “Businesses continue to buy big-ticket items, a sign that the economy is in decent shape.”

WHAT IT MEANS:  Purchases of durable goods rose somewhat disappointingly in December, but once again, the headline number does not tell the true story.  If you take out the nondefense aircraft sector, demand actually rose solidly.  Boeing is starting to turn the corner and there was a surprising drop in total orders despite it receiving a large order early in the month.  Order terminations look like they are slowing down now that the 737Max is flying again. Don’t be surprised if we see big increases in total orders in the months to come as Boeing starts the long road to recovery.  Looking at the details, demand for machinery, vehicles, metals, communications equipment and electrical equipment improved.  Computer orders, which had surged, eased back.  That was not a surprise.  The proxy for business investment activity, capital goods orders excluding defense and aircraft, increased strongly.  For all of 2020, there was a sharp drop in durable goods purchases.  But just about all of it was in transportation as both vehicle and nondefense aircraft demand plummeted.  In other words, if you exclude transportation, large item demand was up modestly.  Given all we went through, that is pretty good.

IMPLICATIONS:  While the headline may have been a disappointment, durable goods demand remains decent.  Given the robust rebound in the summer, it should surprise no one that growth is tailing off.  Tomorrow we get the first look at fourth quarter GDP and the consensus is around 4.2%.  That is really solid.  But there are still issues facing the economy and most forecasts are for growth to taper off as we move through the year.  The wild card, of course, is the size of any additional stimulus.  The Biden plan would cause the economy to surge, though it creates even more debt.  A scaled down bill, which I expect to see passed in the spring, would keep activity going for the year at a moderate pace. 

The FOMC is finishing off its meeting and later today we will get the statement and hear from Chair Powell.  I expect nothing but good news: The economy continues to grow, rates will be kept low for the rest of our lifetimes (just kidding), the Fed will continue to pump money into the financial economy at a significant pace and additional fiscal stimulus will help out.  What more could investors want? 

KEY DATA:  Sales: -0.7%; Core Sales: -1.9%/ IP: +1.6%; Manufacturing: +0.9% / PPI: +0.3%; Goods: +1.1%; Services: -0.1%; Sentiment: -1.5 points

IN A NUTSHELL: “The consumer hunkered down, as shutdowns increased and government support faded.”

WHAT IT MEANS:  If the consumer is the heart of the economy, it may be time for to bring out the defibrillators.  Retail sales fell sharply in December after having cratered in November.  The cutbacks were in most categories, but especially those impacted by shutdowns.  Restaurant demand dropped like a rock, purchases of big-ticket items such as electronics, appliances and furniture were off sharply, department store sales continued to disappear and people even cut back buying food at supermarkets.  Households even slowed their shopping online, which was off significantly.  Gasoline sales rose, but prices drove that increase.  Vehicle demand picked up and households hit the drug stores more heavily.  For some reason that I am not clear about, clothing demand surged.  Maybe it was that winter finally showed up. Excluding automobiles, gasoline, building materials and food services, which most closely mirrors the consumption number in the GDP report, sales fell by nearly two percent after declining by over one percent in November.  Clearly, household hunkered down at the end of last year.

Despite the slowdown in consumer spending, the nation’s manufacturing sector surged in December as output rose sharply.  The expansion was widespread.  Of the eleven durable goods industries, only two (vehicles and computers) posted declines.  Only one of the eight nondurable goods components, paper, contracted. 

Not only is manufacturing output rising, but so is the cost of producer goods on the rise.  The Producer Price Index was up moderately in December led by surging goods prices.  Most of that was in energy, which as we all know, has been soaring.  Excluding energy, producer prices for goods was up minimally.  Good news for consumers came in the form of declining food costs.  While the path from overall producer to consumer prices is hardly direct or clear, that is not the case with food.  Thus, we could see some relief or at least some stability in food prices over the next few months. 

The University of Michigan’s mid-month measure of consumer sentiment eased back, a major surprise given the recent events.  But what is driving the apparent stability in the measure is a vast difference between Democrats and Republicans, with independents stuck smack dab in the middle.  Democrats remain exuberant, Republican are depressed and independents are moderately optimistic.  Will the anger that has been engendered translate into consumer behavior?  That is unclear, but it cannot be a positive.

IMPLICATIONS:  The decline in retails sales is just another indication that government largesse was and needs to continue being the main support for the economy.  As the funding faded in November and December, so did consumption.  With shutdowns and restrictions rising, consumers didn’t do much shopping or eating out or actually buying much at all.  But that could easily turnaround in January as the next round of stimulus checks are going out.  So, if we see a rebound, chalk it up to Uncle Sam opening his wallet and pouring cash into the economy.  And with incoming President Biden proposing a massive new stimulus bill, look for the consumer to resume spending.  The wild card in all this is consumer sentiment.  The myth of a rigged election has been perpetrated on the populace for so long that large numbers of people actually believe it.  That no one has ever explained how a multi-state, multi-million vote fraud was carried out in secret or provided any proof that it actually happened, appears to be irrelevant.  Indeed, fraud was never mentioned in any of the lawsuits objecting to the vote counts.  But if you build it they will come and the big lie about the big steal was built and continues to be built.  How we get over this I don’t know, as large numbers of people, including politicians, are unwilling to admit that the election was fair and Biden won it. As a result, the resentment will fester and that cannot be good for anything, especially the ability to move critical programs through Congress.  And as the data clearly show, that is needed.

KEY DATA:  Imports: +0.9%; Nonfuel: +0.4%; Exports: +1.1%; Farm: +0.6%/ Claims: +181,000

IN A NUTSHELL: “Prices are filtering upward, but with the labor market no longer improving, inflation is not likely to affect the economy.”

WHAT IT MEANS:  Yesterday we saw that consumer costs rose solidly, at least when you factor in energy expenses.  Today’s import price numbers point to continued increases in prices, but again, it should largely be in the energy component.  Prices of imported goods surged in December, led by huge gains in crude oil and petroleum-based products.  Meanwhile, food was down, capital goods prices were flat and consumer and vehicle costs rose minimally.  So, don’t get too worked up about the import price increase.  On the export side, farmers must be smiling.  Agricultural export prices jumped again and over-the-year they are up by more than five percent. Not surprisingly, petroleum export costs were solidly.  In addition, building product prices also rose at a strong pace.  The robust housing market is affecting prices not just in the U.S. but also around the world.

Jobless claims soared last week to the highest level since the end of last August.  A number of factors may have been at work.  The holiday season, coupled with the virus, may have limited the number of people filing, or the filings taking longer to process.  In addition, the new stimulus bill may have drawn unemployed workers who exhausted the benefits back into the system.  However, the four-week moving average, which smooths out the ups and down, bottomed in mid-November and has been above 800,000 for the last month.  That is way too high. With the latest stimulus bill extending benefits, look for this number to rise in the near future.    IMPLICATIONS:If you are wondering why longer-term rates have doubled since early August, one place to start looking is inflation.  No, it is not out of control or even high.  But you can only argue that a 52-basis point 10-year Treasury note is rational if the outlook for inflation is for no inflation. In addition, the economy is coming back and we did see the largest growth rate in history in the third quarter.  The historically low 10-year rate simply made no sense and a movement back toward a level more consistent with a realistic economic outlook had to come.  And it has.  Will we see further increases in rates?  The expectation that the Biden administration will propose a massive new stimulus package could put more pressure on rates.  However, it is not clear when that bill would be passed, or what it will ultimately look like.  In the interim, it is hard to argue that the economy will continue growing strongly.  Yes, new stimulus checks are going to stabilize things, but there continues to be weakness in segments of the household and business sectors.  That argues for more moderate growth, at least until any new monies are available.  As for the Fed, it will continue to churn out data and members will continue to give speeches, but don’t expect anything to happen on the rate side for a very long time. 

KEY DATA:  CPI: +04%; Ex-Food and Energy: +0.1%; Energy: +4%/ Real Hourly Earnings: +0.4%; Over-Year: +3.7%

IN A NUTSHELL: “Inflation is moving up, but it is hard to see that it will become a problem anytime soon.”

WHAT IT MEANS:  When an economy crashes and burns, as happened in the spring, prices have a tendency to crater.  And they did.  When growth rebounds, prices tend to firm and that appears as an increase in inflation.  So, it should surprise no one that inflation has been picking back up lately.  Prices jumped in December – well not really.  The headline number was up pretty sharply but if you just exclude energy, consumer costs barely budged.  The oil market has turned up sharply over the past two months, but that is likely to stabilize.  The previous jump in vehicle prices is unwinding, and medical costs are no longer on the rise.  One place where the pressure remains is food, both at supermarkets and in restaurants.  Over-the-year both categories have increased by nearly four percent.  Also, cookie costs are out of control.  I have had to switch to cakes and cupcakes, where prices are down since December 2019.

The higher inflation and growth have pushed up mortgage rates.  That is causing a surge in refinancings.  The increase in rates is not likely to slow the housing market, though.  The rates remain extremely low and changing job and housing locational decisions remain strong incentives to buy.   

One number I like to watch is inflation-adjusted wages.  But these days, the data are largely worthless.  On the surface, it looks like wages are soaring.  But alas, it’s the math, not the income.  The hourly wage number is a weighted average and with large numbers of low paid jobs eliminated in December, the weighted average rose sharply.  So, even adjusting for the large headline inflation increase, wages gains remained high.  They are coming down on a year-over-year comparison and once restaurants start reopening, the gains should continue to decline.    IMPLICATIONS:With eyes focused on Washington, it is hard to see how any single economic number could make a major difference.  Inflation is just not something that drives the thinking of a lot of people these days, so I don’t expect the report to make a dent in the thinking about the markets.  Instead, it’s the policy direction of the Biden administration that is being watched carefully.  It is likely they will come out with the biggest stimulus bill they can.  The Democrats argued that the last one was just a down payment and now they have the chance to do something big.  The reality is the economy is not ready to try to stand on its own.  There are too many zombie businesses that are being propped up by the stimulus welfare payments and taking those away now could lead to a major surge in bankruptcies.  There will be a period of reckoning when the stimulus funds finally end, but there is little interest on the part of the incoming administration to face that day anytime soon. While there is little doubt that Republicans will rediscover their fiscal responsibility religion, the Democrats can simply answer by saying that they will pay for their programs the same way the Republicans paid for their tax cuts and spending on businesses loans.  You notice I didn’t say how, which makes sense since no one in Washington pays for anything.  Well, someone might pay, but that has nothing to do with the budget.  And even that is not clear.  Regardless, if there is one thing we have learned over the past decade it is that when the government and the Fed spend like crazy, the biggest winners are the markets.  There is little reason to think that would be different if another major stimulus package passes.