KEY DATA: Spending: 0%; Income: +0.2%; Prices: +0.1%; Excluding Food and Energy: +0.2%/ Confidence: +1.4 points

IN A NUTSHELL: “With incomes still growing slowly, consumers are not overly excited about things so they are not going out and shopping ‘till they drop.”

WHAT IT MEANS: If consumers are driving the economy, they seem to be stuck in traffic. Household spending was flat in August, but that was not really a surprise. Vehicle sales were down and that led to a sharp decline in durable goods demand. But consumption of nondurables was also off, so it is clear people didn’t visit the malls a whole lot either. However, people did purchase all sorts of services, which does make up two-thirds of consumption. So that is a positive sign. When you adjust for inflation, spending actually declined and so far this quarter, consumption is growing at a disappointing 2.3% pace. I suspect that will improve as vehicle sales may have rebounded in September.

The real question is whether spending can accelerate and that depends upon income growth and confidence. Household disposable income did rise a touch in August, but not greatly when you adjust for prices. Worse, wages and salary gains came to a near halt. Why that happened is anyone’s guess, but if workers don’t have more money to spend, businesses will not see spending rise sharply, especially since people are trying to save. The savings rate inched up in August, an indication that households are not totally comfortable about the state of the economy. The University of Michigan’s Consumer Sentiment Index rose in September after having dropped in July and August. The index has gone nowhere this year as it was noted that the average for the nine months was almost exactly the same as the September level.

On the inflation front, prices rose minimally, but a touch faster when food and energy were excluded. Since September 2015, overall consumer costs were up a modest 1%, but excluding food and energy, they rose 1.7%, not that much below the Fed’s 2% target. The energy restraint should be largely disappearing over the next few months, so watch for the top line inflation rate to start approaching 2% by early 2017.

MARKETS AND FED POLICY IMPLICATIONS: I am sure the Fed would like to see wages rising faster and households spending that money vigorously. They will just have to wait longer for that to happen. With concerns about Deutsche Bank overhanging the market, the soft consumer spending number cannot be helpful. Interestingly, eight years ago, the rumors would have created major fear in the markets, which doesn’t seem to be the case right now. It just may be that all the new regulations and demands for additional capital have actually limited what could have been a time of worry. But, of course, regulation is bad, at least that is all I hear from my colleagues in the financial sector. Maybe not so much. Hopefully, the issues with Deutsche Bank will be eased by December. I don’t want the Fed to have another excuse to punt.

KEY DATA: GDP: 1.4% (up from 1.1%)/ Pending Sales: -2.4%/ Claims: +3,000

IN A NUTSHELL: “A strong labor market doesn’t seem to be enough to get the housing market moving strongly forward.”

WHAT IT MEANS: Well, it turns out the economy grew faster in the spring than thought. Of course, the difference between a 1.4% growth rate and a 1.1% pace is minimal as the level is still disappointing – to say the least. However, the second revision to second quarter GDP did provide some hope for the future. Most of the added growth came from business investment, which instead of declining was actually up a touch. That is not to say businesses are out there investing like crazy, they are not, but this report makes it more likely firms are ramping things up even more this quarter as after tax profits were up.

The housing market is just not gaining any momentum. The National Association of Realtors reported that pending home sales eased in August, the third decline in four months. Only the Northeast showed an uptick in activity, but that is the smallest region. Inventory, or the lack thereof, was indicated to be the major issue. That has been a concern for quite some time now and with housing starts improving only slowly and new listings of existing homes barely keeping up with actual sales, it is hard to see that the restraint to sales will be removed anytime soon. The lack of supply will, however, keep pressure on prices.

Can people afford the rising home prices? Only if their incomes keep increasing as well and that has to come from higher wages. Clearly, the labor market is tight as unemployment claims, which rose a touch last week, remain near record lows. But that has been the case for months now and wage gains remain sluggish, so I don’t know when that might change.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports really shouldn’t move markets or Fed members. Yes, the economy is moving forward, but growth is hardly strong enough to force the FOMC to do anything. The key housing market is suffering from a lack of listings and new product and until that is corrected, sales will not rise sharply. And until worker incomes rise faster, their ability to spend lots more money will remain limited. GDP growth this quarter, which ends tomorrow, should be solid enough to provide the Fed with the basis for raising rates in December, but only if the other data are supportive. At least the election will be over and either Janet Yellen will find herself in an untenable situation or she will be free to do what she should be free to do. When politicians attack the Fed, they politicize what almost every economist knows to be non-political decisions. That is dangerous as the last thing we need are politicians dictating monetary policy as well as fiscal policy. We know fiscal policy is a total disaster and the only adults left making economic policy in Washington reside at the Fed. I have been critical of Chair Yellen, but I also support her totally. Attacking her for political purposes is shameful, destructive and should be refuted. There, I have said my piece.

KEY DATA: Durables: 0%; Excluding Aircraft: +0.6%; Capital Spending: +0.6%

IN A NUTSHELL: “Businesses look like they are spending again and that is good news for future growth.”

WHAT IT MEANS: Corporate capital spending has been weak this year, in no small part because of the collapse of the energy sector and its related industries, but that may be changing. Orders for big-ticket items were flat in August, but that was due to a large drop in civilian aircraft demand. Of course, the 22% decline came after a 74% rise in July, so you can see why it is important to exclude aircraft, both civilian and defense, from the numbers. Doing so led to a solid increase in durable goods orders. That said, the details of the report were not that great as most of the gain came from two industries, motor vehicles and communications. The rest were down. But there was some truly positive news in the report. The best measure of business capital spending, which excludes defense and aircraft, posted its third consecutive rise. Total orders are down over the year, but the declines are slowing.

There was other data released earlier this week. Most notably, yesterday, the Conference Board reported that consumer confidence surged in September to its highest point since the recession. People are becoming more positive about the labor market. On the housing front, new home sales were off more than expected in August. They had jumped in July, so some give back was expected, but it was larger than forecast. Again, a lack of homes for sale continues to plague the housing market. That said, home price increases are not accelerating sharply. In July, the S&P/Case Shiller National home price index was up 5.1% over the year. That was a small acceleration from the 5% rise posted in June. Pricing pressures should continue to build as long as inventory remains low.

 MARKETS AND FED POLICY IMPLICATIONS: It looks like the Fed members are starting to send a loud and clear message that rates are going up. San Francisco Fed President Williams, a non-voting member, chimed in that the economy can absorb a rate hike, adding to the dissenting voices heard at the FOMC meeting. There were three voters who wanted to raise rates in September. As expected, Chair Yellen told Congress there was no set timetable for a rate hike. Given the number of times the Fed has come up to the edge of a hike only to back down, that was hardly news. But the recent data, though not great, are still positive enough to provide some reason to think the Fed feet of stone will start to shuffle back to the rate hike precipice. With the next FOMC meeting ending on November 2^nd, only six days before the election, don’t expect anything to happen then. But December remains open. Of course, if the data don’t say go, the Fed won’t show, which is the problem with data dependency.

KEY DATA: Starts: -5.8%; Permits: -0.4%/ Philly Fed: -0.7 point; Orders: -4.1 points

IN A NUTSHELL: “Moderating housing activity could add more angst to the Fed meeting.”

WHAT IT MEANS: The FOMC is starting its two-day meeting and the data-dependent diviners of our economic and financial future did not get particularly great news today. On the housing front, new construction activity eased more than expected in August. The fall off in housing starts was evenly split between the single-family and multi-family segments. But the regional changes were quite uneven. There was a double-digit decline in the South, strong increases in the Northeast and Midwest and a modest rise in the West. Since the South makes up about half of all home construction, weakness there can overwhelm gains in the rest of the country. As for the future, permit requests eased. Most economists expected a rise. Once again, a sharp drop in the South overcame modest increases in the remainder of the country. For most of this year and for the past three months, permit requests have lagged starts. That is not a positive sign for future construction activity. That said, the National Association of Homebuilders/Wells Fargo index surged in September. (This report was released yesterday.) The level is similar to what we saw in the 2000s when construction was booming. The homebuilders and the government seem to be on different pages.

Activity in the non-manufacturing portion of the Mid-Atlantic regional economy is expanding but not accelerating. The Philadelphia Federal Reserve’s September index of regional activity eased a touch as new orders slowed. There were some fascinating results in the components of the index. Firms expect to hire more full time workers but cut back on part-timers. I had noted that one way to deal with the dearth of available workers was to move part-timers into full-time positions and that could be happening. Also, while respondents were not very upbeat about the current state of their own businesses, their expectations of the future for both the region’s economy and their individual companies improved. This is a trend that has been underway for about six months and hopefully, reality will catch up with perceptions.

MARKETS AND FED POLICY IMPLICATIONS: With the Fed meeting going on, investors are will likely remain cautious until the statement is released tomorrow. The FOMC is not expected to raise rates but the members may finally indicate that they really do intend to raise rates and it might actually occur this year. The housing numbers are another reason for the FOMC to stand pat, though if you believe the homebuilders, conditions are changing. Of course, this is a Fed that sees a bad number and immediately scrambles for cover, so who knows what will happen. My thinking is that there will be a stronger statement about the potential for rate hikes and Chair Yellen will confirm that at her press conference. She will also leave an opening to do nothing, of course. My hope is that the data dependency aspect of their strategy will be downgraded. If that is the case, they will have more flexibility to do something even if the numbers are not supportive of that action.  

KEY DATA: Jobs: 151,000; Private Sector: 126,000; Unemployment Rate; 4.9% (unchanged); Hourly wages: +0.1%/ Trade Deficit: $5.2 billion narrower

IN A NUTSHELL: “Given how robust job gains were in June and July, the August increase was quite decent, but the slower rise hung the Fed out to dry.”

WHAT IT MEANS: If Janet Yellen and her merry band of terrified rate hikers wanted a strong jobs report to give them cover to raise rates in September, they didn’t get it. That is not to say the jobs report was weak – it wasn’t. But the number of jobs added in August was well below the nearly 275,000 average for June and July and in this political world, that means it was disappointing. The reality is these data are volatile and given the outsized increases early in the summer, some give back was expected. That said, the report was just okay. Job losses in manufacturing were greater than forecast. The decline in construction payrolls, though, may be due more to a lack of skilled workers than the need to hire more workers. Construction is not faltering. And the sharp rise in local government hiring was strange because it wasn’t all in education. Schools are opening earlier, messing up the seasonal adjustments. But there was also a sharp rise in non-education local government workers, which may be signaling a come back in the financial position of this sector. The unemployment rate was stable as was the labor force participation rate. But hours worked were down and wages rose modestly, so there still is some slack in the market.

The trade deficit narrowed much more sharply than expected. There was a huge increase in exports but a decline in imports. Given the strength of the U.S. economy, weakness of the world economy and the relatively strong dollar, that pattern was also a surprise. Food exports led the way with soybeans being the prime mover. I guess the demand for tofu around the world is surging. We also sold more industrial supplies and vehicles, but demand for our capital goods was down. On the import side, food and industrial supplies demand rose but consumer goods, vehicles and capital goods imports were off.

MARKETS AND FED POLICY IMPLICATIONS: The jobs report was less than hoped for but probably as good as could be expected. Unfortunately, the nuance that the data are volatile and there is often some give back for outsized increases is rarely considered. This report was mediocre, but it was just one after two huge ones. That reminds us not to base economic judgment on the data from one month. Really now, was the job market booming in June and July only to collapse in August? Give me a break. Actually, 151,000 is well above the number needed to keep the unemployment rate moving down on a slow but steady pace. And let’s not forget that the closer you get to full employment – and we are nearly there – the more difficult it is to find workers. Adding to my belief the economy is in good shape was the greater than expected narrowing in the trade deficit. It is possible that trade could add to third quarter growth. If that happens, a 3.5% rate is hardly out of the question. But in this world of one number, the key number today was payrolls, which wasn’t nearly strong enough to give the Fed the cover it wanted (even if it didn’t need it) to raise rates in September. Right now, it doesn’t look like the next move will be before December. The Fed will likely miss a perfect time when there are no major negative issues worrying the world, which is different than the other meetings this year. With a rate hike likely out for September, investors will probably breathe easier.

KEY DATA: ADP: +177,000; HWOL: +1,900; Pending Home Sales: +1.3%

IN A NUTSHELL: “It looks like businesses are still adding lots of workers and with want ads high and home sales improving, all signs point to an accelerating economy.”

WHAT IT MEANS: If Friday is the government’s employment report, then Wednesday is when ADP provides some insight into what the private sector was doing on the hiring front. Right now, it looks like firms continued to expand their workforces at a solid pace in August. The employment services company ADP indicated that firms of all sizes hired. Interestingly, large companies are now in the market. They had been the weakest link in the labor market. Looking across industries, manufacturers remain cautious and construction firms seemed to contract. However, the service-producing sector is hiring very solidly.

Will hiring remain decent? It looks that way. The Conference Board’s Help Wanted OnLine measure was up minimally August after a solid rise in July. Ads, which had been declining for a few months, seem to have stabilized. Most likely, with so many positions going begging, companies are getting realistic about what can be filled and are advertising accordingly. Thus, the decline in ads we had seen didn’t signal any major drop in hiring and the current level implies that firms are still looking for lots of new workers.

Most of the recent housing data have been pretty solid and the National Association or Realtors’ July reading on future sales adds to the picture of an improving housing market. Pending home sales increased somewhat modestly in July and didn’t reach the high reached in April. But the level is solid and points to a continuation in the saw-tooth rise in existing home sales. Yes, demand did decline in July, but it should be up in August. Given that there is such a dearth of supply, that is good news.

MARKETS AND FED POLICY IMPLICATIONS: Fed members keep trying to tell us that “everything meeting is a live meeting”, so is a rate hike at the September 20-21 meeting really a possibility? It would take an awful lot of things to go not only right but better than right for that to happen, starting with Friday’s jobs number. My forecast is for roughly 170,000 new positions and an unemployment rate of 4.8%, down from 4.9%. Given that there were nearly 550,000 new positions added in June and July, the risk is that the payroll increase is lower than that I expect. Thus, if we see something north or 200,000, it would be huge. And if wage gains are up by 0.3% or preferably more, then we can start, and I underline start, to ask the question about a rate hike. Given the Fed members’ statements that one number doesn’t determine policy, an increase should require a lot more data than just strong employment numbers that say the economy is accelerating sharply, to support a move. Unfortunately, not a whole lot of August numbers – and obviously none for September – will be released before the next FOMC meeting. So yes, when it comes to the Fed, anything is possible, but right now, it is hard to see that it will do anything. I think they should. I think the economy is strong enough and has been strong enough the entire year to absorb another rate hike. However, after arguing for action for so long, I have decided to move to Missouri and say, “show me”. As for investors, with the jobs report looming and the potential for a surprise being great, they take strong stands at their own peril.

KEY DATA: Consumption: +0.3%; Disposable Income: +0.4%; Prices: 0%; Over-Year: +0.8%; Excluding Food and Energy (Over-Year): +1.6%

IN A NUTSHELL: “Households keep spending and hopefully businesses will follow their lead.”

WHAT IT MEANS: Atlas has some really broad shoulders. The U.S. consumer has been holding up economic growth for quite a while now and they have yet to falter. Consumption rose solidly in July, led by a surge in demand for durable goods. That was hardly a surprise, as we knew vehicle sales jumped. The robust pace posted in July will not likely be matched in August, but demand for light weight vehicles and trucks should add to growth this quarter. Demand for services was also up solidly. The one negative area was soft-goods sales and much of the decline came from a fall in prices of energy. That is already fading. Adjusting for prices, nondurable goods demand was down minimally. So far this quarter, consumption is growing at a 2.7%, which is pretty good given the huge 4.4% rise in the second quarter.

Can consumers continue to spend like crazy? Yes! Disposable income, which is what we have left after the government gets its hands on our income, rose strongly once again. Critically, there continues to be solid increases in wages and salaries. Much of that has likely come from the strong gains in payrolls rather than a rise in the income of those currently working. Still, money is money and the added funds will power spending going forward.

As for prices, inflation remained totally under control. Overall consumer costs barely budged and even over-the-year, they rose at a pace well below the Fed’s 2% target.

MARKETS AND FED POLICY IMPLICATIONS: Last week, Fed Chair Yellen pretty much made it clear the Fed would raise rates when the members were certain their expectations concerning the economy and inflation were being met and incoming data supported those views. So, how does today’s numbers fit into the Fed’s models? The same as it ever was (Yes, that was a Talking Heads lyric). The economy is in good enough shape for the Fed to increase rates. However, while the labor market is tight and wages are rising, it is not so tight that wages are soaring. And, inflation is lagging. In other words, the Fed can do whatever it wants to do. Unless we see another sharp increase in jobs in Friday’s jobs report and wage gains accelerate significantly, the Fed will not be pressured to move in September. The Fed will not know about third quarter GDP at the September 20-21 meeting. All they will have will be estimates that will not include any September data. So, a rate hike then would almost go against the members’ arguments that one number (in this case a jobs report) should drive policy. I would like them to move in September, but I still don’t believe there is a high probability that will happen, especially given the today’s mixed numbers. As for the markets, Friday’s employment release may keep people at their desks instead of getting a jump on the Labor Day weekend, but it will also keep traders cautious.