All posts by admin

November Consumer Price Index and Real Earnings

KEY DATA: CPI: -0.3%; Energy: -3.8%; Excluding Energy: +0.1%/Real Hourly Earnings: +0.6%; Year-over-Year: 0.8%

IN A NUTSHELL:  “Falling energy costs is a gift that we hope keeps giving.”

WHAT IT MEANS:  The continued decline in oil prices may not be the greatest thing since sliced bread, but it is close.  Yes, some energy-related companies are being hurt and there are a few countries whose economies may slip into recession if prices remain low, but for consumers, it is nothing but great news.  Another sharp drop in energy prices caused the Consumer Price Index to fall in November.  Falling clothing costs helped as well.  And with new vehicle purchases jumping, it is not surprising that more used vehicles are available and their prices are declining.  Still, there were some places where prices seem to be firming.  Medical care expenses, both services and commodities, are beginning to accelerate.  Shelter costs are up, though not that rapidly.  We are also seeing a rise in transportation services and tuition, of course.  Food costs have become better behaved, especially for the critical cakes, cupcakes and cookies category.  One final point needs to be made: Services inflation is running at a moderately high pace, with costs up 2.5% over the year.  This component is over 60% of the index.  The only way inflation to remain contained is for commodity costs to stay low, or as it was in November, actually down.  Any rise in commodities would push consumer costs up above the Fed’s target.

The fall in consumer prices is helping household spending power.  Real hourly earnings jumped in November, but over the year the increase remains below one percent.  That pretty much explains the lethargic nature of consumer spending.

MARKETS AND FED POLICY IMPLICATIONS:  The Fed will be coming out with a statement today and this report should have little impact on the members’ thinking.  Inflation, excluding energy, is still just below the Fed’s 2% target, so there is room to maneuver.  But the Fed is not likely to focus on the restraining impact that declining oil prices has on inflation and instead consider the effects on consumer spending.  Barring a large rise in oil prices next year, households will have a lot more money left in their wallets and if there is any acceleration in wages, consumption could be very strong.  Conditions could be in place to raise rates during the first half of next year.  Whether the FOMC opts to do that is unclear, but the idea that the Fed should set monetary policy based on concerns about energy-impacted economies doesn’t sit well with me.  Indeed, the oil drop can only help Europe and Japan.  Regardless, we will know soon enough what the Committee is thinking so I will leave it at that.

Revised Third Quarter GDP, November Spending, Income, Durable Goods Orders and New Home Sales

KEY DATA: GDP: 5.0% (revised up from 3.9%)/Consumption: +0.6%; Disposable Income; +0.3%/Durable Orders: -0.7%; Private Investment: 0.0%/New Home Sales: -1.6%

IN A NUTSHELL:   “The economy boomed in the summer and while growth may have moderated during the fall, it is still moving forward solidly.”

WHAT IT MEANS:  Lots of numbers today.  Third quarter GDP growth was revised upward to its strongest rate in eleven years.  The revision was powered by a realization that consumers spent a lot more than initially thought.   There was also better business investment activity.  It is nice that both households and businesses spent aggressively during the summer, but will that be sustained?  Maybe not at 5%, but we could easily get another number at or above 3.5%.  Consumer spending surged in November after a solid gain in October.  So much for a weak Black Friday.  The gains were across the board, when you adjust for price changes.  So far this quarter, real consumption is rising at a 3.7% annualized pace and that could come in even higher.  First, people have the money to spend.  Income, adjusted for inflation and taxes, surged in November and wage and salary gains were solid.  People are spending but the savings rate is fairly stable, a sign that households are not getting ahead of themselves.  Second, confidence is rising.  The Thompson Reuters/University of Michigan Consumer Sentiment Index rose sharply in December to its highest level in nearly eight years.  Happy people make for happy shoppers.

The manufacturing sector has helped lead the way but there are questions about how strong it will be going forward.  Durable goods orders fell sharply in November and that was with a pick up in civilian aircraft demand.  The report was mixed.  There was weakness in primary and fabricated metals, computers and defense aircraft.  On the other hand, orders for computers, communications equipment and vehicles were up.  Business capital investment was flat.

Housing has been moderating for a while and that trend seems to be continuing.  New home sales fell, surprisingly, in November.  Prices are rising, but not by much.  Indeed, the 1.4% increase over the year is much less than we are seeing in the existing market.  The Federal Housing Finance Agency’s October increase came in at 5% since October 2013.

MARKETS AND FED POLICY IMPLICATIONS: Patience is a virtue but it could also be an albatross around Janet Yellen’s neck.  (I never worry about mixed metaphors.)  The key to Fed policy is economic and wage growth and boy is it clear the economy has shifted gears.  The consensus for fourth quarter growth has been about 2.5%.  With the large upward revisions to third quarter growth, I am now closer to 3.5%, down from 4%, and the spending numbers support that estimate. While housing may not add much, the real uncertainty is consumers emptying shelves and causing inventories to drop.  That would moderate fourth quarter growth but when warehouses are restocked in the first quarter, activity would accelerate.  Regardless, the economy is in very good shape, probably better than the FOMC realized when it met and when Janet Yellen said she would be patient.  The Fed may want to be patient and err on the side of too much inflation, but the strong job gains are likely to continue and lead to solid wages increases fairly soon.  The FOMC may have to move earlier than most now expect.  Investors should love today’s numbers but once they stop drinking the spiked eggnog, they may realize that strong growth pushes forward the time when the Fed removes the syringe from the markets.  But for now, it is time to celebrate.

Have a Happy and Healthy Holiday!

November Housing Starts and Permits

KEY DATA: Starts: -1.6%; 1-Family: -5.6%; Multi-Family: +6.7%; Permits: -5.2%; 1-Family: -1.2%; Multi-Family: -11%

IN A NUTSHELL:  “The housing sector may not be restraining growth, but it is hardly adding much to it.”

WHAT IT MEANS:  The housing sector is neither too hot nor too cold.  But that doesn’t make it just right.  Activity is improving, but in fits and starts – pardon the pun.  Construction activity eased in November but that came after an upward revision to the October housing starts numbers.  That had come in as a decline but is now put at a modest rise.  The issue in November was single-family construction, which was off sharply.  This component is bouncing around but the trend has been upward, even if it is not a steep slope.  The multi-family number rose sharply, but large changes is usual for this very volatile number.  So far this year, housing starts are up over 8% compared to the first eleven months of 2013, so it is hard to complain about the housing sector.  Looking forward, permit requests were off but again, the multi-family segment drove the rise.  Permits are running only a little above starts for the last two months and that points to minimal gains in construction activity in the coming months.  

MARKETS AND FED POLICY IMPLICATIONS: So far this quarter, starts are up at a little less than 3% annualized pace from the third quarter.  It looks like housing could add to growth again, but unless there is a lot more activity in December, any addition will be relatively modest.  Nevertheless, I will take it.  With oil prices plummeting, there is every reason to expect that consumer spending will be strong this quarter.  Indeed, my forecast calls for another quarter of GDP growth in excess of 3.5%, which would make it five out of the last six.  Yesterday’s November industrial production number was really strong.  So far this quarter, manufacturing output is growing at a robust 4.4% annualized pace and that could rise with any decent increase in December.   Job gains have been strong and we got our first glimpse at solidly rising wages.  Yes, Europe and Japan are worries and some countries are being battered by the low price of oil.  In spite of that, the U.S. economy is on an accelerating growth path that should continue for quite some time.  We don’t need a robust housing market to drive growth.  There are other sectors, including consumer spending and non-energy investing that should be strong enough to keep the economy moving forward solidly.  So why are investors so negative?  Remember, Wall Street and Main Street are so totally disconnected that we cannot go directly from the economic data to market performance.  Declining oil prices may be wonderful for the macro economy but if it hurts certain members of a stock index, then you get a decline.  Ultimately, when it is clear how much additional growth and earnings we will get from an extended period of low energy costs, the markets should reflect that reality.  And that is what I expect the Fed to talk about when the FOMC statement is released tomorrow.

November Wholesale Prices

KEY DATA: PPI: -0.2%; Goods: -0.7%; Energy: -3.1%; Services: +0.1

IN A NUTSHELL:   “With business costs well contained and consumer confidence rising, maybe even the Fed members will start feeling good about the economy.”

WHAT IT MEANS:  What am I missing?  I keep looking at my forecast for 2015 and I am well above most others.  Yet the recent data seem to point to an economy that is clearly accelerating and is being pushed forward by falling energy costs and improved consumer confidence.  On the cost side, wholesale prices fell in November, but that should shock absolutely no one.  We know that oil prices are slip, sliding away, so the headline decline was expected.  But even excluding energy, producer costs went nowhere.  Indeed, goods prices excluding energy were down a touch as food price increases eased up.  They had been soaring and that was offsetting some of the decline in oil.  If you look through the report, there were few goods categories where prices are rising.  The one place you can find it is in capital equipment.  I actually think that is just fine as it signals growing investment activity.  As for producer services, they continue to increase at a moderate pace.  Over the year, most wholesale prices are up between 1.5% and 2%, which is hardly threatening since the path from producer costs to consumer prices is not very direct.

There was some really good news on the consumer front.  The Thompson Reuters/University of Michigan’s early reading of December consumer sentiment was released and it looks like confidence is soaring.  The index hit its highest level in nearly eight years with expectations that growth would improve in the future leading the way.  This report reinforces the Bloomberg Consumer Comfort Index numbers that indicated that confidence has reached a seven-year high.

MARKETS AND FED POLICY IMPLICATIONS: If the early returns on holiday shopping are any indicator, people are translating their more ebullient outlook and the additional money left in their wallets after filling up into lots of gifts.  The costs of products should stay down as there is little reason for most retailers to raise prices.  The question, though, is how the FOMC members will balance a clearly strengthening economy with inflation that is generally below desired levels.  I suspect that in next week’s statement, the focus will shift clearly to the economy and the tightening labor market.  The Fed needs to set up its excuse, I mean rationale, for raising rates.  It is not likely it will get much help from too high inflation or even surging wages.  So it needs something else to explain why it is starting on the pathway to rate normalization.  The easiest thing is to focus largely on the economy and that is what I suspect them to do.  As for investors, if anyone can explain why stocks go up or down on any given day, tell me.  I know all the ex post explanations, but today’s excuse du jour, whatever it may be, doesn’t really provide me with any real knowledge.

November Retail Sales, Import Prices and Weekly Jobless Claims

INDICATOR: November Retail Sales, Import Prices and Weekly Jobless Claims

KEY DATA: Sales: +0.7%; Excluding Vehicles: +0.5%; Gasoline: -0.8%/Non-Fuel Import Prices: -0.2%; Fuel: -6.7%/Jobless Claims: 294,000 (down 3,000)

IN A NUTSHELL:   “A firm labor market is helping power stronger retail sales and it looks like we are having a very, merry holiday shopping season.”

WHAT IT MEANS:  Apparently, the reports of the consumers’ demise are premature.  The National Retail Federation was downbeat about Black Friday demand, but with sales running a week or two and Cyber Monday lasting a week, it appears households are shopping ‘till they are at least tired.  Retail sales soared in November and it wasn’t just the jump in vehicle purchases that propelled revenues forward.  Excluding vehicles, sales were still strong even when gasoline was included.  Declining prices led to a sharp drop in fuel purchases and excluding that portion of sales makes the rise even greater.  Indeed, the increases were essentially all across the retail landscape.  People even went to furniture and department stores, two areas that had been lagging. 

On the inflation front, the Fed has nothing to fear, unless they are hoping for higher inflation, which the members are.  Import prices fell in November and the declines were also across the board.  There was even some relief on the food side, which had been running counter to most other import prices.  A strong dollar is probably helping foreign companies grab for market share by lowering prices.

As for the labor market, another number, another indication that the November jobs report, while high, was not a total aberration.  Jobless claims continue to moderate and there is little reason to think that the December payroll increases will be weak.  The levels are consistent with job gains in the 250,000 range and a steady fall in the unemployment rate.  Only the return of frustrated workers can keep the unemployment rate from coming down consistently.

MARKETS AND FED POLICY IMPLICATIONS: It seems to be all coming together.  The labor market is continuing to improve, falling gasoline prices are adding to spendable income and households seem to be using that money to buy lots of things.  The holiday shopping season appears to be off to a very good start but we still have a couple of weeks to go.  Bad weather may create some ebbs and flows in the sales but I expect demand to be strong.  Last month I suggested that the holiday season could show upwards of a 5% rise and I am buoyed by the latest reports.  If we get anything close to that, we could have another quarter of GDP growth at or above 3.5%, confirming that the economy has shifted gears.  Next week the FOMC meets and it will be interesting to see how the members view the economy.  I think it is time to drop “considerable time” from the statement but whether that happens this month or next, it is coming.  The real issue is the first rate hike.  I think in spring the Committee will set the range around 25 basis points.  While that will not be a large move, it will signal the start of a long but steady process of rate hikes.

October Job Openings and November Employment Trends and Small Business Optimism

KEY DATA: Openings: +149,000; Year-over-Year: +838,000; Hires: -20,000; Year-over-Year: +543,000/Employment Trends Index: +0.4%; Year-over-Year: +6.1%/NFIB: +2 points

IN A NUTSHELL:  “The November job gain may have been a bit excessive, but there is little doubt that business hiring is accelerating and it needs to ramp up even more.”

WHAT IT MEANS:  Now that “jobs, jobs, jobs” has taken its place in the trash heap of political slogans and we are switching to “wages, wages, wages”, it is critical to understand how great the pressures are on businesses to increase labor compensation.  It looks like employment cost pressures are building and the dam that is holding it back could be breaking soon.  Two indicators of the condition of the labor market were released yesterday and today.  The Bureau of Labor Statistics’ closely watched Job Openings and Labor Turnover survey (JOLTS) showed that openings continue to increase.  Since October 2013, unfilled positions have increased an incredible 17.5%.  In part that is due to the failure of businesses to fill those positions.  Private sector hiring lagged by nearly 300,000 workers over the past year and actually eased a touch in October.  As a consequence, we are back to a job openings rate that we haven’t seen since the bubble began bursting in 2001.   Employees are quitting their jobs at growing numbers, though in fits and starts.  The level was down a touch in October but is still up over 12% from last year. 

A second measure showing that the labor market is tightening is the Conference Board’s Employment Trends Index, which rose solidly in November.  The index is closing in on the last expansion’s high reached in early 2007.  Also, the National Federation of Independent Businesses’ Small Business Optimism Index jumped in November.  Expectations soared.  It appears that even small company owners are starting to feel better about conditions. These indicators also support the view that the November employment report was not greatly out of whack.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC meets next week and the members have to make some determinations about the tightness of the labor markets and how long they will have to wait before they start seeing sharper wage increases.  The large increase in November is hardly enough to create any major worries at the Fed.  But just about every conceivable labor market indicator is blinking either yellow or red.  So the November wage gain should be taken as a warning that the hoped for – or dreaded, depending on where you sit – faster labor compensation increases may be closer than most believe.  The big debate right now is whether the FOMC’s statement will remove the phrase “considerable time”, which has been used to indicate that rate hikes are well into the future.  I think the November jobs report has given the Committee the perfect cover to do just that.  That would not signal that a rate hike was coming right away.  Indeed, several more months of decent wage increases would be needed.  But it would provide the foundation for starting the rate normalization process sometime during the first half of next year.

November Employment Report

KEY DATA: Payrolls: +321,000; Revisions: +44,000; Private Sector: +314,000; Average Hourly Earnings: +0.4%; Unemployment Rate: 5.8% (Unchanged)

IN A NUTSHELL:   “Is this liftoff?”

WHAT IT MEANS:  The jobs report is the first big one of the month and this was a really big one.  The economy may not yet be a big mean jobs machine but it is just about there.  November job gains were way above expectations and there were solid upward revisions to the previous two months numbers.  For the past three months, an average of nearly 280,000 new positions have been added and that can simply be described as very strong.  The increases were across the board as nearly 70% of the industries posted gains.  You have to search far and wide to find any major drop in employment.  There were strong gains in construction, manufacturing, retail trade, financial activities, transportation, professional services and restaurants.  Even the government chipped in despite a cut back in education.  In other words, everybody seems to be on the hiring bandwagon.  The key, though, is wages and while they rose more than they had been.  That is really good news.  Meanwhile, the unemployment rate was unchanged.  The labor force did rise, so that is an indication the strengthening market is pulling back in more people.

MARKETS AND FED POLICY IMPLICATIONS: This was a great report but don’t expect gains to continue at the 300,000 level.  The economy has not yet reached a growth rate that would support it.  But increases between 250,000 and 300,000 are likely and that would lead to further declines in the unemployment rate.  I expect the full employment rate, which is roughly 5.5%, to be reached in the spring but labor shortages should be showing up sooner.  The November wage increase is a warning that labor market conditions are already starting to turn.  The Fed will not react to a one-month solid rise but if we see additional solid gains, then the tone of the statement will change.  I suspect the Fed will be talking about a tightening labor market at its next meeting, which is in ten days.  As for investors, the yin and the yang is the strong economy vs. the potential that the Fed could raise rates sooner than others think.  But that has been overhanging decisions for a while; it’s just that few have been discussing it.

November Challenger Layoffs and Weekly Jobless Claims

KEY DATA: Layoffs (monthly): -29.8%; Year-to-Date: -5.8%/Claims: 299,000 (down 14,000

IN A NUTSHELL:  ‘It seems that every time we get labor market numbers, we get more indications that the market is tightening.”

WHAT IT MEANS:  The turtle is nearing the finish line.  The goal is a normal labor market and we can see that coming into focus.  Today’s numbers point to firms doing all they can to keep their current workers.  Challenger, Gray and Christmas’ November job cuts report was very encouraging as there was a sharp decline from the October pace.  That is important since there was a surprisingly large number of layoff announcements in October and it raised some questions about the direction of the market.  Those questions look to have been answered.  Layoffs are slowing sharply and are on target to hit the lowest level since 1997.  That was near the peak of the bubble when hiring was robust.

Confirming the strength of the labor market was a large drop in new claims for unemployment insurance.  This number had surged the previous week but we are back down below 300,000 per week and that is an indication that tomorrow’s payroll increase could be strong.

On a separate note, CoreLogic’s October foreclosure report indicates that the overhang of distressed homes is being whittled down rapidly as there is inventory has fallen by 31% since October 2013.  But there are still a large number of houses in process.  The pace of foreclosure is slowing but is still quite high.  That said, the inventory of delinquent homes is the lowest since July 2008.

MARKETS AND FED POLICY IMPLICATIONS: The slow but steady improvement in the labor market that has marked this recovery continues unabated and now we are facing the reality that the pendulum may finally be swinging away from employers and in favor of employees.  We are not there yet, but we are getting there.  That is crucial for the Fed since worker compensation seems to be the operative issue for rate hikes.  Tomorrow we get the November employment report and I wouldn’t be surprised if the job gains, including any upward revisions, total at least 250,000.  I include revisions because they have been pretty large lately and it is important to recognize the full extent of the payroll changes.  As for the unemployment rate, it is a good bet to edge down to 5.7%.  The labor market is closing in on full employment and should reach it by early spring.  That means shortages should be appearing more broadly and at that point, wage increases are likely to follow.  The timing is difficult given the change in attitudes of workers, who are still fearful of quitting or changing jobs, and business managers, who believe they should not have to give raises since they haven’t had to for so long.  That dynamic, though, creates the potential for a gap up in wage gains when more normal views of job mobility and worker compensation reappear.  And if the restraining effect of the foreclosure inventory can dissipate, the housing market would strengthen and that would add further to growth and accelerate the labor market tightening and wage increases.

November Supply Managers’ Non-Manufacturing Index, ADP Jobs and Help Wanted Online

KEY DATA: ISM: +2.2 points: Orders: +2.3 points; Employment: -2.9 points/ADP: +208,000/HWOL: +170,200

IN A NUTSHELL:   “The October lull was just temporary and it looks like the job market is getting better.”

WHAT IT MEANS:  Friday we get the “all important” November employment report but until then, we will be finding out from other sources how the economy did last month.  Right now, all signs are go.  It appears that the services sector pause in October was only to refresh, not depress.  The Institute for Supply Management’s Non-Manufacturing index rebounded sharply in November, led by a surge in new orders.  Similar to the ISM manufacturing report, export demand jumped, though service sector imports grew a little less rapidly.  Despite ramped up production, order books are filling more rapidly and that bodes well for future activity.  The only negative was employment.  But the index simply came down from a very high level to a high level so hiring is still solid.

I am still quite optimistic about Friday’s jobs numbers.  ADP estimates that November private sector job gains came in at a decent though nothing-great level.  Small businesses are hiring like crazy.  That is interesting as the Paychex/IHS Small Business Jobs Index fell in November, so I don’t know what to make of this.  There was some improvement in large firm hiring but that group needs to do more.  And more may be coming.  The Conference Board’s Help Wanted OnLine index jumped in November as the number of new ads surged.  Firms need more workers, but they don’t seem to be doing a good job filling the open positions.  That view was supported by the latest semi-annual survey by Dice Holdings, which indicated that “more U.S. companies are revving up hiring plans”.  Even if Friday’s report is not a huge one, next year is shaping up to be a great one for workers.  

MARKETS AND FED POLICY IMPLICATIONS:  Every day, we continue to see that economic conditions are not only good but they are getting better.  The labor market is tightening and orders are flowing in.  Meanwhile, businesses continue to hold the line on compensation.  Today’s revised productivity numbers indicate that there has been largely no gain in inflation-adjusted earnings over the past year.  That is good for earnings but bad for consumer spending.   Investors should appreciate today’s numbers as they point to a solid but hardly overheating labor market.  That implies the Fed may not be facing demands to raise rates anytime soon.  But the Fed members will be parsing Friday’s unemployment rate and the wages data.  Those are the key indicators and as long as wages remain reasonably well contained, the FOMC can dither. 

October Consumption, Income, Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Consumption: +0.2%; Real Disposable Income: +0.1%/Orders: +0.4%; Business Investment: -1.3%/Jobless Claims: 313,000 (up 21,000)

IN A NUTSHELL:   “On a day where there are a rafter of data, only some of them are turkeys.”

WHAT IT MEANS:  The long weekend has created a backlog of numbers and they are all coming out this morning.  The first group were somewhat mixed.  Consumer spending continued to improve in October, which is very good news.  Indeed, it rose despite a reduction in durable goods demand.  That was a little odd as total vehicle sales edged upward.  A solid holiday shopping season could push consumer demand up to 3% for the fourth quarter, which is where I have it.  As for income growth, that was not as strong as we would like, but conditions are clearly changing.  While gains are not spectacular, total wages and salaries have increased by 4.4% over the year.  Yes, some of that is due to more jobs, but about half is due to actual wage increases.  Still, adjusted for inflation, average wage increases continue to lag.

On the manufacturing front, durable goods orders rose in October.  That was a bit of a surprise, but the details are what matter.  There was a 45% increase in defense aircraft orders and that is not likely to be repeated given the spending restraints in place.  Excluding defense, orders were down sharply.  In addition, the best measure of business investment, nondefense, nonaircraft capital goods orders, posted a second consecutive 1.5% drop.  That is not a sign of aggressive business investment activity.  Order books are filling, so that should lead to more production.

Finally, there was the very strange large surge in weekly jobless claims.   The individual state data don’t seem to jive with the overall change so it is hard to really know why that happened.  Also, Thanksgiving is late this year so maybe there was an issue with the seasonal factors.  In any event, this number should be viewed with caution.  We need to see what happens over the next few weeks to determine if the labor market tightening process is moderating.  Keep in mind; the level is still consistent with solid, though not robust, job gains.

MARKETS AND FED POLICY IMPLICATIONS: It is unclear what to make of today’s numbers.  Nothing was overly strong and there were some weak reports as well.  So the best that can be said is that confusion about the strength of fourth quarter growth remains high.  The estimates range from the low 1% to over 4%, which shows that economists are clueless right now about what is happening.  I still think we could approach 4%, but we need a really good holiday shopping season.  So, go out and spend like crazy this next week.

Have a Happy Thanksgiving!