3rd Quarter GDP, September Pending Home Sales and Weekly Jobless Claims

KEY DATA:  GDP: +2%; Durable Goods Consumption: -26.2%; Consumer Inflation: +5.3%; Ex-Food and Energy: +4.5%/ Pending Sales: -2.3%/ Claims: -10,000

IN A NUTSHELL: “If you don’t build it, they cannot buy it, so it cannot be argued that the slower summer growth rate reflects a weakening economy.”

WHAT IT MEANS:  Economic growth took a hit in the third quarter, as GDP expanded by what would normally be called trend growth.  But when you have had four consecutive quarters of 4.5% or more growth, 2% looks tepid.  The details, though, correctly describe the situation.  The biggest problem was a massive drop in vehicle purchases, which took 2.4 percentage points out of growth.  We knew that had happened and why: There was little inventory to buy.  The demand is there, the supply isn’t. That is not a sign of weakness.  There was a major widening in the trade deficit, which was mostly due to a rise in imported services. Goods imports were still constrained by the port backups.  Goods exports declined, possibly for the same reason.  On the business side, investment rose modestly, while housing construction declined, slowing growth.  As for the government, while state and local governments spent like crazy, the federal government didn’t, with the result being largely a wash.  The one biggest addition to growth was a massive rebuilding of inventories.  That was needed given the huge drawdowns we saw in the previous two quarters.  Finally, the numbers on inflation were as ugly as expected, with or without food and energy included. 

Housing sales have been restrained by a lack of supply, but that could be changing.  The National Association of Realtors reported that pending home sales declined, in September, though that is not as troubling as it might seem. There was a huge pop in the index in August and the current level is high.  The trend over the past two months is up sharply from the February through July numbers, so it would not be surprising to see closings rise over the next few months.

New unemployment claims fell again last week.  The level may not be near the historic lows we saw before the pandemic hit, but they are pretty low on an historical basis.  Given the massive number of job openings, look for claims to continue declining for some time.  And look for the labor market to remain drum tight.    

IMPLICATIONS:  Without perspective, the data provide little information.  When it comes to analyzing the daily economic reports, that has been my overarching philosophy.  If you put the GDP numbers into perspective, it is clear the moderation in the headline growth number does not reflect a weakening economy.  The massive decline in durable goods spending was basically the result of a lack of vehicles on the lots.  And that was largely due to a problem with the supply of microchips which has restrained production.  Demand remains strong, but there is little to purchase.  That is slowly changing, so expect consumer spending to be a lot better in the current quarter.  A key sign of that happening is the massive spending on services. People are buying things for themselves, and they will back it up with big-ticket purchases once there are items to spend it on. So, look for a rebound in growth in the fourth quarter.  How big a jump is unclear as it is hard to know how fast production can expand given the continuing supply chain snafus.  The backlogs at the ports just keeps growing.  Pent-up demand continues to build, and it will likely power solid growth at least through the first half of next year.  I suspect that is how the Fed’s will view things when the FOMC meets next Tuesday and Wednesday.  Today’s GDP report should not stay the Fed from completing its appointed round of asset purchase tapering. 

September Existing Home Sales and Leading Indicators and October Philadelphia Fed Manufacturing Index

KEY DATA:  Sales: +7%; Over-Year: -2.3%; Prices (Over-Year): 13.3%/ LEI: +0.2%/ Phila. Fed (Manufacturing): -6.9 points; Orders: +14.9 points

IN A NUTSHELL: “There may not be a lot of homes for sale, but those that are on the market are getting purchased quickly and at high prices.”

WHAT IT MEANS: The housing market remains in good shape, even if the insanity of last year is fading.  The National Association of Realtors reported that existing home demand rebounded sharply in September, with gains spread fairly evenly across the entire nation.  The sales pace was the highest since January, which given the lack of inventory, is amazing.  Median prices have receded from the record set in June, but they are still up double-digits over the year. 

That growth is slowing is not a surprise and the moderation should continue.  The Conference Board’s Leading Economic Index rose modestly in September, after having surged in July and August.  So yes, conditions are cooling, but just a touch.  The Conference Board noted that it “continues to forecast strong growth ahead: 5.7 percent year-over-year for 2021 and 3.8 percent for 2022.”  Hard to complain about those numbers.

The manufacturing sector has been battered by the messed up global supply chain, but conditions are not terrible.  The Philadelphia Fed’s reading of manufacturing activity in the Mid-Atlantic region was that activity expanded at a somewhat more moderate pace in early October.  Yet orders surged, backlogs built faster, hiring increased and expectations improved.  The big issue is prices.  Over seventy percent of the firms reported paying more for their inputs, while nearly sixty percent were able to raise their prices.  With pricing power nearly universal, it is hard to argue, as Fed Chair Powell continues to do, that high inflation is transitory.   

IMPLICATIONS:  There are all sorts of worries about inflation, supply chain snafus and labor shortages, but the economy continues to chug along quite solidly.  Yes, the supply shortages are slowing growth, but activity is hardly collapsing.  People are buying houses, it seems that every time a vehicle shows up on the lot, it is purchased, and incomes are increasing.  It’s unrealistic to believe that growth above 5%, 4% or even 3% is sustainable for an extended period.  It’s nice to dream big, but when it comes to potential growth, you can exceed 2% greatly for only so long.  Right now, we are doing that, so let’s enjoy it.  Without a steady easing in growth, the bottlenecks we are seeing could last significantly longer than currently expected, raising serious concerns about how long inflation will remain elevated.  When large firms are talking $21 per hour wages, which will rise to $25 per hour, it is clear they believe there has been a shift in the supply of labor and that labor shortages are not going away anytime soon.   

September Housing Starts and Permits

KEY DATA:  Starts: -1.6%; Over-Year: +7.4%; Permits: -7.7%; Over-Year: 0%

IN A NUTSHELL: “Home construction is slowing, but not for a lack of demand.”

WHAT IT MEANS: The labor and goods shortages are having negative impacts across the economy and the housing sector is one place where the effects are significant.  Housing starts were down in September, though the level is not that bad.  Actually, they were pretty close to the where they were in February 2020 and are well above last September’s pace.  The problem appears to be in the single-family segment, which has largely flatlined over the past few months.  Yesterday, we saw that the National Association of Home Builders’ Index rebounded, led by strong current sales.  Traffic was also up and so was expectations of future sales, so the issue isn’t demand.  As for the multi-family component, starts may have fallen in September but they were still up almost 40% since last September.  Looking forward, builders are starting to get permit requests more in line with construction activity.  They had been running well above starts and without the means to use the permits, there appears to be less appetite to pay for them.    

IMPLICATIONS:In an economy that is supply restricted, it is important to look at the data in a somewhat different light than you would in either a normal or demand limited environment.If you cannot build it, they don’t come and right now, builders are finding it difficult to get enough inputs and labor to do that.So, home construction is fading, restricting sales.  The paucity of existing homes on the market is limited housing purchases in that segment of the economy.  If you would look at sales and construction, you would think the housing sector is faltering.  That is clearly not the case as builders are optimistic and homes continue to sell quickly, and frequently at above asking price.  The point is that the economic “slowdown” we are in has not been created by typical factors, such as the Fed jamming on the brakes, or a crisis of one kind or another that leads to layoffs and falling income.  Instead, job and income growth are strong.  Since it is not due to a lack of demand, fiscal and monetary policy are largely impotent to deal with the situation. It is a supply constrained economy where fixing the constraint, the broken global supply chain, is the only thing that will change the situation.  That said, the economy continues to expand solidly.  Economists are downgrading their third quarter GDP estimates and will likely do the same for fourth quarter.  But the pace of growth being forecasted remains well above trend growth of roughly 2%.  The latest Blue Chip Economic Indicators’ consensus is for 3.6% growth in the third quarter and a robust 5.3% in the fourth quarter.  There is no reason to say the economy is in trouble, is weakening or is stagnating.

September Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA:  CPI: +0.4%; Over-Year: +5.4%; Ex-Food and Energy: +0.2%; Over-Year: +4%;/ Real Hourly Earnings: +0.2%; Over-Year: -0.8%; HWOL: +3%; Over-Year: +63.6%

IN A NUTSHELL: “Price pressures are hardly fading, and inflation is eating into household spending power.”

WHAT IT MEANS: Economists have a saying that if you forecast something long enough, you will eventually be right.  Well, Fed Chair Powell may eventually be correct when he says that inflation will fade, but for now, he is still forecasting the same thing, but it is yet to be accurate.  Consumer prices jumped sharply again in September, driven by a wide variety of factors.  Energy and food led the way, which should surprise no one who actually pays for food and energy. If you are on the Fed, well that’s a different story.  Excluding those volatile components, prices rose more moderately .  New vehicle, shelter and medical commodities costs were up significantly.  Most disconcerting was another surge in fresh cake and cupcake costs.  I am getting priced out of the market (never!).  And if you eat out, forget it.  Restaurant prices seem to be on a stairway to heaven.  On the other hand, apparel, medical services and used vehicle prices declined, limiting what could have been a really ugly rise in household expenses.  Over-the-year, the increase in consumer prices was the largest since early 1991.  Yikes.  There was one bit of good news in the inflation data, at least for those on Social Security.  The cost-of-living adjustment will be 5.9%, the largest in about forty years. 

The high inflation rate is causing wage earners to think they are hamsters on a wheel: They just keep running in place.  While hourly earnings continue to jump, the gains are being eaten up by rising prices.  Despite 4.6% rises in both hourly and weekly earnings over the past year, real (inflation-adjusted) earnings declined.  It may take the $21 or more starting wage that some banks are now targeting to pull wage earners out of this morass. 

Meanwhile, businesses continue to look for workers all over the Internet. The Conference Board’s Help Wanted OnLine Index skyrocketed in September and is up massively over the past year.  No, this isn’t because it’s a comparison against a weak pandemic number.  The current level is about fifty percent higher than it was just before the pandemic hit.  That’s insane. 

IMPLICATIONS:Inflation is high, and it seems as if it could be staying at greatly elevated levels for an extended period.  The back-up in supplies is likely to get worse as we are into the holiday season.  With labor shortages abounding, it is hard to see how the ports will be cleared anytime soon.  Seriously, when you hear reports that firms are hiring helicopters to ferry containers from ships, and major retailers are chartering their own ships, you know the supply chain is broken badly.  All you have to do is going into any store and see the lack of inventory on the shelves to convince you that we have a really big problem.  We have a cycle going: Lack of supply, strong demand, rising wages, more demand, not enough supply, and higher prices.Strangely some people are calling the current environment “stagflation”.  Huh?  This is the downside of supply-side economics.Demand is strong and with the problems being are on the supply side, any resulting economic moderation will have nothing to do with economic stagnation.  It’s not even wage-price inflation, though that is part of it.  It’s supply-price inflation, which I think is something new.  And monetary and fiscal policy cannot do anything about it.  So, buckle up.  The next year should be very interesting and I truly hope Mr. Powell starts facing reality soon. 

September Employment Report

KEY DATA:  Payrolls: +194,000; Private: +317,000; Public Education: -149,000; Revisions: +169,000; Unemployment Rate: 4.8% (down 0.4 percentage point); Wages: +0.6%; Hours Worked: +0.2 hours

IN A NUTSHELL: “Other than the volatility in the education sector, this was actually a good report, as the labor market continues to firm.”

WHAT IT MEANS: Stop.  Don’t look at the September headline jobs number or you will be totally confused.  Yes, it was disappointing on the surface.  But as I always say, the information is in the details, so let’s look at them.  Start with the payroll numbers.  The private sector added a lot of new workers.  That is critical given the extreme shortage of labor that employers are claiming is out there.  Apparently, firms are finding people to hire, though clearly not as many as they would like.  The low headline number was largely due to the education component, which has apparently lost its past seasonality.  Schools are opening at a different pattern than in the past, so we had seasonally-adjusted 257,000 workers added in July, and a 150,000 cut in September.  Don’t believe either one of those numbers.  However, the rise of 130,000 over the past three months does make sense.  That shows how you really need to follow the 3-month moving average and not focus on one-month worth of data.  Speaking of which, the private sector average monthly job gain over the past three months is 488,000, which shows that hiring continues to be robust.  Finally, revisions to previous reports added a lot of workers not counted previously, so let’s simply accept the fact that that the headline is totally misleading

There are other parts of the employment report that also point to a very strong labor market.  The unemployment rate fell sharply, though not for all the right reasons.  Employment jumped and unemployment declined significantly, which if good.  But the labor market contracted, which was disappointing.  In a normal strong market, the labor force expands.  COVID seems like the obvious explanation.  Still, we are back to the January 2017 unemployment rate.  The labor market is nearing full employment.  As for the ending of the extended unemployment benefits, it may be too soon to see any impact, but for now, it looks like the theory that ending the special pandemic benefits would make workers more available is just that, theory. 

Finally, average hourly wages surged and are up a robust 4.6% over the year.  In addition, hours worked jumped.  Together they point to a large increase in income. 

IMPLICATIONS:The September employment report paints an accurate picture of the labor market.  Firms are hiring like crazy, but with the labor force stagnant, the number of available workers is shrinking.  As a result, the unemployment rate is dropping and with the demand for workers outstripping the supply, wages are soaring.  This has major consequences for the Fed.  First, with income surging, consumer demand should remain solid, so don’t look for any massive slowing in growth.  Second, labor costs are not coming down anytime soon, and when you combine that with the rising input costs from the broken global supply chain and strong demand, the Fed’s hopes for a near-term moderation of inflation are fading.  I think Chair Powell is finally getting to understand that, as he is indicating he thinks high inflation could go into next year.  Now we need the him to start thinking that it could last well into next year.  Until he does, he will be sounding like a clueless politician, rather than a Fed Chair.  Forty miles of ships waiting offshore to unload in California point to a pretty messed up supply chain. Mr. Powell needs to start preparing the markets for the possibility that inflation could last a lot longer than he has been arguing it would.  I suspect that will start at the next FOMC meeting on November 2,3.  Look for the Fed to announce the start of tapering and possibly a larger cut in purchases than is currently expected.  That would indicate the Fed is serious about withdrawing its stimulus and the members recognize the threat that an extended period of high inflation presents for growth and interest rates.

September Manufacturing Activity and Consumer Sentiment, August Income and Spending and Construction

KEY DATA:  ISM (Man.): +1.2 points; Orders: flat/ Sentiment: +2.5 points/ Consumption: +0.8%; Disposable Income: +0.1%; Prices: +0.4%; Ex-Food and Energy: +0.3%

IN A NUTSHELL: “With inflation and Delta running hot, it is beginning to look like we are in for an early deceleration in growth.”

WHAT IT MEANS:  Lots of data and so little space to discuss the meaning.  So, let’s start with the September reports.  Manufacturing activity stayed strong in September.  The Institute for Supply Management’s index rose, and the level is high.  As for the details, they point to more of the same but no acceleration going forward. The order index was flat, the production measure signaled slightly slower growth, backlogs built more slowly, and prices of goods rose faster.  Hiring turned positive but is not strong.  The sector is in good shape and it should remain that way for a while.

As for consumers, there were two reports that spoke to their attitudes.  First, the University of Michigan’s Consumer Sentiment Index rose a touch in September, but it remains depressed.  Between the virus and inflation, there is not a lot to be happy about.

That sourness in consumer attitudes did not show up in August consumer spending, which surged.  Most of that was from nondurable goods purchases, which was likely driven by rising gasoline prices.  Indeed, the real story in this report was another jump in household’s costs.  That was true even when food and energy were excluded.  With incomes rising modestly, real or inflation-adjusted income actually fell sharply and the rise in consumption was cut in half. 

On the construction front, residential activity was up decently, but that gain was wiped out by a similar decline in nonresidential construction.  These data have been consistently revised upward, so before any judgment is made, let’s see what they look like in a month. 

IMPLICATIONS:Today’s data dump was, for the most part, disappointing.  It was nice to see that the manufacturing sector remains solid, but consumers are not a happy bunch and price increases are eating into their income gains, which is making them even more unhappy.  That doesn’t mean the economy is about to crater.  It’s just that we could see a deceleration toward trend growth occur sooner than expected.  I have growth back to the low 2% range during the second half of next year, but I don’t rule out that happening in the spring, especially if the virus is still with us in earnest.  But the real issue remains inflation and whether it is transitory of more persistent.  The Fed has created the conceptual possibility that it could accept inflation funning in the 2.5% to even 3% range for five years.  For the five and ten years ending 2020, the inflation rate, measured by the personal consumption expenditure deflator, averaged 1.5%. Inflation would have to average 2.5% for the next five or ten years to average out to 2%.  The Fed has built itself a huge cushion when it comes to inflation.It can run hot for an extended period and still meet its stated goal of averaging 2%.  That raises the questions, which I have discussed multiple times before: What happens to inflation expectations if inflation persistently runs above 2%; and is 2% the best inflation goal?  Those are the issues we should be debating, not whether inflation will decelerate from current levels.  It will, but where do we end up?  I continue to believe that trend inflation will be closer to 2.5% than 2% when things ultimately settle down.

August Leading Indicators, Weekly Jobless Claims and FOMC Decision

KEY DATA:  LEI: +0.9%; Claims: +16,000

IN A NUTSHELL: “The Fed is intent on ending its flooding of the markets with liquidity and then raising rates for the simple reason that the economy is in good shape.”

WHAT IT MEANS:  It looks like the only thing about the expected economic slowdown that is slow is the pace at which it is arriving.  If the Conference Board’s Leading Economic Index tells us anything, and it usually does, then we still have some strong growth ahead of us.  The index jumped in August, after a major rise in July.  Only a decline in confidence, which we cannot take for granted, restrained the increase.  The report noted that growth this year could hit 6% and still be 4% next year.  Yes, the slowdown is coming, but it is a way off.

Weekly initial claims for unemployment insurance jumped last week, which was a surprise.  Since hitting its post-recession low on September 4th, the number of people applying for assistance has increased.  These data are volatile because it is impossible to get an accurate seasonal adjustment for weekly data, so don’t read too much into the recent increases. 

Yesterday’s FOMC Decision:  Tapering is coming “soon”, and not much later rate hikes will begin.  Is the sky falling?  Hardly.  It’s the opposite.  The sky is brightening.  Yes, the Delta variant is still a wildfire in many parts of the nation, and that will be the case until it hopefully burns itself out.  That should have happened already, but given the large percentage of the population who will not get vaccinated, there remains plenty of tinder to burn through. Yet the economy continues to move forward, and today’s data don’t point to any major slowdown in the near future.  It was in that light that the Fed, through its statement and more importantly the comments made by Fed Chair Powell at his press conference, determined that the days of extremely easy money need to come to an end.

Keep in mind, the Fed will be still adding to liquidity until about the middle of next year, it’s just that the amount will be reduced, probably monthly.  As the Fed members have noted in the past, first comes tapering, then come tightening.  And if you look at the infamous “dot plot” of Fed funds forecasts, half the members expect a rate hike by the end of next year.  Barring another variant creating even more havoc, or a massive Chinese meltdown (not expected), that looks like a good bet right now.  Whether the hike comes in the fourth quarter of 2021 or the first quarter of 2022 is irrelevant, it is coming.  The economy should continue to grow solidly next year, though more moderately.  But that should be enough to bring unemployment rates down close enough to 4% for the Committee members to declare victory.  Indeed, 4% is their long-run full employment target.  The only issue is inflation, which is still running well above the 2% target.  The members still say that is transitory.  In, addition, the statement reminded us that “With inflation having run persistently below this 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 and longer‑term inflation expectations remain well anchored at 2 percent.”  In other words, the Fed is quite willing to live with high inflation for an extended period.

When you put this all together, it is time to begin planning for rising rates.  Investors should start factoring in not just a lower amount of liquidity flooding the market, but the inevitable move toward the Fed reducing its balance sheet.  Since these actions are coming because the economy is healing and will once again be able to support normal interest rates and a more passive Fed, I will take it. The next FOMC meeting is November 2,3 2021.  Given Mr. Powell’s statement that the announcement on the start of tapering could come as soon as November, expect that to happen.

August Housing Starts and Permits and September Philadelphia Fed NonManufacturing Survey

KEY DATA: Starts: +3.9%; 1-Family: -2.8%; Permits: +6%; 1-Family: +0.6%/ Phila. Fed (NonMan.): -29.5 points; Expectations: -26.8 points

IN A NUTSHELL: “The housing market’s summer construction slump, if there really ever was one, may be over.”

WHAT IT MEANS: While housing prices have been soaring, home construction has been on a major roller coaster ride. Over the first eight months of the year, four times there were declines in housing starts and four months they were up. When you put it all together, so far this year, starts have soared by 21.5% compared to the same period in 2020. In August, they rebounded solidly from the large decline posted in July. The level is high, but largely sustainable. With permit requests continuing to run well above actual construction, we should see the building pace accelerate over the next few months. While starts this year have greatly exceeded last year’s pace, permit requests jumped even more, 25.7%.

The Philadelphia Federal Reserve’s reading of nonmanufacturing activity in the mid-Atlantic region took a nosedive in early September. However, just about every component continued to show that activity is improving. It’s just that the rate of growth slowed. One area where things did improve was hiring. More firms added both full-time and part-time workers. Price pressures remained extremely high, with input costs increasing faster. Firms continued to push through price increases to offset their rising expenses. Looking forward, confidence seems to be flagging, at least a little. The index fell sharply, but over fifty percent of the respondents continue to believe conditions will improve. However, there was a jump in the share that worry that the economy could slow over the next six months.

IMPLICATIONS: Housing construction has been robust, it’s just that it is doing that in fits and starts (pun intended). Given the demand for homes and the paucity of supply, look for the housing sector to add to growth in the third quarter. With retail sales also on the rise, it looks like third quarter growth will be quite strong. So, why are the markets in a tizzy? Sometimes what happens in China doesn’t stay in China. Fears of a meltdown of Evergrande, a huge Chinese developer, brought out concerns that another financial crisis could be coming. One commentator even called it “China’s Lehman Brothers moment”. Yikes. But it isn’t just China. As much as people complain about too much government spending, fears are that gridlock in Congress could cause there to be too little government spending. Let’s not forget that government funds kept millions of small, medium and large businesses from failing and supported millions of unemployed workers and their families. That money is beginning to disappear, and the economy will have to stand on its own. Investors don’t seem that confident the private-sector legs will not be wobbly. Then there is the periodic Congressional brain freeze over the debt limit, or more precisely raising it. I have a suggestion, just let the country default and see what then happens. No don’t. This is just a dumb political game and as I and most other economists have argued for years, simply get rid of the debt limit. Heck, Congress created the mess by passing the spending bills, so pay for them. Finally, there is the not-so-surprising possibility that the investors may be simply taking stock of the fact that prices have soared. A pull back could be nothing more than normal rethinking of things after such as large increase. Ultimately, the economy will prevail and there is little reason to think growth will crater. Slowdown? Of course. Growth at recent levels is just not sustainable, when you consider that roughly two percent is trend growth. The markets need a psychological reset, where anything 2.5% or above is viewed as solid, strong, or even robust, which where it is right now.

August Consumer Prices, Real Earnings and Small Business Optimism

KEY DATA:  CPI: +0.3%; Over-Year: +5.3%; Ex-Food and Energy: +0.1%; Over-Year: +4%/ Real Hourly Wages: +0.4%; Over-Year: -0.9%/ NFIB Optimism: +0.4 point

IN A NUTSHELL: “The inflation rate is moderating, but it is still quite high.”

WHAT IT MEANS:  The Fed Chair has been saying, inflation is coming down, and at least in August it did, at least a little.  The Consumer Price Index rose less than expected, helped along by declines in the costs of used vehicles, medical commodities, and transportation services, which was largely airline fares.  But energy was up sharply, food expenses rose solidly, and new vehicle prices continued to spike.  Still, this was a fairly restrained report.  Key segments, such as shelter and medical services increased at reasonable rates. In addition, the details of the components are starting show some signs of coming off their highs.  While in the past few months, there were very few negative signs in the detailed tables, the number in August rose significantly.  That seems to lead credence to the arguments that inflation will subside.  The questions of at what rate inflation will stabilize and how long it will take to settle down to a more normal level, are still a long way from being answered.

The more moderate rise in inflation helped workers, especially since the tight labor markets are driving up wages sharply.  Hourly earnings soared and even adjusting for inflation, real wages increased solidly.  Unfortunately, they are still down compared to last year.  That is true even if hours worked are added. All that extra money is going to pay for the higher cost of goods, and then some.

According to the National Federation of Independent Business, small businesses remain cautious about the economy and are getting more worried about the future.  It’s Optimism Index edged up in August.  But the percent of respondents expecting business conditions to improve over the next six months dropped sharply for the second consecutive month. The Outlook index hasn’t been this low since January 2013.  Firms are concerned about labor, commodity costs and sales.  They are still trying to hire, but like firms of all sizes, it is a struggle.    

IMPLICATIONS:One month of more moderate inflation pressures is nice to see, but it doesn’t create a trend. We need a few more months of reasonable numbers before we can become comfortable that the declaration in inflation is at hand. The micro-details of the report seem to imply some easing in pressure, but again, we need to wait and see, as there is no letup in the cost of labor and other inputs.  Firms operating expenses are on the rise, and they don’t have the means to address the large increases without raising prices. So, it is hard to argue that inflation will diminish rapidly.  At the same time, the Delta variant continues to punish large parts of the nation and given the battles over vaccines and masks, the likelihood is that it will be with us for quite a while.  And there is no certainty another variant doesn’t appear that creates more issues. If investors are uncertain, they have every good reason to feel that way and we know that uncertainty is rarely good for the markets.  Add to that a FOMC meeting next week where it is unclear what will be said about tapering, and you have the recipe for some real volatility.  The rest of this week is filled with some more important numbers, such as industrial production, import prices, retail sales, and an early reading on September Consumer Sentiment.  It could be a very bumpy week in the markets.

August Producer Prices

KEY DATA:  PPI: +0.7%; Over-Year: +8.3%; Goods: 1%; Goods Ex-Food and Energy: +0.6%; Food: +2.9%; Services: +0.7%

IN A NUTSHELL: “Still no relief from the never-ending rise in producer costs.”

WHAT IT MEANS:  I am sure that Fed Chair Powell truly believes that the inflation pressures we are seeing are only transitory, but as of August, wholesale costs were still soaring.  Both goods and services expenses jumped, and it wasn’t due to energy, which was up moderately (at least for energy).  Indeed, the increases were across all industries.  There are over fifty special categories of the PPI that slice and dice the data in every way possible.  Every single one of them posted an increase.  Even more distressing was the year-over-year numbers: Only one special group rose less than four percent.  For consumers, the food numbers don’t look good.  They were up sharply in August and have risen nearly thirteen percent since August 2020.  While the pathway from producer costs to consumer prices is not direct and frequently ends in a dead end, when it comes to food, those usually wind up being passed through.  As for services prices, they are rising significantly as well, but not quite as massively as goods costs.  That, of course, is faint praise. 

IMPLICATIONS: The next FOMC meeting is on September 21, 22 and I truly wish I was a fly on the wall.  You have the Fed Chair who wants to go slow when it comes to tapering asset purchases.  There is also the “weak” August employment report, that I think has been totally misread.  It really wasn’t weak, but the Committee will not have the September report before they meet, so they only have what has already been released.  On the other side are a number of Reserve Bank presidents who feel inflation is a growing issue and the economy has recovered enough that continued massive additions of liquidity could create more inflation problems.  They want to at least announce the Fed’s intention to taper.  So, what will the Fed do?  The members will probably find wording that says they are watching the economy and inflation carefully and at the suitable time, will announce that that the need for aggressive actions will be coming to an end.  In other words, they will say close to nothing.  And that makes sense.  The economy doesn’t need as much stimulus as the Fed is putting into the system, but timing matters and the “weak” employment report is the 800-pound gorilla in the Eccles Boardroom.  As for investors, they need to chill. The economy is just fine, though growth is moderating because most of the reopening process has been completed and too many people refuse to get vaccinated, so the virus resurgence is affecting confidence and restraining activity in a number of industries.  That is correctable without a sharp slowdown occurring. And inflation, even if it persists at an above 2% pace, may not be that bad.  There is nothing magical about 2% inflation.  For many businesses, it locks them into sub-2% price increases and places major pressures on controlling operating costs, which sometimes is out of their control. The equity markets have risen massively, and it would not be a surprise if there was pull-back, especially if more normal growth has yet to be priced into the markets.  But the economy shows no signs of faltering, and that too should be a factor in investor decision making.   

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