August Consumer Prices and Real Earnings and Weekly Jobless Claims

KEY DATA: CPI: +0.1%; Over-Year: +1.7%; Ex-Food and Energy: +0.3%; Over-Year: +2.4%/ Real Earnings: +0.4%; Over-Year: +1.5%/ Claims: -15,000

IN A NUTSHELL:  “Whether or not inflation is low depends upon the measure you use.”

WHAT IT MEANS:  Is inflation tame?  The answer is, as it usually is with economic data, it depends.  Today’s inflation report was the August Consumer Price Index.  The rise was modest, as long as you include food and energy, which tend to bounce around.  Indeed, energy costs fell sharply while food costs were flat.  Excluding those components, though, consumer prices were up fairly sharply. What is driving that increase?  In August, it was a number of factors.  If you eat out, your tab keeps rising faster than most other goods.  If you are feeding a cake, cupcake and cookie habit, like me, you are paying more for those as well.  Medical expenses are once again soaring.  Men’s clothing prices are jumping as are women’s footwear.  Information expenses have risen solidly three of the past four months.  Shelter costs are seemingly always rising and if you travel, not only are airplanes uncomfortable but they are more expensive.  And used vehicle prices are soaring.  In other words, there are lots of goods and services whose costs are moving upward, at least according to the Consumer Price Index.

One of the problems with rising inflation is that it eats into consumer spending power.  At least in August, the modest top line increase allowed inflation-adjusted earnings to surge.  Both hourly wages and hours worked were up nicely and the inflation offset was limited.  That led to a strong gain in consumer spending power.  That said, the 1.5% rise over the year is nothing great and makes it hard to see how consumers can continue to keep the economy growing strongly without some help from other sectors.

One bit of really good news was the sharp decline in weekly jobless claims.  It is near its historic low level.  That shows that the labor market remains tight, which should limit the deceleration in wage gains.  MARKETS AND FED POLICY IMPLICATIONS:  The Fed is always mentioning that inflation remains below target, though they continuously state that it will eventually get back there.  The Fed uses the Personal Consumption Expenditure deflator as its benchmark and indeed, when you exclude the volatile food and energy components, inflation is below the 2% target.  But that is not the case with other measures.  The core Consumer Price Index, which excludes food and energy, is now rising faster than it has in eleven years.  There are a number of other indices that use the CPI but try to factor out volatile elements.  The Cleveland Fed’s median and trimmed mean CPIs and the Atlanta Fed’s Sticky Price CPI are also up at their highest pace this decade. In other words, there are some reasons to believe inflation is not nearly as tame as Mr. Powell thinks.  We will get the next reading of the PCE price index in two weeks and that is likely to remain below target.  What will be important is how much the core index rises and how close it gets to 2%.  The July increase over the year was only 1.6%, so it still has a way to go.  As for the markets, it is still all about trade and when hopes rise that the war will not go nuclear, markets do well.  When threats of a greater war are raised, the fallout shelter becomes a favorite place to hide.Right now, the news is positive.  If you know what it will be tomorrow, please tell me so we both know. 

August Employment Report

KEY DATA: Jobs: 130,000; Private: 96,000; Revisions: -20,000; 3-month ave.: +156,000; Unemployment Rate: 3.7% (unchanged); Wages: +0.4%

IN A NUTSHELL:  “The softening in job growth should surprise no one but it doesn’t mean the economy is headed toward a recession right away.”

WHAT IT MEANS:  The job slump, if you want to call it that, continues.  In August, payrolls rose moderately, though much of the gain was from government hiring.  The decennial census temporary job surge is starting and that added 25,000 workers, so you can say the top line number was even weaker than it looks.  Indeed, the relatively modest private sector gain better matches what happened.  But the details are hardly negative.  Health care, professional and technical services, finance and construction all posted solid increases in payrolls.  Manufacturing was up a touch as well.  But retail keeps shrinking and transportation and warehousing, which were expected to lead the way, has been largely flat lately.  That may be an early sign that the slowdown is gaining steam.  Another concern is that only 53.5% of the industries posted gains.  That was the second lowest percentage in 9.5 years, a further sign that firms are becoming more cautious in their hiring.

As for the unemployment rate, that was unchanged as a surge in workers into the labor force was largely absorbed.  The participation rate moved up, which is nice to see.  But maybe the best data came from the hours worked and wages section of the report.  Hourly wages were up a strong 0.4% and a solid 3.2% over the year.  With hours worked rebounding, weekly earnings surged 0.7% and have risen 2.9% over the year.    

MARKETS AND FED POLICY IMPLICATIONS:  I guess if you forecast something long enough, it will eventually come true and that is the case with the slowdown in job growth.  I, and most of my colleagues, have been expecting the large job gains we saw last year fade into the past. Well, we are adding workers at a slower pace that is more consistent with the expansion.  But it is clearly enough to keep the unemployment rate from rising.  Thus, while this is not a very good report, it is hardly a bad one, especially given the rebound in earnings.  Households still have the income to keep spending and I suspect their level of confidence, which has been shaken by the trade war, will likely either stabilize or slow its decline.  This report also has something for everyone at the Fed.  If you want to cut rates, just cite the more modest payroll rise.  If you want to keep rates stable, point to the strong gain in income.  Indeed, that is the exact conundrum the Fed faces.  The data have moderated and in some cases softened, but they are hardly pointing to a recession.  Yet the Fed’s fearless leader, Jay Powell, seems to be quaking in his wing tips.  And the markets are screaming for a fifty basis point reduction.  The data do not support a half-point rate cut and the disagreements at the Fed are likely to restrain a move greater than a quarter point.  Still, Chair Powell may claim to be data driven but he is flying by the seat of his pants and that may be on fire.  So don’t rule anything out except maybe no move.  The low number of jobs added probably has taken that off the table for the September 17-18 FOMC meeting.   

August Private Sector Jobs, NonManufacturing Activity, Layoff Notices, Jobless Claims

KEY DATA: ADP: 195,000; ISM (NonMan.):  +2.7 points; Orders: +6.2 points; Employment: -3.1 points/ Layoffs: 53,480/ Claims: +1,000

IN A NUTSHELL:  “While all eyes are on tomorrow’s employment report, today’s data reinforce the view that the economy continues to hold its own.”

WHAT IT MEANS:  The job market will be the key factor if we are to escape a recession created by an extended trade war.  Thus, any report that provides insight into what is happening will be analyzed closely.  Today, the data pointed mostly to continued good gains in jobs.  The ADP reading of August private sector employment gains came in well expectations.  There was a surprisingly decent rise in manufacturing payrolls and less surprising surges in education and health and leisure and hospitality.  Schools are going back earlier and it was a generally strong tourism/vacation year.  Otherwise, there were really no major outliers. 

The rest of the labor market data were mixed.  Supporting the idea that the labor market has not faltered was the modest rise in jobless claims last week.  The level remains near historic lows.  On the other hand, the Challenger, Gray and Christmas report on layoff notices was pretty disturbing.  The number was the highest for an August since 2009.  We don’t want to see any employment data point compared to any 2009 number!  For the first eight months of this year compared to last year, layoff notices are up over 36%.  That is worrisome and might be an early sign of building problems.

While manufacturing may be the first casualty of the trade war, the remainder of the economy remains solid.  The Institute for Supply Management’s NonManufacturing rose sharply in August as new orders surged.  However, hiring looks like it is moderating.

MARKETS AND FED POLICY IMPLICATIONS:  The labor market appears to be in decent shape, but how strong is unclear.  The August employment report, that we get tomorrow, may tell us more.  The consensus is for job gains to be in the 170,000 range, though I think that is high.  I just don’t see manufacturers adding workers as the ADP report indicated.  But I am not looking for a really weak number.  I think something in the 150,000 range looks reasonable.  What I am watching more carefully is the unemployment rate.  It is still extraordinarily low, but it looks like the bottom has been reached and it is slowly inching up.  I don’t rule out it ticking up to 3.8%.  I have to laugh writing that there would be concern with a 3.8% rate since historically, it is really low.  But direction matters and a further rise will be what is reported and what consumers see.  We need household confidence to remain strong and rising unemployment rates, even if they are from a low level, don’t create warm and fuzzy feelings in workers.  As for the markets, it is still all about the trade war and anytime investors hear that there might be an armistice, they celebrate.  But after the celebration, we usually get a hangover driven by the reality that the war is not over and that is likely to be the case once again.  And that means investors should discount the daily wild fluctuations.  Otherwise, we may see more jobs in the health care sector as people get their ulcers treated. 

August Manufacturing Activity and July Construction

KEY DATA: ISM (Manufacturing): -2.1 points; Orders: -3.6 points; Jobs: -4.3 points/ Construction: +0.1%; Private: -0.1%

IN A NUTSHELL:  “With manufacturing now starting to contract, it is even more critical that the consumer keeps spending.”

WHAT IT MEANS:  The canary in the mine may be falling off its perch.  For the first time since August 2016, the Institute for Supply Management’s (ISM) manufacturing index dropped into negative territory.  And the details were even more distressing.  Only one of the major sub-indices, supplier deliveries, was positive and it isn’t even clear that the slowing of deliveries occurred for good reasons.  One respondent noted that: “Tariffs continue to be a strain on the supply chain and the economy overall.”  That is, it may, at least in part, be getting harder to get inputs because of the trade war rather than because of excess demand.  Thus, I am not so sure we should put that index into the positive camp.  On the other hand, orders were weak as the index went negative for the first time since December 2015.  Export demand is disappearing.  As a consequence, production is declining, hiring is faltering and order books are thinning.  In other words, this was an ugly report.

The construction sector is not doing much better than manufacturing.  While building activity was up a touch in July, it was the government that was leading the way.  In the private sector, a pick up in residential building was more than offset by weakness in nonresidential construction.  Eight of the eleven components were down, including that the weakness is broad based.  MARKETS AND FED POLICY IMPLICATIONS:  Not surprisingly, the markets didn’t react too well to the manufacturing contraction number.  It has been quite clear that the manufacturing sector globally has been hurt badly by the trade war.  J.P. Morgan’s Global Manufacturing Index was negative for the fourth consecutive month.  The U.S. decline joins drops in the Eurozone and Japan.  However, all these negative numbers don’t indicate the U.S. or the world is now in a recession.  Indeed, the ISM index has to fall another six points before it indicates the U.S. economy could be shrinking.  It does show that that third quarter growth is likely to be in the 2%, which is pretty much the consensus forecast.  Since that is roughly trend growth, I am not ready to say a recession is baked in the cake.  Manufacturing can decline for a while without the economy flat lining.  But that means the consumer has to pick up the pace, as businesses are not going to invest facing the uncertainties created by the trade war.  And that make the labor market data even more important. Given the weak ISM employment index, it will be interesting to see what the manufacturing number is in Friday’s August jobs report.  I would not be surprised if the sector shed workers and that could help make the report a pretty mediocre one.  The strong labor market has been the chief reason consumer confidence and spending has been solid.Take that away and then I start worrying about a recession.  A disappointing payroll gain could put even more pressure on the Fed to cut rates again soon.  Unfortunately for the Fed, lower rates are likely to do little since they are falling because of recession worries.  Businesses are not likely to invest heavily if they don’t think the economy will hold up.  And if households start fearing a recession, will they actually start taking on more debt?  To those who say the Fed can save us, I need only remind them that the context within which the Fed reduces rates matters, not just the level – and the context is not positive. 

July Income and Spending and August Consumer Sentiment

KEY DATA:  Consumption: +0.6%; Disposable Income: +0.3%; Prices: +0.2%; Ex-Food and Energy: +0.2%/ Sentiment: -8.6 points

IN A NUTSHELL:  “Households may have shopped in July, but declining savings and faltering confidence creates concerns about consumption going forward.”

WHAT IT MEANS:  They came, they saw, they bought.  Okay, it is not really a good idea to compare consumers with Julius Caesar, but you get the picture.  Households were out there spending in July.  Indeed, they spent heavily on everything: Durables, nondurables and services.  So, why am I worried?  Income did not keep up with spending.  Wages rose modestly, a problem I have discussed for quite a while.  Though that has not stopped people from spending up to this point, it may start restraining demand going forward.  Both the savings level and savings rate dropped to their lowest levels since November 2018.  Households are still saving at a decent pace, but the reduction in total savings is a warning sign.  The kicker from the tax cuts may be fading.  And we will not have another Amazon and copycat sales by other retailers for a while.  As for inflation, it was moderate.  A jump in energy costs offset a decline in food.  Both the overall Personal Consumption Expenditure index and the “core” index remained in the 1.5% range, which is well below the Fed’s 2% target.

A second reason for concern about consumer spending is the sharp drop in the University of Michigan’s Consumer Sentiment Index in August.  The decline was the largest since the end of 2012.  Both components faded, but the expectation decline was twice as large as the current conditions fall off.  It was noted that the key factor in the faltering of household perceptions was the trade war.  As noted, “Compared with those who did not reference tariffs, consumers who made spontaneous negative references to tariffs also voiced higher year-ahead inflation expectations, more frequently expected rising unemployment, and expected smaller annual gains in household incomes”.  It should be pointed out that the Conference Boards Consumer Confidence Index fell only modestly in August

This week’s numbers came out in drips and drabs and they told differing stories.  Solid July durable goods orders and capital spending, as well as a pick up in the Chicago Business Barometer points to a stabilization in the manufacturing sector.  But soft home prices and a decline in pending home sales indicate the housing market is not getting any major boost from the low interest rates. MARKETS AND FED POLICY IMPLICATIONS:Forecasting the economy is hard enough when you only have to deal with trends in the economic numbers.  It is now clear that the overarching issue is the trade war, which is a political strategy that has economic implications.  Since it is the president’s policies (and tweets) that have to be determined first and then a probability placed on both the magnitude and timing of the policies, it is clear that any forecast is limited in its nature.  But economic forecasts are not limited in their value.  Forecasters have to make their own determinations of the factors just mentioned and then include those guesses into their models.  What we see is a growing belief that the war will continue for an extended period and is likely to ramp up.  And that is leading to more and more economists indicating that a recession within the next year is an expanding, if not likely, outcome.  Of course, on the other hand (hehe), a sudden end to the trade war would likely allow the economy to continue growing, though maybe not at a very strong pace.  Still, up is better than down.  So, my suggestion is that the president should simply declare victory and bring the troops home.

July Housing Starts and Mid-August Consumer Sentiment

KEY DATA: Starts: -4%; 1-Family: +1.3%; Permits: +8.4%; 1-Family: +1.8%/ Sentiment: -6.3 points

IN A NUTSHELL:  “With housing going nowhere and consumer confidence faltering, it is not a major surprise that investors are worried about the economy.”

WHAT IT MEANS:  The yo-yo markets have every reason to be bouncing around like crazy.  One day the president is General Lee sending General Pickett and his trade war troops straight up the hill and the next he is in retreat. It cannot be ruled out that Trump’s assault on China may end as ignominiously. 

The next year will determine if Trump and Lee have something in common.  For now, all we can do is look at the data.  Today, the numbers are housing starts and consumer sentiment.  Starts dropped in July and the decline was in three of the four regions.  Only the West posted a rise and that was relatively modest.  However, to confuse matters, permit requests surged.  For the three months ending July, permits are 4.6% above starts and that points to a rebound in construction over the next few months.  That said, it looks as if home construction has largely stabilized and with sales pretty much flatlined as well, there is little reason to expect starts will jump either. 

Meanwhile, the consumer is beginning to get a little antsy about the trade war.  The University of Michigan’s Consumer Sentiment index tanked in the first half of August and the biggest reason given was the trade situation.  According to the report, “Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports, spontaneously cited by 33% of all consumers in early August, barely below the recent peak of 37%.”  Both the current conditions and expectations indices declined.MARKETS AND FED POLICY IMPLICATIONS:  The next FOMC meeting is September 17-18 and there is lots of new data that may – or may not – provide some clarity on where the economy is headed.  The Fed, regardless of what it says, is no longer data dependent.  At least not data that have to do with the U.S. economy, which may be moderating but is not faltering.Instead, it is being tossed around in the same way as investors by the president’s tweets.  The trade war is what concerns most Fed members; at least I think that is the case.  We haven’t heard a lot from them lately.  The Fed has to guess what the president is actually going to do, when he will do it and what those decisions, whatever they are, will mean for the U.S. and world growth.  In other words, the Fed is flying blind. What it has going for it is an economy that is still in pretty good shape.  What it has to worry about is a faltering Chinese economy that is starting to impact other countries around the world and a potential all out trade war.  The longer this goes, the less the Chinese have reason to settle before the 2020 election.  President Xi has to weigh further economic pain over the next fifteen months against a possible Trump re-election and uncertain policies afterward.  As President for Life, he has some flexibility to take the pain for potential long-term gain.  If that happens, the Fed is in a total bind.  It would have to cut rates significantly to have any chance of improving the economy and even then it is not clear if aggressive action would do much.  If Chair Powell continues on his race back to zero, what does he do then?  For several years now, I and many other economists have warned that the Fed needs to get rates back up to more normal levels so it has the ability to fight the next war/recession.  Does anyone believe they succeeded in doing that?  With such great uncertainty over what Trump will do next, it should surprise no one if we continue to see wild swings in the stock and bond markets.

July Employment Report, Consumer Expectations and June Trade Deficit

KEY DATA: Payrolls: +164,000; Revisions: -41,000; Private: 148,000; Unemployment Rate: 3.7% (Unchanged); wages: +0.3%/ Confidence: +0.2 point/ Deficit: down $0.2 billion

IN A NUTSHELL:  “Job growth is right where it was expected to be and with confidence remaining high, the only concern remains trade wars, which look to be heating up again.”

WHAT IT MEANS: The normally highly anticipated jobs reported was released today and it came in almost at the exact number that forecasters anticipated.  In July, a moderate number or workers were added to the payrolls.  Clearly, that means it is a wrong number (drum roll). Actually, it is pretty much where job gains for this entire year were predicted. In other words, this was a ho hum number.  But there were reductions in the reported gains for May and June’s big rise turned out to be good not great. The three-month average is now below expectations.  As for the report, manufacturing job increases were surprisingly good.  The problem is that the retail sector just keeps contracting and given the structural changes in the sector, that should continue.  Unfortunately, warehousing and transportation are not picking up the slack. With firms not hiring few temporary help, we should not expect a sudden surge in hiring. As for the unemployment rate, it was stable.  The labor force rose solidly but as is usually the case, a lot of those entrants had trouble finding positions right away.   The participation rate edged up but it has remained in a pretty narrow range this year.  Finally, wages were up decently but not strongly.  However, hours worked declined and that does not bode well for overall income gains.  If incomes don’t keep rising solidly, consumption will have to moderate and that has been the sector shouldering the burden of growth.

As for the consumer, confidence remains in good shape.  The University of Michigan’s Consumer Expectations Index edged up in July.  The current conditions component eased but a rise in expectations overcame that decline.  Except for a steep drop early this year, the index has been in a fairly tight range for the past sixteen month.  That is good since the level is solid.

The trade deficit narrowed just a touch in June, which should be good news.  But both imports and exports were down fairly significantly and that is not a sign of either strong domestic or international demand.  Despite the President’s claims, farm exports, led by sales of soybeans, were up both monthly and for the year.  As one of my closest friends likes to say, “never let facts get in the way of bad policy”.  The biggest issues were sharp drops in vehicle, gem diamond and computer sales.  Energy didn’t play a large role in this report.  The petroleum deficit, though, was the lowest in memory.  That could easily turn next month, widening the deficit. 

MARKETS AND FED POLICY IMPLICATIONS:  Just a day after Fed Chair Powell talked about trade issues moving from boil to simmer, the heat got turned up again.  Nice call Jay.  Okay, it is unfair to knock the Fed Chair on a decision that was not expected at this exact time, though it was somewhat telegraphed.  The President complained that the Chinese were not buying our farm goods as promised, which for him is a political problem.  Of course it is an economic one as well, but the two have become one with this administration.  The result is that fundamental economic data that are not outliers are probably trees falling in a forest before measuring devices were invented.  When the tweet about more Chinese tariffs came out, the markets tanked and it looks like we are in for a long period of battles.  Ten percent is just the opening gambit.  Twenty-five percent is the next likely threat.  Ultimately, those tariffs/taxes on consumer of business goods will have to be passed on.  How would the Fed react?  Normally, I would argue that the Fed would see through the economic slowdown and any potential rise in prices caused by tariffs as being temporary.  But this is the Powell Fed and any one month of data matter, though which numbers and which month are unclear.  So, buckle up.  We have a volatile president and an unanchored Fed and what that means for the economy is anyone’s guess.  My new motto: “You tell me and we both know”. 

July Manufacturing Activity, June Construction, July Layoff Notices and Weekly Jobless Claims

KEY DATA: ISM (Manufacturing): -0.5 pt.; Orders: +0.8 pt.; Employment: -2.8 pts./ Construction: -1.3%; Private: -0.4%/ Notices: 38,845/ Claims: +8,000

IN A NUTSHELL:  “The manufacturing sector is not likely to do much until the trade issues are behind us.”

WHAT IT MEANS:  If you believe the Fed and Mr. Powell in particular, it is all about trade.  Trade wars are causing uncertainty, slowing world growth, U.S. business investment and exports and restraining manufacturing activity.  And there is little doubt that is the case.  In July, we saw that the industrial portion of the economy continued to moderate.  The Institute for Supply Management’s Manufacturing index eased to its lowest in three years.  Production and hiring increased significantly more slowly and order books thinned at a more rapid pace.  None of those are good signs and the modest increase in jobs points minimal help from manufacturing in tomorrow’s July employment report.  A similar measure, the IHS Markit Manufacturing Purchasing Managers’ Index, hit its lowest level in nearly a decade, so it does appear that manufacturing conditions have weakened significantly this year. 

Adding to the economy’s woes is the slowdown in construction, which declined sharply in June.  Most of that came from a large drop in government spending on education, highways and health care.  I guess we don’t need new schools, roads or hospitals.  But this report was not totally negative as private sector commercial and health care construction rose.  Still, commercial construction has not been great this year and there is little reason to expect that to change. 

As for the labor market data, the numbers did little to change the perception that conditions remain tight.  Challenger, Gray and Christmas reported that layoff notices continue to grow rapidly.  The weakest sector is industrial goods, consistent with the softening of the manufacturing sector.  The rise in unemployment claims last week only moves us back to more normal, but extraordinarily low levels.

MARKETS AND FED POLICY IMPLICATIONS: What will Mr. Powell and his band of monetary policy makers do next?  You tell me and we both know.  The economy is still expanding decently but the trade war issues are not going away.  With China showing it can be just as intransigent as Trump, don’t look for much to happen anytime soon.  The Chinese have decided to target agriculture and they are not buying our farm products.  How long farmers will be willing to stay on government welfare I don’t know, but it cannot be for too much longer. A lot of what is going on has to do with politics not economics, so the Chinese decision to hurt the politically important farm sector has to be recognized as an important factor in the negotiations to create true change in the bilateral relationship. Consequently, if a trade agreement with China occurs, it is likely to be mostly puff and little pastry.  But it would at least ease the uncertainty provide a short-term boost to growth.  Until then, the expansion should continue to moderate but not falter.  Chair Powell still claims the Fed is data dependent, which is hard to believe given the data didn’t support a rate cut.  I just don’t know what he is looking at and what he characterizes as weak enough to cut again.  If all he is worried about is world growth, he will probably get the data he needs to reduce rates again this year.  If growth and inflation are the keys, I am not sure the numbers will be as supportive.  And with the Fed clearly divided, forecasting what happens next has become a lot more uncertain, which is saying a lot given Mr. Powell’s penchant to change course on a dime.

July 30-31, 2019 FOMC Meeting

In a Nutshell:  “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate…”

Decision: Fed funds rate target range reduced to 2.00% to 2.25%.

As expected, but not universally agreed with, the Fed cut interest rates by 25 basis points – one-quarter point – for the first time in a decade.  That occurred despite an economic statement that was the same as in June and an economy where the data have been better than expected.

So, why did the Fed reduce rates now?  The key factors appear to be a fear of too low inflation that could lead to an extended, Japanese-style deflationary slump and worries about the world economy that were largely created by trade policy. 

On the inflation front, it looks like inflation expectations are the key. Fed Chair Powell recognized that 25 basis points will not cure the problem of below target inflation.  Indeed, it is fairly clear that a quarter-point cut will have limited economic impacts.  But he believes that image matters and the reduction in rates and the end of the quantitative tightening process (which was also announced), should provide the confidence that inflation will ultimately move back toward target levels.  I guess the Fed once again is putting its stock in jawboning, a strategy that hasn’t worked well in the past. He also noted that it might take longer to get back to target.  That was likely noted so he can buy the Fed more time.

As for the world economy, the idea of cutting rates was to take out some insurance against a domestic slowdown induced by the trade issues.  Of course, he did not indicate how a rate cut would accomplish that goal.  That’s because it cannot.

As for future rate cuts, he hinted that this was the start of a process, but he tried to make it clear it would not be a long process.  In other words, we should expect another rate cut, though it is not clear if that might happen at the next meeting or one a little later.  Of course, if we keep getting solid data, who knows what this Fed will do. 

So, what should we make of this move.  The Fed has now become the economic mouth that is trying to roar.  That is, he thinks that when the Fed talks, everyone listens.  They do, but do they believe in what the Fed is saying?  That’s unclear because rates are already low, global factors are beyond the Fed’s control and low inflation has been an issue for years now and small rate adjustments can accomplish very little.

But to me, the real problem is the markets.  The Fed became the drug dealer of choice when it implemented and more importantly, sustained quantitative easing.  But the junkies, i.e., the markets, are now controlling the drug dealer.  When the markets get starved for more opiates, they scream and yell and ultimately, the Fed provides the drugs.  It did that in two ways today, by lowering rates and ending QT early. 

It is likely the markets will soon start demanding more.  Indeed, the huge decline in the stock indices in the first hour after the announcement and during Mr. Powell’s press conference, as well as the rise in the dollar, seemed to say that one 25 basis point cut will not do it.  As addicts will tell you, they can never get enough and the Fed is opening itself up to that potential problem, especially if the trade negotiations with China drag on. 

If Mr. Powell wants to delude himself by continuing to make the argument that this is just a “mid-cycle adjustment”, then so be it.  But he is now at the mercy of a mercurial president, foreign economies over which he has no control and economic/inflation perceptions rather than economic fundamentals.  As Oliver Hardy liked to say: “Well, here’s another nice mess you’ve gotten (us) into.”(The next FOMC meeting is September 17-18, 2019.) 

July Private Sector Jobs and Second Quarter Employment Costs

KEY DATA: ADP: 156,000; Small: 11,000; Large: 78,000/ ECI (Over-Year): +2.7%; Wages: +2.9%; Benefits: +2.3%

IN A NUTSHELL:  “Despite decent job gains, worker compensation gains continue to fade, which is a real conundrum.”

WHAT IT MEANS:  Our illustrious Fed Chair is concerned about the economy and since growth has depended on strong consumer spending, the focus has to be on job gains and worker compensation.  In both cases, conditions remain solid, though not nearly as strong as one would expect.  Take payrolls.  According to the employment services firm ADP, private sector hiring was solid in July, though nothing spectacular.  The issue is with small businesses, which are hardly hiring.  These firms are being battered by tight labor markets, which make it difficult to find workers.  Small companies tend to have limited or no be benefits and need part-time employees and if workers can find full-time jobs with benefits, they will take it.  That is usually with larger firms, who are hiring at a strong pace.  Small businesses are also facing the reality that demand is shifting to online purchases, a place where they have significant problems competing.  So it is not a surprise they are losing out.  But the implication is that most hiring will occur at medium to large-size companies, a change from the past.  The hospitality, health care and administrative services sectors continue to add workers solidly, though manufacturing and mining have weakened.

With the supply of workers is constrained by the low unemployment rate, we should be seeing income gains accelerating.  That is just not happening.  Compensation is decelerating.  The Employment Cost Index rose at a solid but slower pace in the second quarter, marking the second consecutive quarter that worker compensation moderated.  Both wage gains and especially benefits increases have faded.  That is a real surprise, especially the sharp drop in benefits growth.  Anecdotal stories have it that firms are using lots of non-monetary inducements to keep or attract workers.  It could be that those benefits are not being captured by the government’s survey. Indeed, government benefits remain high and the public sector is limited in its ability to be imaginative in retaining and attracting workers.  So, we may be getting an incomplete picture of the compensation situation.MARKETS AND FED POLICY IMPLICATIONS: The Fed’s rate decision will be coming out soon so the markets will be focusing more on what is in the statement and what Chair Powell says at his press conference than on any economic number.  But the data don’t point to a faltering economy, only a moderating one.  With the economy expanding at trend growth in the second quarter and with inflation at a pace in excess of the Fed’s 2% target, there is no reason to cut rates. But Mr. Powell put the Fed into a straight jacket and he has to loosen it at least a little today.  Where we go from here, though, is the real question and given the rapidity with which Whiplash Jay changes direction, I have little idea what the next move will be.

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