November NonManufacturing Activity and Layoff Announcements and Weekly Jobless Claims

KEY DATA:  ISM (NonManufacturing): -0.7 points, Orders: -1.6 point; Employment: +1.4 points/ Layoffs: 64,797/ Claims: -75,000

IN A NUTSHELL: “The bad news on the COVID-19 front has yet to show up in the economic numbers.”

WHAT IT MEANS: The virus may be here, there and everywhere, but whatever negative impact that may have on the economy has yet to show up in the economic data.  The Institute for Supply Management’s NonManufacturing Index edged downward during November, but the decline was modest and the level remains quite solid.  The service segment of the economy has expanded for six consecutive months now.  Order demand was strong, even if it didn’t increase as fast as it been. Maybe most importantly, firms added workers at a greater pace.  That contrasted with the ISM manufacturing report, which had payrolls contracting. 

The better than expected news on hiring was supported by a very good initial jobless claims report.  The number of people filing for unemployment compensation fell sharply last week.  These data are volatile and large increases and decreases are not unusual, so let’s not go overboard on the decline.  Indeed, with the virus surging, it is unclear if that created issues for those wanting to file for unemployment checks.  Businesses are running out of stimulus money and our political leaders are fiddling around while firms and households burn and that points to rising layoffs and claims in the weeks to come.

Speaking of layoffs, Challenger, Gray and Christmas reported that workforce reduction announcements fell from October and it was the second lowest number this year.  Of course, that is the good way of looking at it.  When you compare it to last November’s level, it’s a different story: The number was up over forty five percent compared to November 2019IMPLICATIONS:Will the good news on the vaccine front outweigh the bad news on the virus and political front?  That is a good question.  At the rate the virus is spreading, hospitals across the nation could be overwhelmed by the end of the year.  And that will come when many workers on the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation programs start to lose their benefits.  The first provided benefits for people such as small business owners or gig workers who weren’t normally eligible.  The second provided extended benefits.  It’s estimated that about twelve million workers are at risk.  Would Congress and the president let that happen?  It is Washington and the next election is not for two years, so who knows what will happen?  Clearly, the so-called fiscal conservatives who found in the spring that the balanced budget idea was causing their poll numbers to become unbalanced, have suddenly rediscovered the joys of claiming we cannot afford a welfare system anymore.  Meanwhile, those that want to spend more continue to say no amount is too much.  Well, there is something between nothing and everything, but if you expect our fearless – or maybe feckless is a better term – leaders to do the right thing, you probably just fell off the turnip truck.  Maybe something will happen, but I am not overly hopeful.  But if no bill, or even a modest one is passed before January, don’t be surprised if the economy starts to stall.  But investors will likely assume eventually something will get done and if anything at all passes, they will probably celebrate like crazy.

November Manufacturing Activity and October Construction Spending

KEY DATA:  ISM (Manufacturing): -1.8 points; Orders: -2.8 points; Employment: -4.8 points/ Construction: +1.3%; Private Nonresidential: -0.7%; Private Residential: +2.9%

IN A NUTSHELL: “The feared economic slowdown is starting, but it is pretty slow off the blocks.”

WHAT IT MEANS:  The transition from the recovery boom to the more sustainable growth pattern that we should start seeing in the first half of next year is underway.  It looks like the brakes are being applied somewhat gently.  The Institute for Supply Management’s manufacturing activity index faded in November, but it did not crater.  Indeed, the level of activity, while somewhat slower than we had been seeing, is still pretty solid.  Yes, new order growth did moderate, but there is still a ton of demand out there.  That is true for exports and imports as well.  With order books filling a little faster, there is little reason to expect that production will be cut back significantly anytime soon.  The one concern in the report was in employment.  For the third time in four months, payrolls were reduced.  We get the October payroll data on Friday and it will be interesting to see if manufacturing gains are much more modest than they have been.  I suspect that will be the case.

Construction spending jumped in October, but it was all in the residential portion of the economy.  Excluding housing, private building activity declined.  Over-the-year, private residential construction is up a robust 14.5%, which offset the over eight percent drop in nonresidential activity.  Outside of warehousing, which is likely to build out given the further move toward online spending, I suspect that firms will be hesitant taking on any major expansions until the longer-term pace of economic activity is clearer. 

IMPLICATIONS: Right now, it is all about the vaccine, and the news is all good.  Doses should be reaching the public by the end of the year or early next year and vaccinations should ramp up as we go through the first half of 2021.  What needs to be seen is whether the public accepts the vaccine and doesn’t still think that politics is driving the delivery of the product.  The introduction of politics into the process created negative views on both sides of the political divide, but now that it is here, we could see attitudes change significantly.  But if we believe the scientists, and we should, it could take much of next year before the nation is largely immunized.  That would mean the number of cases and deaths are likely to be high through the first half of 2021 and restrictions will not be easing, let alone disappearing soon.  So, the economic moderation that I and most of my colleagues have been expecting is coming.  That, of course, seems to mean nothing to investors.  The markets went up without any hope of a vaccine, gains were sustained when the possibilities of one coming soon were raised and accelerated when the announcements were made.  When it comes to Wall Street, the pandemic was a nonevent.  For Main Street, it was hardly that.  Indeed, if we don’t get another significant stimulus package soon, with programs ending and restrictions rising, first quarter growth could disappoint.  But again, investors are looking through the first half of the year, so exuberance is likely to be sustained, even if most economists really have no idea what the second half of 2021 will look like. 

November Consumer Sentiment, October Income, Spending, New Home Sales and Durable Goods Orders and Weekly Jobless Claims

KEY DATA:  Sentiment: -4.9 points/ Consumption: +0.5%; Disposable Income: -0.8%; Prices: 0%/ New Home Sales: -0.3%; Prices (Over-Year): +2.5%/ Orders: +1.3%; Capital Spending: +0.7%/ Claims: +30,000

IN A NUTSHELL: “Rising unemployment claims and falling consumer sentiment may be the first signs that the virus surge is having a real impact on the economy.”

WHAT IT MEANS: Welcome to the day before Thanksgiving when the economic data tend to get dumped on us by the boatload.  And today was no exception.  Let’s start with the consumer related numbers.  The University of Michigan’s Consumer Sentiment Index fell moderately in November, led by a sharp decline in expectations.  I am not sure how to read the consumer optimism/expectations numbers at this time.  The election and its bizarre aftermath, where one group is convinced there was massive voter fraud and the other group is convinced that those who believe those claims are massively insane, makes it likely we are seeing political reactions that in the past rarely led to any real economic follow through.  Indeed, the report noted that: “For the first time since Trump entered office, Democrats rather than Republicans held a more optimistic economic outlook”.  But people also did indicate they are being affected by COVID, so there are some real concerns out there – and there should be.

Indeed, the second consecutive weekly jobless claims increase is something that needs to be watched closely.  There is every reason to think that the rise will continue, even if it does not do so on a consistent basis.  With virus cases at record highs, with Thanksgiving likely to worsen things and with hospitalizations and deaths surging, mass vaccinations of the population cannot come too soon.  But it will be months before that happens and in the interim, restrictions are likely to accelerate, even in states that were unwilling to do anything in the past.  Those restrictions may not happen until their hospitals run out of room and deaths jump, but that, unfortunately, looks like it is coming. Don’t be surprised to see not only rising new claims, but also increasing continuing and total claims for the next few months.

And then there is there is the consumer.  Consumption rose solidly in October, but again, the data are hard to read.  Amazon Days were in October not July and seasonally adjusting that change is, of course, impossible.  But given the timing, households may have done their holiday shopping that week, so don’t assume spending will be great this year.  One reason for concern was the sharp drop in disposable (after-tax) income.  The big decline was in government assistance and there is no reason to think another stimulus bill will be coming anytime soon.  Worse, it is unclear how much additional spending can pass the Senate, so we could have a either gridlock or a disappointing new round of stimulus.  Consequently, the income just may not be there to spend a lot this holiday season. 

Still, the fundamental economy remained in really good shape in October.  Not only did consumption jump, but so did durable goods orders.  There was a decline in vehicle and machinery demand, but Boeing is back in business and that helped.  Most importantly, the measure that tracks private sector capital spending posted another big gain, indicating that businesses remain optimistic about the future.

Finally, the sector that has been leading the way, housing, continues to be strong.  Yes, new home sales eased back in October, but given it was 41.5% above the October 2019 pace, I think developers will take it. 

IMPLICATIONS:  The question is no longer whether the recovery will slow, it will.  The real issue is by how much will it decelerate.  The longer the virus naysayers keep refusing to take even the basic step of requiring masks, the longer and deeper will be the resurgence.  The numbers are staggering but people still don’t believe them.  It isn’t “fake news”, a term that is likely to cause chaos in this country for years to come.  Maybe the best news is that few are using that term to describe the vaccines that have been announced.  Large numbers of people indicated they would not get vaccinated, but it appears that science may actually be winning the day.  That would be refreshing as it has been quite a while since the data were believed by many people and politicians alike.  That said, we don’t really know how the long it will take before a large enough segment of the population is inoculated so that the virus risk is greatly limited.  It does not look like that would happen before the spring, at the very earliest, so growth going forward is likely to be disappointing.  On that uplifting note, let me conclude by saying:

Have a safe, healthy and happy Thanksgiving!

October Existing Home Sales and Leading Indicators, November Philadelphia Manufacturing Activity and Weekly Jobless Claims

KEY DATA:  Sales: +4.3%; Over-Year: +26.6%; Prices: +15.5%/ LEI: +0.7%/ Phil. Fed (Manufacturing): -6 points/ Claims: +31,000

IN A NUTSHELL: “The economy keeps rolling along, though we do have to watch to what impact, if anything, the surging virus has on the labor market.”

WHAT IT MEANS:  There are few signs that the economy is doing anything but expanding solidly, at least through October and into early November.  The housing market remains on fire.  Existing home sales rose solidly in October, and it is likely that the increase would have been a lot greater if there were any homes left for sale.  The sales pace is back to where we saw it during the housing bubble, which is worrisome, at least if you are an economist.  The inventory is at a record low, when measured by sales rate.  And sometimes, economics actually works.  The lack of supply and robust demand has caused prices to skyrocket.  Can you say housing bubble?

The Conference Board’s Leading Economic Index rose strongly in October, matching the large gain posted in September.  In other words, there are no signs of a major, or maybe even a minor slowdown.  Obviously, we will not see growth in the fourth quarter anywhere near the 33% third quarter gain, but it should strong when you consider what would be a normal strong level.

On the manufacturing front, the Philadelphia Fed’s survey of manufacturers’ index eased in the first half of November.  But the level is still quite high for just about all components.  Maybe most importantly, firms increased their hiring.  The expectations index dropped more sharply, and a growing percentage of firms indicated that activity could decline in the next six months.  But again, optimism is still quite high.     

Initial claims for unemployment insurance rose last week, breaking a string of four weeks of steady decline.  However, one week does not make a trend.  Since the weekly claims number peaked at the end of March, the decline has been steady but broken frequently with a few weeks of increases.  We would have to see about a month of increases before it might be concluded that the labor market is starting to weaken. 

IMPLICATIONS:  For most politicians COVID-19 is like the weather: They like to talk about it, but they don’t do anything about it.  However, with the virus running rampant, some political leaders are starting to take tentative steps to reimpose restrictions.  Those actions are hardly universal, and the public is clearly suffering from Covid-fatigue and is either unwilling or unconvinced of the need for new restrictions.  Thus, we will not be facing anything like what happened in the spring.  Nevertheless, the steps to reduce virus cases, hospitalizations and deaths are likely to cause workers to be laid off, unemployment claims to rise and long-term unemployment, which is already rising, to increase even faster. The question is, how much will the government actions impact the economy going forward?  Despite the number of deaths, politics seems to be the driving force in how the problem is being handled.  And yes, vaccines are coming on board.  But they will do little to slow the spread for at least three to six months.  Is stronger action, such as requiring masks (if you even think that is strong) needed?  Of course.  Will most governors or mayors take any major action?  I doubt it.  And you can be sure the federal government will not take the lead.  So, the number of deaths will likely jump over the next few months. To put things in perspective, here are some cities where the number of deaths from COVID-19 has equaled or exceeded their population (from largest): Buffalo, Winston-Salem, Richmond, Boise, Baton Rouge, Birmingham, Salt Lake City, Tallahassee, Providence…         

October Employment Report

KEY DATA:  Payrolls: +638,000; Private: +906,000; Retail: 104,000; Restaurants: +192,000; Construction: 84,000; Temporary Help: +109,000/ Unemployment Rate: 6.9% (down from 7.9%); Participation Rate: +0.3 Percentage Point

IN A NUTSHELL: “The virus may be raging, but it hasn’t stopped firms from hiring.”

WHAT IT MEANS:  You know those stories about the moderation in hiring?  Well, not so fast.  The economy added a ton of new workers in October.  Yes, the headline number was somewhat less than in September, but that was due to the Census ending.  Government employment plummeted.  The private sector, meanwhile, continued to hire like crazy.  Over the past three months, firms have increased their payrolls by 2.8 million workers, a truly impressive performance.  And the gains were spread across the economy.  Not surprisingly, given the housing data, construction soared.  With vehicle demand and retail sales solid, manufacturing was up solidly.  On the services side, other than continued weakness in the airline industry and education, which is being buffeted by virtual leaning, there were few areas where jobs were lost.  Indeed, nearly 69% of the 258 industries posted payroll increases. 

But the real story was in the unemployment portion of the report.  The unemployment rate cratered and for all the right reasons.  The labor force grew, the number of people unemployed declined and the labor force participation rate popped.  That indicates workers are confident enough that they will find a position if they start looking and that when they do look, they are getting jobs.  The work week remained elevated and wages rose, though somewhat modestly.  The only negative in this report was that long-term unemployment is rising rapidly.  For those in sectors that are coming back or who worked in firms that are reopening, becoming re-employed has been relatively easy.  For others, though, their jobs are gone and getting new ones is becoming more difficult. 

IMPLICATIONS:  This was a big report.  The recovery in the economy and the labor market remained on track in October.  Can we keep it up?  It is all about the virus, not any underlying weakness in the economy.  A look at the details of the report points to good, but not great numbers in the months to come, especially if the virus keep raging through the country.  Can we keep getting massive increases in restaurant employment, or will new restrictions be placed on this sector.  With cold weather moving in, outdoor dining is going to disappear in many parts of the country and coupled with the restrictions that are not likely to be eased anytime soon, there could actually be a decline in employment in this sector.  Will housing starts keep rising so builders will continue to need more workers?  Retailers continued to open up, but will customers come into stores if the virus keeps surging?  And it is doubtful that temporary help firms can come anywhere near what they did in October.  That was just an outsized number.  So yes, the labor market improvement will continue, but the private sector has been adding workers at a pace that can only be reproduced if the reopening process continues unabated.  That is not likely.  Still, investors will probably love this report.  Anything that feeds the beast is embraced and this report has a lot of meat on the bone.    

3rd Quarter Productivity, Weekly Jobless Claims and October Layoff Announcements

KEY DATA:  Productivity: +4.9%; Labor Costs: -8.9%/ Claims: -7,000/ Layoffs: 80,666

IN A NUTSHELL: “The labor market is slowly improving, but we will get a better idea of where things stand when tomorrow’s employment report is released.”

WHAT IT MEANS:  The insane downs and ups in the economy have created massive economic numbers that need to be put in perspective.  Actually, I am not even sure what to make of these data.  Consider third quarter productivity.  It rose quite nicely, but not that much out of the ordinary.  So, why am I so crazy about the data?  Well, how does a 43.5% annualized increase in output and a 36.8% jump in hours worked strike you?  And then there was the 19.1% jump in manufacturing productivity after having declined by 14.3% in the second quarter.  Until we wash out the shut down and reopening data, some of the economic numbers will remain weird. 

Jobless claims declined modestly last week and that is the good, even if it would be a lot better if the numbers fell more rapidly.  At the current rate, we could see another three million workers lose their jobs this month.  But the total number of people receiving checks from all the programs keeps dropping solidly and now stands at 21.5 million.  Yes, that is incredibly high, but a month ago the number was five million more.  So, we are making progress. 

Challenger, Gray and Christmas reported that layoff notices fell sharply form September’s level.  That’s the good news.  The bad news was that it was over sixty percent above the number of announcements made in October 2019.  Several sectors, such as leisure and entertainment, energy services and transportation continue to cut workers significantly.       

IMPLICATIONS:  The Fed is wrapping up its latest two-day meeting and normally, the statement and press conference would be closely followed.  And they will, but given that the election outcome remains uncertain, whatever is written and said will likely go the way of the tree falling in the forest.  The course of fiscal policy could be significantly different depending upon who is elected and the composition of Congress.  The surprisingly strong performance of Republicans may move them back toward fiscal restraint, which they showed none of over the past few years.  That is worrisome since sometimes it does make sense to spend money and right now is that time.  I suspect that Fed Chairman Powell will make that clear when he holds his press conference.  But for now, let’s wait and see what the final election results look like and then start to ponder where the economy may go from here.   

September Durable Goods Orders, October Consumer Confidence and August Home Prices

KEY DATA:  Durables: +1.9%; Ex-Aircraft: +0.5%; Confidence: -0.4 point; Current Conditions: +5.7 points; Expectations: -4.5 points/Home Prices: +1%; Over-Year: 5.7%

IN A NUTSHELL:  “The manufacturing sector continues to hold its own.”

WHAT IT MEANS:  The momentum from the reopening of the economy doesn’t appear to be losing a lot of steam, despite a lack of stimulus.  Durable goods orders soared in September, but the headline number is a bit deceiving.  If you removed aircraft from the mix, since an order today usually doesn’t lead to much change in production for a while, you get a much more moderate rise.  And if you just exclude civilian aircraft, orders would have been down.  And it was not as if Boeing’s orders surged.  Instead, they went from cancellations to new orders and that added greatly to total orders.  The problem is that the details were quite mixed.  While demand for metals, motor vehicles and communication equipment rose, orders for computers, machinery and electrical equipment were off.  There was one clearly positive number in the report:  The proxy for business capital spending, nondefense capital goods orders excluding aircraft, increased sharply once again.  Businesses are investing.

The Conference Board reported that consumer confidence was down modestly in October.  However, there was a major break between the current and future conditions segments.  Not surprisingly, the current state of economic activity was viewed as getting better.  But the hopes for a strong future economy faded.  Consumers are beginning to worry that growth could get worse in the next six months and that could affect their spending decisions.

Another housing report, another blockbuster number.  The Case Shiller national home price index rose sharply in August and the year-over-year gain keeps accelerating.  Most of the twenty major metro areas posted gains.  The only outlier was New York.  The city’s housing market is being battered by the trend toward suburban living. 

IMPLICATIONS:Thursday, the first estimate of third quarter GDP will be released and the data all point to a massive rise.  The estimates range from about +25% to +35 and anything in that range will set a new record.  But that is last quarter’s news.  Where do we go from here?  That is less clear.  Housing is holding up and with mortgage rates at historic lows this sector should remain strong. But given how far it has come, can it grow a lot more?  That is doubtful without getting into a real bubble situation.  Job gains remain strong, but so are layoffs.  That points to slowing payroll increases.  And the stimulus money is running out quickly and if we don’t get something before the election, we may not get anything until next year.  But that is speculation.  The reality is that we haven’t seen any major softening in the economy.  Businesses are investing, consumers are buying, homebuyers are frantically looking for something to buy at any price and the government, well it’s the government so let’s not say any more about that.  Until the numbers actually start showing a slowdown, it has to be assumed that the fourth quarter will also be very good, but very good in traditional terms: Let’s say over 4% growth.  The wild cards remain the surging virus and the uncertainty about a vaccine.  That makes economic forecasting not much more than throwing darts.  I’ve decided to switch to my left hand, since my right has not done particularly well lately.   

August Trade Deficit and Job Openings

KEY DATA:  Deficit: +5.9%; Exports: +2.2%; Imports: +3.2%/ Openings: -204,000; Layoffs: -272,000; Hires: +16,000

IN A NUTSHELL:  “The skyrocketing trade deficit may not make a large dent in the record third quarter growth, but going forward it could be a real problem.”

WHAT IT MEANS:  The reopening of the economy has worked its magic on economic growth, but there is still one problem area for the economy, the trade sector.  The U.S. deficit with the rest of the world soared again in August.  Exports have begun to pick up, but imports are rising more rapidly.  Keep in mind; we buy well over twenty percent more goods from the rest of the world than we sell to those countries, so the difference in the growth rate is magnified.  The resulting monthly trade deficit was the largest since August 2006.  So far this year, the total trade deficit is slightly down, though given the recent trends and the continued economic weakness around the world, we will likely wind up with a widening deficit for all of 2020.  So much for trade wars and recessions narrowing the deficit.  The trade war didn’t help much on the export side and the recession only slowed imports for a few months.  Where the trade war seemed to make a huge difference was with the imbalance with China.  For the first eight months of the year, the deficit with China has shrunk by 16.5%.  But that was all in imports.  The hoped for bump in our sales to China that was supposed to come from the trade agreement signed earlier this year went the way of the longest expansion on record.  Instead, our sales to China are down a little less than one percent.  Don’t expect that to be made up anytime soon, if at all.  As for the impact on growth, it looks like the widening deficit could cut growth by well over one percentage point, but given that third quarter growth estimates range from the upper twenties to the mid-thirties, that will hardly make a dent in the historic number. 

As for the labor market, conditions are really good and today’s report did little to dispel that notion.  The Job Openings and Labor Turnover survey (commonly called JOLTS) indicated that openings fell in August.  However, the level is still pretty high.  Maybe more importantly, layoffs and discharges declined and are back to what we would see in a growing economy.  But workers don’t feel a whole lot confident as quits declined as well.  The quit rate is pretty low. 

IMPLICATIONS:  Today’s reports basically confirm what we already knew:  The trade situation is bad and deteriorating further while the labor market situation is getting a lot better.  That means little for the third quarter but possibly a lot for next year, when growth rates will resemble more typical years.  The election could have an impact on our economic relationships not just with China but Europe and Mexico as well.  If Trump is reelected, you can assume that the trade wars we are running will be ramped up further.  Like most economists, I don’t think trade wars do anyone any good.  Companies are not going to come running back to the U.S. if there are countries other than China where they can produce their goods at a huge discount to the costs of U.S. manufacturing.  It would take massive subsidies to get that to happen and I doubt a Democratic House would go for that. If Biden is elected, the pressure on China might ease up, but not go away.  Where it could get better is with Europe and especially the rest of Asia.  The TPP trade agreement, which actually made conceptual sense in that it was intended to isolate China from the rest of Asia and open new markets for the U.S., might be resurrected. Maybe we can bring home some of the critical products in our supply chain by passing laws requiring them to be produced here, but that will raise costs to U.S. companies and individuals that need those products.  Which means the government may have to subsidize their production and/or purchase.  Four weeks to Election Day and who knows how long afterward until we know who won.  Should be a very interesting month or two.      

September NonManufacturing Activity and Employment Trends and August Help Wanted OnLine

KEY DATA: ISM (NonMan.): +0.9 points; Orders: +4.7 points; Employment: +3.9 points/ ETI: +2.8%/ HWOL: +1.7%

IN A NUTSHELL:  “Another set of reports; more signs of continued recovery.”

WHAT IT MEANS: The good numbers just keep coming.  Today, the Institute for Supply Management reported that activity in the service and construction portions of the economy continued to improve in September. Sixteen of the seventeen industries indicated they expanded.  Only Professional, Technical and Scientific Services was down.  It is hard to explain why that one group didn’t follow the crowd, but it is rare to see any survey that everyone is on the same page.  Indeed, less than eight percent of the respondents said activity slowed over the month, making it clear that the expansion is quite broad based.  The details of the report were quite solid as orders rose sharply and employment moved from contracting to growing.  The one warning sign was that order books have pretty much stop fattening despite the solid increase in demand.  

The Conference Board released two labor market related measures today and both pointed to further gains for workers, though not as massive as they had been.  The Employment Trends Index, rose again in September as all eight of its components were up.  Clearly, the improvement in the employment situation is pretty much across the economy as we saw last Friday in the jobs report. That was the good news.  The less good news was that the index is about half of what it was in February, showing how far we still have to go to get back to where we were.

The second Conference Board release was its August Help Wanted OnLine Index, which posted a somewhat modest gain.  But don’t get fooled by the less than spectacular rise.  The measure is only about four percent below its high.  Firms are looking for workers like crazy, even with the unemployment rate near eight percent.   Job gains may continue to decelerate, but compared to normal times, they should still be strong for the remainder of the year. 

IMPLICATIONS:The labor market has done a lot better than expected since the economy has reopened.  Nevertheless, total nonfarm payrolls are still 10.7 million below the peak in February.  It could take another three years or more to get back to that level, assuming a moderately effective vaccine is approved and is widely available and accepted sometime during the first half of next year.  The economy is not going to fully reopen and indeed remains at risk, until the vaccinations are widespread.  Keep in mind, just because a vaccine is approved, that doesn’t mean large numbers of people will get the shot or shots immediately.  The CDC shot itself in the arm (pun intended) by giving the impression, accurate or not, that it was susceptible to political pressure.  That is likely to slow the acceptance of the vaccine and increase the time needed to get most of the population immunized.  Until that happens, the final stage of the reopening will take a long time and as we have seen from recent events, hot spots are likely to appear anywhere if not everywhere without the vaccine.  That implies job growth will slow as the easy part of the reopening is largely done.  Now comes the hard part: Finishing the reopening, weaning ourselves off government welfare and cleaning up the mess created as firms that have been hanging on give up.  And I don’t even want to think about what the election will bring. 

September Employment Report and Consumer Sentiment

KEY DATA:  Payrolls: +661,000; Private: +877,000; Government: -216,000; Unemployment Rate: 7.9% (previously 8.4%); Wages: +0.1%; Hours: +0.1 hour/ Sentiment: +6.3 points

IN A NUTSHELL:  “The private sector keeps adding lots of jobs as the reopening continues unabated – for now.”

WHAT IT MEANS: The employment rebound is still going strong.  Job gains in September were spread across almost the entire economy, as over 70% of the 258 industries posted increases in payrolls.  That is impressive. Not surprisingly, the largest rise was in hospitality, especially restaurants, which added 200,000 new (or returning) workers.  Retail came in second, again not a major surprise.  What was a shock was that a large percentage of the increase was in clothing stores.  I guess people are going out and buying work clothes again.  Reopening hotels also hired back lots of workers.  Other areas of strength were health care, as people are visiting their doctors again, warehousing, as the online sector only keeps booming, amusement parks and casinos and manufacturing, where both durable and nondurable goods producers expanded their workforces.  There were the usual suspect increases, such as a huge increase in social services and the special cases, such as public transit.  And finally, construction was up, but at a somewhat less than robust pace given what is going on in the housing sector.  The large drop in public jobs was due to the modification of the education hiring patterns.  August was up more than usual and those gains, and more, were unwound in September. 

As for the unemployment situation, the rate declined solidly once again, but not for the reasons we hoped.  The labor force and participation rate fell sharply.  A strong labor market normally draws in new workers.  You cannot make much of one month’s decline, but it is something to watch going forward. 

On the income front, wages increased minimally, but hours worked rose to a level seen only once before (this past May) in the 14½ years the measure has been in existence.  Firms are really working those they have hired back quite hard.

The University of Michigan reported that consumer sentiment rose moderately in September to the highest level in six months.  Expectations of future conditions were up somewhat more than the current conditions index.  Interestingly, the report noted that “the data indicate that lower income households face continued income and job losses compared with the modest gains expected by upper income households”.  That is, the recovery is not being spread evenly across income groups.  That is not surprising, though it is quite troubling.IMPLICATIONS:The recovery remains on track, even if the government is getting sicker and sicker (you can take that in any way you want).  Yes, the number of new positions added was below consensus, but there was a large upward revision to July and August, so the shortfall was not that great.  So, where do we go from here?  This morning, it is not as clear as it was yesterday.  The political and therefore business dynamic of saying that the virus is under control and businesses, such as restaurants, can reopen fully may change now that the president has contracted the virus.We have to see the blowback in places such as Florida, which declared victory and moved on, before we know if the reopening process will slow.  Given that we are starting to see a resurgence in the virus and that flu season is upon us, I think that is a real possibility. Going forward, payroll gains and the decline in the unemployment rate may be slower than expected and it could raise the importance of producing a vaccine that is widely available and accepted.  Will investors care?  Who knows?  Bad news has been discounted before and the link between the president testing positive and a potential slowdown in the recovery may be a bridge too far for many.

Linking the Economic Environment to Your Business Strategy