KEY DATA: ISM (Manufacturing): +1.6 points; Orders: +5.1 points; Production: +4.8 points/ Construction: -0.7%; Private Commercial: -1.3%; Private Residential: -1.5% 

IN A NUTSHELL: “Manufacturing is bouncing back but construction activity remains hit or miss.”

WHAT IT MEANS:Manufacturing continues to improve, which is good news for the economy.  The Institute for Supply Management’s Manufacturing index rose solidly again in July and the details were mostly very good.  There were strong gains in orders, and despite a jump in production, backlogs have started to build.  That holds out hope that activity will continue to improve in the next couple of months.  Firms are also beginning to regain pricing power.  About the only negative in the report was the employment index.  While it was up, the level remains in negative territory, meaning that jobs are still being cut, though at a slightly slower pace.  There are few signs that firms are adding lots of new workers and that is a reason to believe the next set of job reports could be disappointing.

Construction spending fell in June, which was not a surprise.  The sharp drop in private residential activity was greater than expected and with the general economy only starting to reopen, nonresidential commercial construction also fell sharply.  Until it is clear where we are going, which could be months given the surge in the virus, don’t expect construction to pick up significantly.  Governments just don’t have the money to spend and businesses are hardly going to expand greatly if they don’t know whether demand will be there to pay off the costs.     

IMPLICATIONS: Given where we ended the second quarter, it is clear that third quarter growth will be huge.  Maybe nowhere near the second quarter decline, but impressive nonetheless.  How impressive, remains a question.  The next economic bailout bill is still to be passed and there are still people waiting for the checks they were supposed to get in the spring and workers who just cannot get on the unemployment rolls despite being unemployed for weeks.  The cut in the unemployment payments created by the political gridlock and miscalculations could show up in spending fairly quickly, but the rebound once the checks go out will likely take a lot longer.  So, August could be an ugly monthunless something happens in Washington soon – like two weeks ago.  Despite the fact that the economy cannot stand on its own, investors will probably continue assuming that Uncle Sam the Candy Man will continue providing everything needed.  And they could be right, at least until the election is over.        

KEY DATA:  IP: +5.4%; Manufacturing: +7.2%/ Import Prices: +1.4%; Fuel: +21.9%; Export Prices: +1.4%; Farm: +1.4%/ HWOL: +5.2 points/ Empire State: +17.4 points; Expectations: -18.1 points

IN A NUTSHELL:  “Manufacturing continues to improve as the vehicle sector starts to return to normal production levels.”

WHAT IT MEANS:  One thing about math, you can get some very amazing changes when you start with very low numbers.  Industrial production soared in June as the manufacturing sector reopened.  Leading the way was the vehicle sector, which had shut down almost completely in April.  Plants started reopening in May and then ramped up production in June to such an extent that half of the total manufacturing production increases in those two months came from rising assembly rates alone.  It is not clear that sales will continue to jump, so don’t expect the July vehicle or manufacturing numbers to look nearly as strong as they were in May and June.  Still, the story was not just SUVs.  Every single manufacturing group posted a gain in June.  That rarely happens.  Warm, not hot weather led to a surge in utility production, but oil and gas drilling continued to shut down.

Import prices, which had also cratered in March and April, are starting to rebound.  But most of the gain came from the recovery of energy costs.  Few other sectors showed significant gains.  With imported food costs rising modestly, there could be some easing in the price pressures that we have seen in consumer prices.  On the export side, farmers got some decent increases, but their prices are still down sharply over the year.

Firms are starting to hire again and that means they need to advertise, at least a little more.  The Conference Board’s Help Wanted OnLine index rose solidly in June and was back to 2017 levels.  That said, it remains well below the peak posted in January.

Not surprisingly, the New York Fed’s Empire State Manufacturing Index jumped in July.  This is a diffusion index, which we know changes dramatically with the economy reopening.  So let’s look at not just the index, but for me the key number, those reporting “lower”.  For the general business conditions, employment, production and new orders indices, that number remains in the mid-20% range.  That is still high.  The jobs index itself was largely flat while hours worked were still falling, though modestly.  Worse, expectations are beginning to react to the surging virus and are falling.

IMPLICATIONS:We are at a crucial point in the recovery.  The virus is getting out of control in a number of large states and new cases are even beginning to rise in most states that didn’t reopen early.  School openings are unclear, sporting events are being run without spectators, downtown office building remain largely ghost towns in many major cities and our politicians cannot decide what is the best way to proceed.  With federal guidance limited, local decision making down to school district levels is predominating.  The resulting patchwork process of safety and reopenings is showing signs of faltering.  I wrote in April that I expected a major decline in the spring quarter and a sharp, but not nearly as large rise in the fall.  That is likely to still be the case, though the third quarter gain could be less than many had hoped for.  It will still be record-setting, but not the nearly twenty percent rise that many forecasters expect (Blue Chip consensus is roughly 18%).  Forecasting economic data these days is much more daunting than in the past.  Even then, I often just had my award-winning cat pick a number.  As an economist who is a member of just about every major forecasting panel, I have to come up with numbers each week.  But truthfully, most of us are largely guessing.  Thus, when markets move on results that are above or below expectations, those reactions are irrational since the numbers often are based on models that don’t work well under the current circumstances.So, try not to get too excited by what seem to be good numbers or too distressed by bad ones.  Over time, we might discover that they were neither that strong nor that weak. 

KEY DATA:  CPI: +0.6%; Ex-Food and Energy: +0.2%; Food: +0.6%; Energy: +5.1%/ Real Earnings: -1.7%; Over-Year: +4.3%/ NFIB: +6.2 points

IN A NUTSHELL:  “Inflation is not an issue unless you eat, drive and/or cool your house (yes, that is an oldie but goodie, but it still works).”

WHAT IT MEANS:  Almost fifteen years ago, I used the comment above to criticize the Fed for saying that inflation was not an issue if you exclude food and energy.  That caught the eye of at least one member of the Fed, Janet Yellen, who kidded me about it at a program where I received a forecasting award.  Well, sufficiently chided, I stopped using the phrase, but it is worth trotting out again.  For the most part, inflation is quite tame, as we saw in the June Consumer Price Index report. But as anyone who buys food knows, the costs of eating at home continue to rise pretty sharply.  They jumped again in June and are up 5.6% over the year. Meat, poultry and fish costs are up double-digit over the year, but most other food prices rose sharply as well.  Being the one who does the shopping in the house, I can testify that costs are surging and the supply chain remains frayed as well.  As for energy costs, the rise looks high, but prices are coming off the shutdown lows and they are still at moderate levels.  What was most outrageous was the June surge in cake and cupcake costs. I just don’t know what to do.

Though real earnings, or income adjusted for price changes, fell sharply in June, the gain over the year remains extremely high.  But these data have to be put in context (as is the case with most of the numbers).  The average wage is a weighted by the numbers of workers in each category.  With the lower paid hospitality, retail and service firm workers bearing most of the brunt of the layoffs, the weighted average increased.  As the economy reopens and these workers return, the average wage should continue to decline.  Thus, this is one report that sometimes gets press coverage but these days it shouldn’t. 

Small business optimism improved again in June.  The National Federation of Independent Businesses’ index has increased for two months now.  Firms are starting to hire back their workers and hope to hire more and, not surprisingly, expect sales to improve in the future.  But this report also has to be viewed with some caution.  The economy is reopening and of course payrolls and sales are rising, as are hopes that will continue.  But this report does not tell us about the level of employment or demand.  It says things are getting better, which is good, but not how good things are.

IMPLICATIONS:  The June reports are looking a lot better, but they don’t include any impacts from the surge in the virus across the nation and the beginnings of the retrenchment in the reopening process.  It is not clear that the July employment numbers will reflect what is happening as they are collected the week of the 12^th and it may take a few weeks before the layoffs get measured.  That raises questions about what the July employment report will actually represent.  So watch the weekly unemployment claims and continuing claims numbers, as they are closer to real time measurements. If they start to rise again, and I expect that to be the case, then that will be an indication the recovery is slowing.  Another labor market issue to consider is the reopening – or not – of schools.  The timing, especially of hiring for the new school year, may impact the August data.  What I am saying is that the numbers may be collected correctly but they could be largely irrelevant.  That is what happens when you have huge changes occur in short periods of time.  When you couple that with the indices, that reflect direction not magnitudes, it is clear that we are flying somewhat blind right now.  We know things are getting better, but there is likely to be some big bumps in the road coming.  But it is also hard to know how good – or bad – things are and we may not know that for months.  So, don’t take the headline number seriously.  Look for trends and study the details, which is something I argue all the time but I felt needed to be reinforced right now.      

KEY DATA:  ISM (NonMan.): +11.7 points; Orders: +19.7; Employment: +11.3 points/ ETI: +3.8 points

IN A NUTSHELL:  “Economic activity is coming back, but the jobs situation may not be as rosy as the employment report suggested.”

WHAT IT MEANS:  The reopening is picking up steam and spreading across many sectors of the economy (the impacts, if any, of the surge in the virus are not in most of the current data).  The latest report to show a huge gain was the Institute for Supply Management’s June Nonmanufacturing Index.   Orders surged, backlogs finally began to build again and overall activity skyrocketed.  But let’s remember, this is another diffusion index and that means we are getting direction not magnitude.  Still, in this case, up is always better than down.  But the employment index showed how changes in the indices could be misleading.  The measure jumped in June but is still showing that firms are cutting their workforces fairly sharply.  A quarter of the firms laid off workers while only sixteen percent added to their payrolls.  That is not good news for future employment reports.

Indeed, the Conference Board’s Employment Trends Index, while rising, remained extremely depressed in June.  The level was still down over fifty-five percent from the February reading.  The report included this warning, which I agree with: “In response to (the virus) resurgence, many governments have delayed or reversed their re-opening plans, which could lead to lower hiring. Given the possibility of less recruiting and the fact that layoff rates remain high (emphasis added), the upward trend in the number of jobs may not continue. The unemployment rate may plateau or even increase in the coming months.”

IMPLICATIONS:  Things are looking up when it comes to overall economic activity.  That is not surprising given that we really didn’t start reopening the economy until early to mid-May.  Investors are eating up every one of these good economic numbers, even if they don’t necessarily say the economy is in good shape.  Actually, none of them say that.  But they point to better times ahead.  The only thing that could slow that progress is a resurgence in the virus.  Oh, right, that is actually occurring.  So, how are the markets reacting?  Virus? What virus?  Investors are running around, hugging each other and partying, all without masks.  Will that lead to a further market sickness?  Only if you believe markets are rational.  The recent Congressional Budget Office update on the economy forecasted that GDP would not return to the fourth quarter 2019 level until spring 2022.  That is in line with what I suggested three months ago.  It will not get back to maximum sustainable GDP, which is the trend level of full employment activity, for nearly a decade.  At the end of 2019, the economy was running above that level.  As for the unemployment rate, the CBO expects it will not fall below 6% until the very end of 2024.  It was 3.5% in February.  In other words, for a lot of workers, happy days will not be here again for a very long time.  There are significant challenges ahead, even abstracting any additional virus-induced problems.

KEY DATA:  Sales: +16.6%; Over-Year: +12.7%; Prices (Over-Year): +1.6%/ Phila. Fed (NonMan.): -3.6 (up 65 points); Business Activity: 7.3 (up 48.7 points)

IN A NUTSHELL:  “The leading light, housing, remains on a clear upward track.”

WHAT IT MEANS:  Yesterday, when the May existing home sales numbers came out lower than expected, I explained that the data were lagging in that they were closings of contracts signed in previous months.  I suggested we wait a few months to see how recent activity changes conditions.  Well, if the new housing sales numbers are any indication of the current state of the housing market, it looks like things are quite good.  Purchases, or at least contract signings, jumped in May with three of the four regions showing demand growth anywhere from 15% to 45%.  The only negative was in the Midwest, where sales fell.  It is unclear why demand was weak there, but it is also not unusual that one area differs from the others.  Still, there was one concern in the report: Inventory is extremely low and that could restrain sales, unless construction picks up.  As for prices, they rose, but only modestly.     

NonManufacturing activity picked up in the MidAtlantic area.  The Philadelphia Fed’s Index went from a record low to a nearly flat condition.  But remember, this is a diffusion index and it only shows direction, not magnitude of change.  Indeed, the negative index points to continued weakness in the economy, though the business index did show some gains.  That said, this was not a great report.  Orders are still falling sharply, order books are thinning and payrolls for both full-time and part-time workers continue to be cut.  Those details point out that changes in diffusion indices have to interpreted very carefully.    

IMPLICATIONS:  At least housing is in good shape.  With mortgage rates incredibly low and the Fed making sure there is plenty of money to go around (and around and around), as long as the virus doesn’t get totally out of hand, this sector should continue to do well.  For the next few months, as the reopenings continue, the darkest cloud is the virus surge in those parts of the country that didn’t have major problems early in the pandemic.  The virus sets its own conditions and even if areas don’t return to shut down status, a high level of cases would restrain a wide range of activities.  We still haven’t had a massive return of workers to downtown areas and high rises, especially in the hardest hit areas.  That could take months and it is unclear what will happen when they do return.  All those support businesses that depend upon office workers for their income are going to be stressed for a long time.  That means governments that depend upon tax revenues generated by those activities will continue to see shortfalls in income.  For example, the latest data from the City of Philadelphia has May tax revenues down 31.2% from the May 2019 level.  But investors see nothing but blue skies ahead and exuberance is hard to restrain.  In other words, equity prices are delinked from economics and the potential for earnings, and when that happens, forecasting the direction of the markets becomes even more difficult than forecasting the weather more than a few hours out. 

KEY DATA:  Starts: +4.3%; Permits: +14.4%

IN A NUTSHELL:  “The housing market is setting up to be the leading force in the recovery.”

WHAT IT MEANS:  One of the first sectors that was allowed to reopen was construction and we are seeing the positives of the decision to do that.  If you just looked at the construction numbers, you might not come to that conclusion.  Housing starts rose moderately in May, led by a major recovery in the West and a solid gain in the Northeast.  However, weakness persisted in the South and Midwest.  It was expected that starts would rise more, so this was a bit of a disappointment.  Indeed, if you compare the level of starts in May to February, you see a nearly 38% decline.  So why am I so upbeat?  Simple, housing permit requests are soaring.  They were up sharply in May and have are now about 15% below the February level.  That seems large, but it can be made up reasonably quickly.  More importantly, for the last three months, permits were running over fourteen percent above starts.  Builders are not wasting money on permits and the big gap points to a strong increase in construction over the next couple of months. 

Adding to the belief that the home construction and housing in general will be solid going forward was a report by the Mortgage Bankers Association.   As noted, “Purchase applications increased to the highest level in over 11 years and for the ninth consecutive week. The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence”.  That is very good news for builders, who seem prepared to meet the growing demand.    

IMPLICATIONS: The home construction segment still has a long way to go to get back to the pre-virus pace of activity.  But while other sectors, such as restaurants or manufacturing, may take a very long time to get there, the indicators are mounting that housing will be one of the first segments to recover.  Unfortunately, the depressed April and May starts numbers point to home construction restraining second quarter growth significantly.  On the other hand, if the permits/starts gap gets narrowed during the summer as expected, the sector could add greatly to third quarter growth.  The markets have rallied on what I call false positive reports.  Those are numbers that look great, but only because they started from such a low level.  With housing, while the levels remain lower than hoped for, supporting data argue for a major comeback that could get us within range of the February standard of comparison in a reasonable time period.  But it is really not clear that the economic data are the major drivers of the markets.  The Fed is buying just about anything that is being sold and that includes individual corporate bonds.  Mr. Powell has made it clear he doesn’t want to give up the gains – even as he claims he doesn’t target the equity indices.  Really?  It is best to watch what the Fed does, not what the Fed Chair says, as he doesn’t want to appear to be supporting the equity markets, which of course he is doing.  About the only thing he admits he cannot do is to get money into the hands of specific household groups.  So, he has strongly suggested that Congress get busy doing that.  Let’s see: The Fed is supporting the equity and bond markets and the government is supporting businesses and households.  Isn’t capitalism great?     

KEY DATA:  Sentiment: +9.1%; Current Conditions: +6.7%: Expectations: +10.9%/ Import Prices: +1%; Fuel: +20.5%; Food: +2.2%; Exports: +0.5%; Farm:-0.5%

IN A NUTSHELL:  “Households are feeling a little better about the economy, but they are hardly exuberant.”

WHAT IT MEANS:  To get the economy really going, we need households to start spending a lot more.  How they feel about things will be the key factor in consumption and confidence is rising.  The University of Michigan’s Consumer Sentiment Index rose solidly in the first part of June.  Households have seen the unemployment rate go down and they feel a little better about the labor market.  That said, this is hardly a “happy days are here again” report.  As the statement noted: “… few consumers anticipate the reestablishment of favorable economic conditions anytime soon. Bad times financially in the economy as a whole during the year ahead were still expected by two-thirds of all consumers, and a renewed downturn was anticipated by nearly half over the longer term.”  While uncertainty about the future is beginning to ease, it is still higher than it was at anytime during the Great Recession.  That raises questions about the willingness to purchase big-ticket items.  If we don’t see that happen, the recovery will be slower than hoped for.

As for inflation, import prices rose in May, but you can chalk that up to the rebound in petroleum costs and the continued increase in food prices.  Crude petroleum led the way, rising by over thirty percent.  Food costs were driven by jumps in meat and vegetable prices.  Excluding those two categories, the cost of foreign products entering the country fell slightly.  On the export side, the long-suffering farm sector took another hit as prices sold around the world declined again.  They are now off by 3.5% since May 2019.    

IMPLICATIONS:  There is no reason that inflation should surge, which is important as the Fed is embarking on flooding the economy with massive amounts of liquidity.  The energy price increases we have recently seen represent the ending of the price war between Russia and Saudi Arabia.  Prices should settle down now.  As for food, eventually the supply chain will start catching up and while we may see a few more months of elevated food cost increases, those should also move back toward more normal levels.  So the Fed has a green light to do whatever it wants to do – and from Chair Powell’s comments this week, it intends to do that.  Still, the Fed can provide only liquidity; it cannot get income into workers hands or convince people to spend.  That would require a combination of fiscal policy and improving consumer confidence.  From the Michigan survey discussion, it is clear that the threat of a resurgence in the virus continues to hang heavy on household thinking.  With so many states seeing an uptick in cases, the impact on confidence could offset, at least to some extent, the improvement created by the reopening of the economy.  Also, as we go through the summer, the income supplements are slated to disappear.  That raises questions about the ability of many households to keep spending even at their reduced pace.  Thus, there remain many uncertainties facing the economy. 

The markets have bought into the V-shaped recovery with no impact from a virus resurgence. But the extent of the right side of the V is in doubt.  Yesterday’s meltdown is an example of what could happen once the surge in job gains fades after the economy largely reopens and if the current uptick in cases accelerates and becomes more widespread.  The exuberance has taken us almost all the way back and it can have long legs.  Alan Greenspan gave his famous irrational exuberance talk in early December 1996.  The market (NASDAQ) kept going up for another 3.5 years. When the music will stop, if it ever will, is anyone’s guess, especially given all the liquidity the Fed is pumping into the system.  But as we saw on a number of occasions over the past twenty years, if it does, the impacts can be massive.    

KEY DATA:  Claims: 1.54 million (-355,000); Continuing Claims: 20.93 million (-339,000)/ PPI: +0.4%; Foods: +6.0%; Energy: +4.5%

IN A NUTSHELL:  “Layoffs are slowing, but the level of people still applying for unemployment payments remains incredibly high.”

WHAT IT MEANS:  Given the surprising May jobs report and the widespread reopening of the economy, the unemployment claims and continuing claims numbers have taken on new importance. New unemployment claims declined for the tenth consecutive week, which is the good news.  However, the number of people being laid off remains extraordinarily high.  There is really nothing good about having one and a half million more people becoming unemployed.   The number of workers who are receiving unemployment checks also fell, but the level remained above twenty million, a sign that the labor market is coming back but is still hurting.  The Bureau of Labor Statistics admitted that there was a misclassification in the data and the unemployment rate should have been a lot higher ion both April and May.  Once the reopenings are largely complete, or as complete as they will get, the claims numbers have to drop below 350,000 before we can have confidence that the decline in the unemployment rate will continue unabated.  Since that is not likely to happen for quite some time, the unemployment rate could remain in double digits for much of the remainder of the year. 

Wholesale prices jumped in May, which was a surprise.  What was not that great a surprise was the jumps in food and energy.  Meat shortages led to the wholesale price of beef and veal to surge by 69% and as every shopper knows, those costs have been passed through to the consumer.  Crude oil prices (West Texas Intermediate) jumped by almost 73% in May, so the wholesale surge in energy costs also made sense.  Excluding those two sectors, though, the prices of wholesale goods were flat.  On the services side, there really was minimal inflation pressure except from airlines starting to increase their prices from the rock bottom levels they had been. 

IMPLICATIONS: In May, for the first time since the unemployment numbers were created in 1967, the number of people receiving unemployment checks (continuing claims) exceeded the number of people unemployed.  That, of course, makes no sense since you have to be unemployment to remain on the unemployment rolls.  That is the clearest indication that BLS, which produces both of those numbers, got the May unemployment report wrong.  They admitted that the misclassification of data started in March and the unemployment rate was understated by one roughly percentage point in March, five in April and three in May.  Assuming that BLS will finally correct the classification process in June, you have to use an unemployment rate of approximately 16.4%, not 13.3%, when comparing the May to June numbers.  That would be the apples to apples comparison.  Given the size of the labor force, three percentage points means about 4.75 million workers have to come off the rolls before we can cut into the reported 13.3% rate.  That could happen in June, but it also means that the decline in the rate might be minimal. 

But the real news came from Fed Chair Powell.  His press conference yesterday was a classic two-handed economist approach.  On the one hand, he made it clear the Fed would be providing massive amounts of liquidity to the system for an extended period.  The Fed’s Summary of Economic Projections (SEP) table showed the funds rate at the current level through 2022.  But then he produced the other hand.  He noted that millions of workers might never return to their old jobs, implying that getting back to February’s 3.5% unemployment rate was not likely to happen for who knows how long.  It is likely that the unemployment rate will not get below double-digits until the last quarter of the year.  The GDP growth forecast, which showed solid gains the rest of this year and next, still implied that we would not get back to the 2019 fourth quarter level until spring 2022, two years from now.  And all that is occurring without any assumption of a second wave of the virus, which the FOMC did not discount in its statement.  Basically, Mr. Powell let everyone know that the Fed will do all it can, but the best it can do is limit the damage.  That is a sobering message for investors, who were assuming that everything is beautiful and the virus was a nonevent.  We will see if politics takes over the future course of fiscal policy, as it seems to be doing.  My concern has always been what will happen when the economy has to stand on its own.  Stretching out that time frame will be up to our political leaders, which means putting politics aside.  Good luck with that.