Category Archives: Uncategorized

August Durable Goods Orders

KEY DATA: Durables: 0%; Excluding Aircraft: +0.6%; Capital Spending: +0.6%

IN A NUTSHELL: “Businesses look like they are spending again and that is good news for future growth.”

WHAT IT MEANS: Corporate capital spending has been weak this year, in no small part because of the collapse of the energy sector and its related industries, but that may be changing. Orders for big-ticket items were flat in August, but that was due to a large drop in civilian aircraft demand. Of course, the 22% decline came after a 74% rise in July, so you can see why it is important to exclude aircraft, both civilian and defense, from the numbers. Doing so led to a solid increase in durable goods orders. That said, the details of the report were not that great as most of the gain came from two industries, motor vehicles and communications. The rest were down. But there was some truly positive news in the report. The best measure of business capital spending, which excludes defense and aircraft, posted its third consecutive rise. Total orders are down over the year, but the declines are slowing.

There was other data released earlier this week. Most notably, yesterday, the Conference Board reported that consumer confidence surged in September to its highest point since the recession. People are becoming more positive about the labor market. On the housing front, new home sales were off more than expected in August. They had jumped in July, so some give back was expected, but it was larger than forecast. Again, a lack of homes for sale continues to plague the housing market. That said, home price increases are not accelerating sharply. In July, the S&P/Case Shiller National home price index was up 5.1% over the year. That was a small acceleration from the 5% rise posted in June. Pricing pressures should continue to build as long as inventory remains low.

 MARKETS AND FED POLICY IMPLICATIONS: It looks like the Fed members are starting to send a loud and clear message that rates are going up. San Francisco Fed President Williams, a non-voting member, chimed in that the economy can absorb a rate hike, adding to the dissenting voices heard at the FOMC meeting. There were three voters who wanted to raise rates in September. As expected, Chair Yellen told Congress there was no set timetable for a rate hike. Given the number of times the Fed has come up to the edge of a hike only to back down, that was hardly news. But the recent data, though not great, are still positive enough to provide some reason to think the Fed feet of stone will start to shuffle back to the rate hike precipice. With the next FOMC meeting ending on November 2nd, only six days before the election, don’t expect anything to happen then. But December remains open. Of course, if the data don’t say go, the Fed won’t show, which is the problem with data dependency.

August Housing Starts and Permits and September Philadelphia Fed NonManufacturing Survey

KEY DATA: Starts: -5.8%; Permits: -0.4%/ Philly Fed: -0.7 point; Orders: -4.1 points

IN A NUTSHELL: “Moderating housing activity could add more angst to the Fed meeting.”

WHAT IT MEANS: The FOMC is starting its two-day meeting and the data-dependent diviners of our economic and financial future did not get particularly great news today. On the housing front, new construction activity eased more than expected in August. The fall off in housing starts was evenly split between the single-family and multi-family segments. But the regional changes were quite uneven. There was a double-digit decline in the South, strong increases in the Northeast and Midwest and a modest rise in the West. Since the South makes up about half of all home construction, weakness there can overwhelm gains in the rest of the country. As for the future, permit requests eased. Most economists expected a rise. Once again, a sharp drop in the South overcame modest increases in the remainder of the country. For most of this year and for the past three months, permit requests have lagged starts. That is not a positive sign for future construction activity. That said, the National Association of Homebuilders/Wells Fargo index surged in September. (This report was released yesterday.) The level is similar to what we saw in the 2000s when construction was booming. The homebuilders and the government seem to be on different pages.

Activity in the non-manufacturing portion of the Mid-Atlantic regional economy is expanding but not accelerating. The Philadelphia Federal Reserve’s September index of regional activity eased a touch as new orders slowed. There were some fascinating results in the components of the index. Firms expect to hire more full time workers but cut back on part-timers. I had noted that one way to deal with the dearth of available workers was to move part-timers into full-time positions and that could be happening. Also, while respondents were not very upbeat about the current state of their own businesses, their expectations of the future for both the region’s economy and their individual companies improved. This is a trend that has been underway for about six months and hopefully, reality will catch up with perceptions.

MARKETS AND FED POLICY IMPLICATIONS: With the Fed meeting going on, investors are will likely remain cautious until the statement is released tomorrow. The FOMC is not expected to raise rates but the members may finally indicate that they really do intend to raise rates and it might actually occur this year. The housing numbers are another reason for the FOMC to stand pat, though if you believe the homebuilders, conditions are changing. Of course, this is a Fed that sees a bad number and immediately scrambles for cover, so who knows what will happen. My thinking is that there will be a stronger statement about the potential for rate hikes and Chair Yellen will confirm that at her press conference. She will also leave an opening to do nothing, of course. My hope is that the data dependency aspect of their strategy will be downgraded. If that is the case, they will have more flexibility to do something even if the numbers are not supportive of that action.  

August Employment Situation and July Trade Deficit

KEY DATA: Jobs: 151,000; Private Sector: 126,000; Unemployment Rate; 4.9% (unchanged); Hourly wages: +0.1%/ Trade Deficit: $5.2 billion narrower

IN A NUTSHELL: “Given how robust job gains were in June and July, the August increase was quite decent, but the slower rise hung the Fed out to dry.”

WHAT IT MEANS: If Janet Yellen and her merry band of terrified rate hikers wanted a strong jobs report to give them cover to raise rates in September, they didn’t get it. That is not to say the jobs report was weak – it wasn’t. But the number of jobs added in August was well below the nearly 275,000 average for June and July and in this political world, that means it was disappointing. The reality is these data are volatile and given the outsized increases early in the summer, some give back was expected. That said, the report was just okay. Job losses in manufacturing were greater than forecast. The decline in construction payrolls, though, may be due more to a lack of skilled workers than the need to hire more workers. Construction is not faltering. And the sharp rise in local government hiring was strange because it wasn’t all in education. Schools are opening earlier, messing up the seasonal adjustments. But there was also a sharp rise in non-education local government workers, which may be signaling a come back in the financial position of this sector. The unemployment rate was stable as was the labor force participation rate. But hours worked were down and wages rose modestly, so there still is some slack in the market.

The trade deficit narrowed much more sharply than expected. There was a huge increase in exports but a decline in imports. Given the strength of the U.S. economy, weakness of the world economy and the relatively strong dollar, that pattern was also a surprise. Food exports led the way with soybeans being the prime mover. I guess the demand for tofu around the world is surging. We also sold more industrial supplies and vehicles, but demand for our capital goods was down. On the import side, food and industrial supplies demand rose but consumer goods, vehicles and capital goods imports were off.

MARKETS AND FED POLICY IMPLICATIONS: The jobs report was less than hoped for but probably as good as could be expected. Unfortunately, the nuance that the data are volatile and there is often some give back for outsized increases is rarely considered. This report was mediocre, but it was just one after two huge ones. That reminds us not to base economic judgment on the data from one month. Really now, was the job market booming in June and July only to collapse in August? Give me a break. Actually, 151,000 is well above the number needed to keep the unemployment rate moving down on a slow but steady pace. And let’s not forget that the closer you get to full employment – and we are nearly there – the more difficult it is to find workers. Adding to my belief the economy is in good shape was the greater than expected narrowing in the trade deficit. It is possible that trade could add to third quarter growth. If that happens, a 3.5% rate is hardly out of the question. But in this world of one number, the key number today was payrolls, which wasn’t nearly strong enough to give the Fed the cover it wanted (even if it didn’t need it) to raise rates in September. Right now, it doesn’t look like the next move will be before December. The Fed will likely miss a perfect time when there are no major negative issues worrying the world, which is different than the other meetings this year. With a rate hike likely out for September, investors will probably breathe easier.

August Private Sector Jobs, Help Wanted OnLine and July Pending Home Sales

KEY DATA: ADP: +177,000; HWOL: +1,900; Pending Home Sales: +1.3%

IN A NUTSHELL: “It looks like businesses are still adding lots of workers and with want ads high and home sales improving, all signs point to an accelerating economy.”

WHAT IT MEANS: If Friday is the government’s employment report, then Wednesday is when ADP provides some insight into what the private sector was doing on the hiring front. Right now, it looks like firms continued to expand their workforces at a solid pace in August. The employment services company ADP indicated that firms of all sizes hired. Interestingly, large companies are now in the market. They had been the weakest link in the labor market. Looking across industries, manufacturers remain cautious and construction firms seemed to contract. However, the service-producing sector is hiring very solidly.

Will hiring remain decent? It looks that way. The Conference Board’s Help Wanted OnLine measure was up minimally August after a solid rise in July. Ads, which had been declining for a few months, seem to have stabilized. Most likely, with so many positions going begging, companies are getting realistic about what can be filled and are advertising accordingly. Thus, the decline in ads we had seen didn’t signal any major drop in hiring and the current level implies that firms are still looking for lots of new workers.

Most of the recent housing data have been pretty solid and the National Association or Realtors’ July reading on future sales adds to the picture of an improving housing market. Pending home sales increased somewhat modestly in July and didn’t reach the high reached in April. But the level is solid and points to a continuation in the saw-tooth rise in existing home sales. Yes, demand did decline in July, but it should be up in August. Given that there is such a dearth of supply, that is good news.

MARKETS AND FED POLICY IMPLICATIONS: Fed members keep trying to tell us that “everything meeting is a live meeting”, so is a rate hike at the September 20-21 meeting really a possibility? It would take an awful lot of things to go not only right but better than right for that to happen, starting with Friday’s jobs number. My forecast is for roughly 170,000 new positions and an unemployment rate of 4.8%, down from 4.9%. Given that there were nearly 550,000 new positions added in June and July, the risk is that the payroll increase is lower than that I expect. Thus, if we see something north or 200,000, it would be huge. And if wage gains are up by 0.3% or preferably more, then we can start, and I underline start, to ask the question about a rate hike. Given the Fed members’ statements that one number doesn’t determine policy, an increase should require a lot more data than just strong employment numbers that say the economy is accelerating sharply, to support a move. Unfortunately, not a whole lot of August numbers – and obviously none for September – will be released before the next FOMC meeting. So yes, when it comes to the Fed, anything is possible, but right now, it is hard to see that it will do anything. I think they should. I think the economy is strong enough and has been strong enough the entire year to absorb another rate hike. However, after arguing for action for so long, I have decided to move to Missouri and say, “show me”. As for investors, with the jobs report looming and the potential for a surprise being great, they take strong stands at their own peril.

July Spending and Income

KEY DATA: Consumption: +0.3%; Disposable Income: +0.4%; Prices: 0%; Over-Year: +0.8%; Excluding Food and Energy (Over-Year): +1.6%

IN A NUTSHELL: “Households keep spending and hopefully businesses will follow their lead.”

WHAT IT MEANS: Atlas has some really broad shoulders. The U.S. consumer has been holding up economic growth for quite a while now and they have yet to falter. Consumption rose solidly in July, led by a surge in demand for durable goods. That was hardly a surprise, as we knew vehicle sales jumped. The robust pace posted in July will not likely be matched in August, but demand for light weight vehicles and trucks should add to growth this quarter. Demand for services was also up solidly. The one negative area was soft-goods sales and much of the decline came from a fall in prices of energy. That is already fading. Adjusting for prices, nondurable goods demand was down minimally. So far this quarter, consumption is growing at a 2.7%, which is pretty good given the huge 4.4% rise in the second quarter.

Can consumers continue to spend like crazy? Yes! Disposable income, which is what we have left after the government gets its hands on our income, rose strongly once again. Critically, there continues to be solid increases in wages and salaries. Much of that has likely come from the strong gains in payrolls rather than a rise in the income of those currently working. Still, money is money and the added funds will power spending going forward.

As for prices, inflation remained totally under control. Overall consumer costs barely budged and even over-the-year, they rose at a pace well below the Fed’s 2% target.

MARKETS AND FED POLICY IMPLICATIONS: Last week, Fed Chair Yellen pretty much made it clear the Fed would raise rates when the members were certain their expectations concerning the economy and inflation were being met and incoming data supported those views. So, how does today’s numbers fit into the Fed’s models? The same as it ever was (Yes, that was a Talking Heads lyric). The economy is in good enough shape for the Fed to increase rates. However, while the labor market is tight and wages are rising, it is not so tight that wages are soaring. And, inflation is lagging. In other words, the Fed can do whatever it wants to do. Unless we see another sharp increase in jobs in Friday’s jobs report and wage gains accelerate significantly, the Fed will not be pressured to move in September. The Fed will not know about third quarter GDP at the September 20-21 meeting. All they will have will be estimates that will not include any September data. So, a rate hike then would almost go against the members’ arguments that one number (in this case a jobs report) should drive policy. I would like them to move in September, but I still don’t believe there is a high probability that will happen, especially given the today’s mixed numbers. As for the markets, Friday’s employment release may keep people at their desks instead of getting a jump on the Labor Day weekend, but it will also keep traders cautious.

July Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Durables: +4.4%; Excluding Aircraft: +1.1%; Capital Spending: +1.5%/ Claims: -1000

IN A NUTSHELL: “Businesses are investing again and given that capital spending was the weakest link in the last GDP report, third quarter growth could be really strong.”

WHAT IT MEANS: Another day, another day of pretty good data. Business investment reduced growth in the spring by 1.7 percentage points. Much of that came from a reduction in inventories, but big-ticket spending was off solidly as well. It looks like that is reversing in the summer. Durable goods orders surged in July, helped by a huge rise in both defense and nondefense aircraft demand. But just about every other major component showed a rise, including computers, machinery, electrical equipment and metals. Vehicle demand was flat, but that came after a solid rise in June. Critically, nondefense, nonaircraft capital spending, which is the best indicator of private investment spending, rose for the second consecutive month. It hadn’t done that since January 2015.   Non-transportation backlogs built, a hopeful sign for future production.

Jobless claims edged down last week. Given we are at near record lows for labor force adjusted new unemployment applications, the drop is another sign that the labor force is tightening further. The insured unemployment rate, which is the number on unemployment insurance as a percent of those who are covered by unemployment insurance, is near its all-time low. This number peaked at 5% in May 2009 and is now at 1.6%. That is another indicator of the labor market’s tightness.

MARKETS AND FED POLICY IMPLICATIONS: Businesses are starting to loosen the purse strings. I have argued that there is a major disconnect between the C-Suite and Main Street and maybe that yawning chasm is starting to narrow. If so, economic growth could start accelerating. Housing starts have started off the quarter strongly and that sector should add to growth as well. So, it appears the economy is indeed beginning to pick up some speed. Of course, after three consecutive quarters of roughly one percent growth, any decent expansion would look great. With the economy looking like it could post a 3% or more growth rate in the third quarter, Janet Yellen, who talks tomorrow, will have to explain why rates should not be raised. There are three more FOMC meeting this year but one comes the week before the election. This skittish Fed doesn’t seem to be willing to do anything that might make anyone upset, so a rate hike at the November 1-2 meeting looks unlikely. Thus, if the Fed stands pat after the September 20-21 meeting, they will have to wait until mid-December. By then, there should be a whole ton of issues that arise that cause fear and panic at the Fed and convince the members that raising rates a whole quarter point would crush the world economy. In other words, if this Fed is to raise rates, it really should start doing it right away, before the next “crisis” occurs. I cannot wait to hear Chair Yellen’s talk.

July Retail Sales and Wholesale Prices

KEY DATA: Sales: 0%; Excluding Vehicles: -0.3%/ PPI: -0.4%; Excluding Food and Energy: 0%

IN A NUTSHELL: “The consumer paused in July and with price pressures soft, the Fed members will probably gain a few more grey hairs.”

WHAT IT MEANS: The consumer has been the rock on which the economy has depended for its modest growth. Well, it looks like households went on a July vacation. Retail sales went nowhere and even that result was due largely to solid vehicle demand. Excluding that segment, demand declined. The spending malaise spread across the economy.   Clothing, gasoline, food both at home and away, building materials, general merchandise, electronics and appliances all posted declines. We did buy a lot online and some more furniture, but that was it. Core sales, which best mirror the GDP numbers on consumption and exclude gasoline, vehicles, building materials and food services, were flat as well. That said, these data are not price-adjusted. We know that gasoline prices were down and it wouldn’t be surprising if clothing costs also dropped. So don’t write off the consumer just yet.

If soft consumer spending was not enough of a concern for the worrywarts at the Fed, they also have to deal with soft wholesale prices. Producer costs were down in July, led by drops in both food and energy. Excluding those components, prices still went nowhere. Even services, which had been rising sharply, posted a decline. It’s hard to explain this sudden turnaround, so we need to be a little cautious in the interpretation of the numbers. It should also be noted that the path from producer prices to consumer prices is not straight and often a dead end. Looking forward, there is some pressure at the intermediate level for services and some goods, so future reports may not look this weak.

MARKETS AND FED POLICY IMPLICATIONS: Consumer spending has been robust and once in a while, households do cool their spending. Since this has been a really warm summer, spending on air conditioning is likely to be high and that is in the services component, not retail sales. So don’t assume that there will be a weak third quarter consumption number just because a non-price adjusted retail sales report came in below expectations. Still, the Fed members are afraid to come out from under their rocks until growth is sustainably solid and inflation in near or at their target, and today’s reports don’t provide them with any comfort that will happen soon. As for investors, they should be concerned about the soft consumer demand but happy about a Fed on hold. Which one drives the markets is anyone’s guess, but as an investor, I would really like to see better profits that are driven by stronger sales.

Second Quarter Productivity and July Small Business Optimism

KEY DATA: Productivity: -0.5%; Labor Costs: +2%/ NFIB: +0.1 point

IN A NUTSHELL: “With businesses failing to invest in either capital or labor, it should not be a surprise that productivity is weak.”

WHAT IT MEANS: You have to spend money to make money and businesses are doing neither. Capital spending has been down for three consecutive quarters and firms are doing all they can to keep wages down. While that may keep quarterly earnings from totally falling apart, it is also causing efficiency, both in the short run and ultimately the longer-term to be weak. Productivity fell for the third consecutive quarter as output rose less than hours worked. Even though wages rose at a modest pace – and adjusted for inflation they declined – labor costs were up nonetheless. Increasing labor costs and falling productivity is never a good combination for firms.

Small business optimism rose a touch in July, according to the National Federation of Independent Businesses. That said, the level remains well below the long-term average, so we cannot say that small business owners are ebullient. Actually, they seem to be moving forward only cautiously. Hiring is getting better, but barely. The biggest problem remains qualified workers, though the firms don’t seem willing to pay up to attract them. Investment doesn’t look like it will grow strongly anytime soon. Basically, as NFIB Chief Economist Bill Dunkelberg commented, “small businesses continue to be in maintenance mode”.

MARKETS AND FED POLICY IMPLICATIONS: What kind of thinking is it if you keep doing the same thing and you get the same result? Yet business executives keep on doing the same thing: They are not investing in anything. They seem to be caught in one of those infamous vicious cycles: Earnings are weak so capital spending gets cut, which reduces productivity, so earnings soften, which causes wage increases to be limited, which further reduces productivity, which … Get the picture? But, of course, it is all about the next quarter’s numbers, so the idea of spending your way out of the problem by investing in capital and labor is not on CEOs or CFOs option list. But the problems that this failure to invest are creating are not just in the here an now. Potential GDP growth is being reduced. What will change the negativity into a positive cycle? Hard to know as the C-Suite lives in its own strange world. But the Fed has to be concerned about this as it limits the ability of the economy to rebound from the sluggish growth pattern it has been in. As for investors, it is the issue of quarterly earnings reports that, at least in part, is the problem with corporate spending. But they keep demanding performance now and as long as that continues, we will have periods like this where we seem to be going nowhere and with no solution in sight.

July Employment Report and June Trade Deficit

KEY DATA: Payrolls: 255,000; Private: 217,000; Unemployment Rate: 4.9% (Unchanged); Wages: +0.3%/ Trade Deficit: $44.5 billion ($3.6 billion wider)

IN A NUTSHELL: “Dear Fed: Wake up and smell the job growth.”

WHAT IT MEANS: Maybe it’s not morning in America, but the coffee is brewing and jobs are being created. After one poor employment report, the consensus was that the economy had stalled. I said at the time: “Take a deep breath, breathe slowly and don’t panic”.   I hope you did because businesses are adding lots of new workers. The July payroll increase was not only well above expectations, but it was strong across the board. No major sector posted a decline. Almost 64% of the industries added workers, a very high percentage. Over 54% of the manufacturing industries, the economy’s weak link, added employees. Construction companies and temp help agencies were up solidly and retailers are bringing on workers to meet the strong demand. Even the government is back in the hiring business after cutting back for so long. Wage gains were strong. The labor force and participation rate increased. Even the flat unemployment rate is understandable given the surge in the number of people looking for work. Good paying jobs, mediocre paying jobs and low paying jobs all were up. In other words, there was almost no weakness in this report, which is largely unheard of.

The trade deficit widened in June as imports rose faster than exports. That shouldn’t surprise anyone since the U.S. economy is still the best industrialized one in the world. Of course, given the huge jobs numbers, this number is a tree that fell in the forest. It was nice to see that we continue to sell more goods overseas and there were increases in consumer and capital goods and agricultural products. On the import side, demand for foreign consumer and capital goods was also strong.  

MARKETS AND FED POLICY IMPLICATIONS: I noted yesterday that even if the jobs report were much stronger than expected, the Fed would not take the bait. The report was much stronger than anyone forecast but all it is likely to do is get the Fed to focus on something else, such as wage gains or economic growth. On the wage side, there is a clear increase in gains but it is not yet threatening. So, Fed Chair Yellen can continue to claim the market still has some slack. Given the rise in the participation rate, that might be true, but there is not a whole lot of slack left. Also, job growth is likely to settle down into a 175,000 to 200,000 range over the remainder of the year, which will look a lot softer than the past two month average of nearly 275,000. I am sure some political wag will claim job growth is faltering, but that level is about as good as we can expect given the low supply of available labor – the unemployed and discouraged workers. It is also strong enough for the unemployment rate to fall every few months. So, while the economy is strong enough to absorb modest 0.25% rate hikes in both September and December, this Fed does not seem to be inclined to do that.   But we should expect to see the members begin the softening of the beaches process and it is best to assume that at we will get at least one rate hike this year.

July ADP Jobs, Supply Managers’ Non-Manufacturing Index and Conference Board’s Help Wanted Online

KEY DATA: ADP Jobs: 179,000/ ISM (NonManufacturing): -1 point; Orders: +0.4 point; Hiring: -1.3 points/ HWOL: +156,800

IN A NUTSHELL: “The July data are pretty decent, but we still have the big-dog, the employment report, on Friday.”

WHAT IT MEANS: It looks like the economy is continuing to grow moderately, despite what Fed members and skittish investors may think, and today data support that view. The key number this week, as it is every week it is released, is the monthly employment report. ADP’s estimate of private sector job gains points to a very solid number on Friday. It may not be nearly as strong as June’s number, but that just offset the oddly weak May number. What was nice to see was a fairly even distribution between companies of all sizes. Large firms had been doing very little on hiring front but that may have started changing. There were also decent gains in every industry except construction.

Adding to the belief that Friday’s number could be good was the sharp rebound in the Conference Board’s Help Wanted OnLine numbers. The labor market is not quite as robust as it was a year ago, but it is still tight and continues to tighten.

With manufacturing not doing much, it has been left up to the services and construction sectors to support growth. That is still happening. The Institute for Supply Management’s NonManufacturing index fell in July, but the level remains high. Only three of eighteen industries were in decline, with one of them being mining. Low oil prices continue to restrain growth. Importantly, orders grew faster. Whether it be manufacturing or nonmanufacturing, demand is growing strongly despite the declines in the overall ISM indices. Similar to the manufacturing report, hiring grew more slowly and that is a concern.

July vehicle sales look like they were pretty solid. What is amusing is that the rate, which was about 17.8 million units annualized, was not considered to be strong. It is and the reaction shows the failure to understand the difference between current levels and sustainable levels. The consumer is spending on big-ticket items and that is key to solid economic growth.

MARKETS AND FED POLICY IMPLICATIONS: The Fed didn’t raise rates in June because of a soft jobs report and uncertainty over Brexit. Then when the employment numbers rebounded and it became clearer that Brexit would not likely have a major impact on the economy, the members started saying they need stronger or even strong growth. While it is tough to hit a moving target, and the Fed’s target on what would get them to raise rates seems to move on a daily basis, the economy is trying to provide some basis for the resumption of the normalization process. Remember, we are talking normalization here, not jamming on the brakes. The data for July may not point to a “strong” economy, but they indicate growth is solid. For at least two years, the economy has been decent enough for the Fed to have raised rates periodically. The members have been disinclined to do that so they keep coming up with new excuses. A “strong” economy may be unreasonable and that may be the reason some of the members are now hinting at that requirement. Of course, that is today’s hurdle. Who knows what will be tomorrow’s – or after Friday’s employment report.