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January NonManufacturing Activity, Private Sector Jobs and Help Wanted Online

KEY DATA: ISM (NonManufacturing): -2.3 points; Orders: -2.4 points; Hiring: -4.2 points/ ADP Jobs: +205,000/ Online Ads: +13,500

IN A NUTSHELL: “The new year hasn’t started off with a bang, but more like a whimper.”

WHAT IT MEANS: The first data for 2016 are trickling in and while the economy continues to expand, there are no signs it is accelerating. The Institute for Supply Management’s January reading on the nonmanufacturing portion of the economy was disappointing. Business activity decelerated sharply as orders grew at a slower pace than in December. As a consequence, hiring activity moderated as well. With order books filling slowly, it doesn’t look like we are in for any major acceleration in growth in this, the largest portion of the economy, anytime soon. The only unknown in this report is how much the blizzard hurt activity. As a consequence, we need to be careful in getting too down about the weakness. That said, on Monday, the January Supply Managers’ manufacturing index was released and while it was a little better than in December, it too pointed to sluggish growth.

This being the first week of the month, it means that Friday is Employment Friday. ADP released its estimate of January private sector job growth and it was better than expected. Payroll gains were solid and spread across companies of all sizes and in almost every industry. The only weak link appears to be manufacturing, which we also saw in the Supply Managers’ report. Still, after huge gains at the end of last year, expectations are that the January numbers would be a lot lower. This report suggest hiring should be less but decent nevertheless.

Speaking of the labor market, The Conference Board’s Help Wanted OnLine measure rose minimally in December. Labor demand picked up strongly in the Midwest and West, more moderately in the South, but declined in the Northeast. Again, it is not clear if weather played a role in the drop.

January motor vehicle sales were released this week and they were up despite the blizzard. The economy may be slowing, but people are once again in love with new vehicles.

MARKETS AND FED POLICY IMPLICATIONS: The latest economic news hasn’t been great and investors are getting whipsawed. We are seeing more questions about Chinese and even Japanese growth. So, where are we? As long as jobs are being created and incomes are rising, households will keep spending. And that is likely to be the case. Businesses may be turning cautious, but if they are linked into the domestic economy, they should continue to hire and invest, at least if they are not part of the energy complex. Basically, there are more uncertainties out there and that is likely to cause the Fed to be cautious in their drive to normalize. Both the January and February jobs report will be released before the next FOMC meeting, so let’s wait a while before we conclude a rate hike in March is off the table. However, the probability of it occurring at that meeting has slipped.

December New Home Sales and 4th Quarter Workforce Vitality

KEY DATA: Sales: +10.8%; Year-over-Year: +14.5%; Prices (Year-over-Year): -4.3%/ Workforce Vitality (Year-over-Year): +4%

IN A NUTSHELL: “It was a great year for housing and workers didn’t do that badly either.”

WHAT IT MEANS: Looking at the two feet of snow in my backyard makes it hard to remember the December record warm weather, but today’s new home sales number brings that back into my mind. Builders ended the year on a major high as new home sales surged in December. While the wonderful conditions helped, another factor may have been at work: Consumer desires for more reasonably priced units were being matched by supply. Indeed, there was a sharp drop in median prices. The share of homes sold in the middle market, $200,000 to $500,000 jumped from 64% to 68%. In the $500,000 and up segment, the share fell from 16% to 13%. Basically, homebuyers seem to be losing a little of their desire to own the big, expensive McMansions. In December, the large increase was driven increases in all regions, though the gain in the South was modest. For all of 2015, sales were up sharply despite a double-digit drop in the Northeast. Roughly 20% increases in the South and West led the way, while new home purchases rose modestly in the Midwest.

I often note that the hourly wage data are confusing. They have not been around long enough to determine a trend. Worse, they are averages that are affected by the type of hiring that occurs. For example, a firm may be raising wages for their continuing workers but if turnover brings in new workers at lower wages, the math tells us that wages may not be rising much. So, how do we really determine what is happening? ADP’s Workforce Vitality report fills in some of the gaps. The overall index rose strongly over the year, but what was eye opening were the wage numbers. Though overall wages rose 2.1% over the year, wages for full-time workers who stayed in their positions jumped 4.1%. Full-time workers who switched positions saw their wages increase 4.7%. In other words, the headline number hides the extent to which wage pressures have built. And with the unemployment rate likely to fall to 4.5% or even lower by the end of the year, those wage pressures will only build further.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting today and will issue a statement soon. Those who worry about the equity markets expect the FOMC to back off their rate increase plan. But the economic data are okay. Yes, fourth quarter growth looks like it was soft, but let’s look at the composition when it comes out on Friday. Housing is solid, the consumer is buying lots of vehicles and the job market is strong. The U.S. economy is still solid and outside the energy sphere of influence, it is very good. Excluding energy, inflation is slowly accelerating even with the strong dollar. And the pressure on wages will only add to the belief that inflation will move back up to normal rates, especially when the oil price declines end. But the markets are focused on oil and to the extent that falling energy prices lead to falling stock prices, the Fed will have to decide how much the financial economy trumps the real economy. That will be true not just in today’s statement, but in comments the members will make going forward. I believe they should stay the course, but that is not a consensus view.

December ADP Jobs, ISM NonManufacturing Activity, Help Wanted Online and November Trade Deficit

KEY DATA: ADP Jobs: +257,000/ ISM (NonManufacturing): -0.6 point/ HWOL: -276,800/ Trade Deficit: down $2.2 billion

IN A NUTSHELL: “The markets may be worrying about China but investors have little cause to be concerned about the U.S. economy.”

WHAT IT MEANS: Tons of data were released today and they generally told a similar story: The U.S economy is just fine. Since on Friday we get the “all-important” jobs report, we should probably start with some estimates of what that number may look like. If ADP is anywhere close to the government’s number, the December jobs report be really good. The payroll services firm’s estimates of private sector growth have trended over time with the BLS data, but have been off quite a bit on a monthly basis. Regardless, the payroll gains were spread reasonably evenly across all sizes of companies. It was good to see large firms hiring again. This component had been pretty moribund during most of 2015. There was a surge in construction, but that may have been the result of the unseasonably warm weather.

Most people concentrate on manufacturing, but the real action is in the services sector, which is the biggest portion of the economy. Watching what happens there is critical to understanding the direction of the economy. The Institute for Supply Management’s December Non-Manufacturing Index declined to its lowest level in twenty months, but the details tell a different story. The measure of activity and production rose, as new orders, especially exports, grew faster and firms increased hiring. Firms got their products out the door faster and that drove down the index. In other words, the largest portion of the economy is doing just fine.

As for hiring, The Conference Board’s measure of help wanted online ads fell sharply in December. The data are volatile and smoothing them out, the trend is still up. Still, firms seem to have become a little more cautious as the number of new ads has pretty much stabilized.

On the trade front, the deficit shrank in November as both exports and imports fell. Interestingly, oil imports soared. Imports of cell phones fell by nearly 20%, but they have been bouncing around like crazy. On the export side, we sold less of most products except aircraft. Still, it looks like the trade deficit could narrow in the fourth quarter, boosting growth.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data may not have been uniformly strong, but they do point to a very solid economy. That seems to matter little to investors as worries about China and Korea and oil prices are overwhelming indications that the domestic economy is growing at a pace that will allow the unemployment rate to keep falling, and labor shortages to continue expanding. A year from now, the unemployment rate should be at or more likely below 4.5% and many parts of the country will be dealing with rates below 3%. A year ago I expected that 2015 would be the year of “take this job and shove it”. I was a year early. Turnover rates in some industries are rising already and should be increasing across most industries and occupations by the summer. Firms will have to make decisions about how to deal with increasing demand and a shrinking employment pool. That is the issue on which most U.S. firms should focus, not a slowing China or low energy prices.

November Retail Sales and Wholesale Prices

KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.4%; Control: +0.6%/ PPI: +0.3%; Goods: -0.1%; Goods Less Food and Energy: -0.1%; Services: +0.5%

IN A NUTSHELL: “The consumer appears to be in a shopping mood and that is good news for the economy and the Fed.”

WHAT IT MEANS: We may not be shopping ‘till we drop, but we are out there spending money. Retail sales were up modestly in November if all you do is look at the headline number. But as usual, the top line is very misleading. First, declining gasoline prices led to weaker dollar sales numbers, not necessarily weaker unit sales – the average price fell by 5.3% but total sales were off only 0.8%. Once again, vehicle sales were off a little, but it is hard to make the case that people stopped going to dealerships. The November sales pace was exceeded only a handful of times over the past forty years. Meanwhile, households bought electronics and appliances, clothing, sporting goods and most merchandise in general. We shopped online and when we were out, we ate out. And if we stayed in, we ate a lot also. In other words, we spent money. Adjusting the retail sales data so they better match up with GDP personal consumption numbers, the so-called Control Group, demand increased sharply.

On the wholesale inflation front, the divide between goods and services continued in November. Goods producer prices eased a touch, but the drop was the smallest in five months. When you exclude food and energy, the decline was minimal as rising food prices offset falling energy costs. Finished consumer goods prices less energy were up not just in November, but over the year as well. That is a potential sign the downward pressure on consumer goods prices may be fading. But the real pressures remain in the services component, which is roughly two-thirds of consumption. Service producer price increases appear to be accelerating.

MARKETS AND FED POLICY IMPLICATIONS: These reports, as well as an early indication by the University of Michigan that consumer confidence may be improving, buttress the Fed’s stance that it is time to raise rates and the economy can handle it. The one major restraint to growth is lower energy prices, which is causing major adjustments in that sector. In the short-term, those cut backs are overwhelming the slow adjustment to the lower energy expenses by consumers. Households don’t seem to be spending a whole lot of the added cash flow. But really, are there many people who are not linked to the energy sector that really believe that in the long run, the economy is better off with $100/barrel for oil than $40? I suspect that most Fed members realize that the adjustments in the energy-patch may be harsh, but they will fade. Meanwhile, the added money in consumers’ pockets will eventually find its way into the economy in a very broad based manner. There is nothing in the way of a Fed rate hike on Wednesday. I suspect the statement will focus on the FOMC’s expectations that future hikes will be slow, but we already know that. Slow, by the way, seems to be every other meeting. So, the real question is, when will the economy become strong enough and inflation high enough that Fed goes every meeting? If low rates are causing economic dislocations, a slow rise doesn’t help very much. Just ask Alan Greenspan.

November Employment Report

KEY DATA: Payrolls: +211,000; Revisions: +35,000; Unemployment Rate: 5.0% (Unchanged); Hourly Wages: +0.2%

IN A NUTSHELL: “There ain’t no stopping (them) now.”

WHAT IT MEANS: My apologies to Luther Vandross, but there really is nothing except a major crisis that will stop the Fed from its appointed first round of rate hikes. All it would have taken is a mediocre employment report to provide the necessary cover to raise rates and the November data were more than that. Job gains were solid and there were also upward revisions to both September and October. The three month average now stands at 218,000, which is quite good given that the biggest complaint businesses have is the lack of supply of qualified workers. And the increase came despite further cut backs in energy-related firms, weakness in clothing stores, a weird crash in the motion picture industry and a very strange reduction in the vehicle sector, which continues to set new sales records. And, we actually saw a decline in temporary help services companies! In other words, this report was probably even stronger than the headline number implies. Hourly wages rose but there was a small reduction in hours worked, which also seemed a bit strange.

On the unemployment side of the report, almost every component was solid. While the rate remained at 5%, there were strong increases in the labor force and the number of people employed. This led to a rise in the participation rate. While I don’t think much of it, the infamous U-6 rate, which includes all reasons for not having a job, did raise a tick. However, it is still down 1.5 percentage points over the year. The stronger labor market is curing lots of ills.

In a different report, the trade deficit widened in October, but the three-month average is still declining. In any event, today is all about the employment numbers.

MARKETS AND FED POLICY IMPLICATIONS: This report all but green lights the Fed. And it should. There really is nothing more to say other than reprint the Luther Vandross lyrics from the song, “Ain’t No Stoppin’ Us Now”,

Now, are y’all ready?
Are y’all ready?
Here we go now
Do it with the fever
Yeah, come on

Ain’t no stoppin’ us now
We’re on the move
(Hey-yeah, hey-yeah)
Ain’t no stoppin’ us now
We’ve got the groove

There’ve been so many things that have held us down
But now it looks like things are finally comin’ around, yeah
I know we’ve got a long, long way to go, yeah
And were we’ll end up, I don’t know
But we won’t let nothin’ hold us back
(Writer(s): Gene Mcfadden, John Whitehead, Jerry Allen Cohen, Copyright: Mijac Music, Warner-tamerlane Publishing Corp.)

November Manufacturing Activity and October Construction

KEY DATA: ISM (Manufacturing): -1.5 points; Orders: -4 points; Hiring: +3.7 points/ Construction: +1%

IN A NUTSHELL: “The lull in manufacturing continues even as other segments of the economy heat up.”

WHAT IT MEANS: This is the fall of manufacturing’s discontent. The Institute for Supply Management reported that in November, the industrial sector declined for the first time in three years. New orders and production turned negative after having also grown about three years. I guess all good things must end, though it is not nice to see this trend turn downward. Both export and import orders continued to slow, though the import cut backs are moderating. On the other hand, the employment index, which did dip into the red earlier in the year and again in October, rebounded. Manufacturing has been restraining the job numbers so maybe we will see an uptick in Friday’s employment report.

While manufacturing may be having issues, the construction sector is doing just fine. Construction spending jumped in October and the rise was spread almost evenly between public and private, residential and nonresidential. For the first ten months of the year, private construction is up 11.2% compared to the same period in 2014. The October level of total private construction was nearly 16% higher than last year’s pace. Once again, the increases were spread evenly between residential and nonresidential activity. That is interesting since some of the housing reports have been less than stellar. For example, yesterday’s National Association of Realtors’ Pending Home Sales numbers were up less than expected. The problem facing the housing market seems to be supply, but despite the solid construction numbers, there are still not a lot of homes, new or existing, that are on the market. It looks like 2015 will be a great year for builders and the good times seem to be getting better.

MARKETS AND FED POLICY IMPLICATIONS: While everyone likes to focus their attention on manufacturing, it is the services component that generates most of the jobs. Manufacturers employed less than 9% of all employees and just a little over 10% of private sector workers. The manufacturing job slowdown probably reduced the total average monthly job gains by less than 10,000 per month. That is a concern, but not so great that it changes the perception that the job market is strong. The real problem, as we all know, is in the mining/oil production sector. Despite the free fall in oil patch activity, total construction in the rest of the economy is doing quite well. That is what should be the take away and what the Fed members will likely consider as they barrel toward the first rate hike in two weeks (most likely). With the November jobs report being released on Friday, investors will probably assume today’s numbers changed no minds at the Fed and react accordingly.

October Income and Spending, Durable Goods Orders, New Home Sales and Jobless Claims

KEY DATA: Consumption: 0%; Income: +0.4%/ Durables: +3%; Excluding Aircraft: 0%; Capital Spending: +1.3%; New Homes: +10.7%/ Jobless Claims: -12,000

IN A NUTSHELL: “The economy is hardly a turkey so the Fed, which is fed up with low rates, will likely tighten the economy’s belt a little next month.”

WHAT IT MEANS: The day before Thanksgiving is when everyone dumps their data so they can get out early and today was no exception. Most of the reports were decent. Let’s start with the consumer. Households’ balance sheets are better as income is rising solidly. Most encouraging was a sharp increase in wages and salaries. The tight labor market, which got even tighter in October as claims were about as low as they get, is finally causing firms to raise compensation more rapidly. However, people aren’t out shopping until they drop or even until they are tired. They are spending money, but not at a great pace. The weakest segment of was durable goods demand, which is really nothing to worry about. October vehicle sales were one of the highest on record so we know consumers are more than willing to buy big-ticket items. Indeed, the added burden of monthly vehicle loan payments may be a reason that retail sales have not taken off despite the rise in incomes. But households are not stretched as the savings rate continues to edge up. We are approaching the 1990s savings rate. On the inflation side, prices rose modestly and when food and energy were excluded, they were flat.

Manufacturing has been a soft spot in the economy, but that may be changing at least a little. Durable goods orders rose sharply, but most of that was for civilian and defense aircraft. Still, orders for computers, communications equipment and machinery were up. Again, there was one very positive component of the report: Business capital goods orders rose strongly and it looks like the cut backs in investment may have ended.

New home sales surged in October – not really. There was a sharp rise in signed contracts but that was only because the September number was revised down. The October level was okay but not particularly great. This report, though, was weird. Demand in the Northeast jumped by 135% but fell slightly in the West. But the strangest number was medium prices: They fell, yes fell, by 6% from the October 2014 level. That makes no sense at all.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data did nothing but provide the Fed with more cover to raise rates in December. The only potential speed left is the November jobs report, which will be released on Friday, December 4th.   But that number would have to be almost catastrophic – i.e., negative – for the Fed to get worried. The markets are expecting a rate hike so a move shouldn’t cause that great a reaction. With growth exceeding potential, with wages rising more solidly and with businesses starting to invest again, there is lot for the economy to be thankful for. So, on that note let me say:

Have a wonderful Thanksgiving!

August Trade Deficit and Home Prices

KEY DATA: Deficit: $48.3 billion ($6.5 bil. wider)/ Home Prices (Year-over-Year): 6.9%

IN A NUTSHELL: “The stronger dollar is beginning to bite into exports and the trade deficit is soaring as a result.”

WHAT IT MEANS: When you have the one solid economy in the world and your currency is rising, you start to price your goods out of the market that is precisely what is happening.   U.S. exports fell sharply in August, declining by over 3%. The only category that posted a gain was capital goods, as aircraft shipments surged. Otherwise, we saw declines in sales of food, consumer goods, vehicles and industrial supplies. Oil was down, but that was more a price issue than a demand slowdown. Meanwhile, we bought a lot of goods from the rest of the world. Indeed, demand for almost everything except vehicles and petroleum rose. Looking across the world, it is hard to find a country that bought more of our products. But, lots of countries ramped up their sales to us. Not surprisingly, Chinese exports to the U.S. rose sharply while their purchases of U.S. products continued to decline. This is not a new trend: It has been going on for about a year now. Actually, that is a pattern that has emerged with other major trading partners such as Mexico and Canada.

While the world may be having issues, the U.S. economy, especially the housing market, is not. CoreLogic reported that home prices surged 1.2% in August and were up by nearly 7% over the year. A growing number of metropolitan areas are now considered to be “overvalued”. The strong price increases are lifting a lot of boats from underwater to good condition. That should create increasing numbers of homes on the market and since inventory has been a restraining factor, sales should rise. But as more resales hit the market, housing starts increase and ultimately mortgages rise, the price increases should moderate.

MARKETS AND FED POLICY IMPLICATIONS: The U.S. is the market of last resort and foreign companies are shipping everything they can over here. At the same time, the dollar is creating pain for our exporters. Though trade should restrain third quarter growth, domestic economic conditions are still quite good. When you adjust for prices, exports may be slipping, but they are hardly crashing and burning. Firms are fighting hard to keep their share of the foreign markets. Also, housing remains quite strong. While others bemoan price increases, I keep arguing that people can sell their homes only if they have enough equity to allow them to sell. Nothing helps housing supply more than rising prices, so I am happy to see the increases and see that they are spreading across the nation. As for the markets, isn’t it great that the investors think bad news is good news? Who cares what that really means: All that matters is the Fed may put off raising rates and the liquidity will keep on rolling into the financial markets. Yes, I am being sarcastic. Do these data have any implication for Fed policy? Probably not. Former Fed Chair Ben Bernanke comments this week were taken to imply the Fed is on hold for a long time, or at least until the 2% inflation target is clearly in sight. Mr. Bernanke was a great crisis manager, but clueless about the economy when it was not in trouble. Remember, he claimed the housing bubble was slowly deflating. Enough said.

September ADP Jobs Estimate and Help Wanted Online

KEY DATA: ADP: 200,000; Manufacturing: -15,000; Construction: +35,000/ Help Wanted: -138,500

IN A NUTSHELL: “Job growth looks like it is still strong so the softening in want ads is somewhat puzzling.”

WHAT IT MEANS: Friday we get the September employment report and unless there is an outsized number of positions added and the unemployment rate falls below 5%, it will not likely cause anyone to think the Fed members would consider raising rates at the next meeting. That said, it could be solid enough to bolster the belief that the FOMC will actually do something, other than creating confusion, at the December meeting. ADP estimated that the private sector added new positions at a solid but not spectacular pace in September. While the manufacturing sector is being buffeted by the fall in energy prices and the rise in the dollar, construction seems to be taking off. There was an oddity that bears watching: The largest firms are the ones hiring. That had not been the case for quite some time. On the other hand, small business job gains were modest. This segment had been critical to sustaining the solid payroll increases we have been seeing. Why this pattern, which is opposite to the norm, occurred in September is anyone’s guess.

While hiring continues unabated, firms seem to be more cautious in advertising their open positions. The Conference Board reported that online help wanted ads fell in September. The level is still really high, so don’t take the decline as indicating the labor market is weakening. But we seem to have hit a lull in the growth of new ads. Firms may be realizing that if they cannot fill the openings they have already posted, there is no reason to advertise lots of new ones. Where are the new jobs? Not surprisingly, in computers, health care and management.

MARKETS AND FED POLICY IMPLICATIONS: The labor market continues to be strong and we are likely to see that on Friday. The consensus is for about 200,000 new positions being added and the unemployment rate staying at 5.1%. That would signal that conditions are solid, even if payrolls gains are not quite as strong as they were last year. Basically, the report would be the equivalent of “more of the same” which for the Fed means they don’t have to make a decision right away. As for investors, they are probably just glad to see the quarter end and hope that the final quarter will be better. Since the expectations are for a non-market moving report on Friday, other factors, such as oil, commodities and international issues should dominate, at least until 8:30 AM on Friday. The one warning I have is that the jobs data tend to have periodic surprises. We haven’t had an outsized move, be it on the upside or the downside, for a while. If I had to guess, a surprise would be on the upside, but I have been too optimistic for several months so I am not putting my estimate where my fears are.

September Consumer Confidence and July Home Prices

KEY DATA: Confidence: +1.7 points; Current Conditions: +5.3 points/ Home Prices: +0.4%; Year-over-Year: +4.7%

IN A NUTSHELL: “Despite the volatility in the markets, households are still confident, which means they should keep spending heavily.”

WHAT IT MEANS: When the University of Michigan’s mid-September reading on consumer sentiment was released, we saw a sharp decline. But that may have only been due to the shock of the wildly fluctuating stock markets. The final reading for the month was u from that initial level and that trend was reinforced as the Conference Board’s Consumer Confidence Index rose in September. People tend to spend money when they are comfortable about their current situation, especially their jobs, and they expect their incomes to grow. That is pretty much what the report indicated. The Present Situation Index jumped and the percentage of people saying they expect their incomes to rise in the next few months also was up solidly. There is some concern about the future, though. Whether that is due to the stock market declines or some issues finding jobs is not clear.

The data on the housing market remain solid. The S&P/Case Shiller national home price index rose moderately in July and over the year, it is up at a pace that is not excessive. That is not to say that there aren’t housing price surges occurring in some parts of the nation. Since July 2014, prices rose by double-digits in San Francisco and Denver and by 6% or more in Dallas, Portland, Las Vegas, Los Angeles Miami and Seattle. The national index is now only about 7% below the peak it reached in February 2007.

MARKETS AND FED POLICY IMPLICATIONS: We tend to watch the train wrecks, not the trains that merrily roll along and that seems to be the case right now when it comes to the economy. While some firms that have been battered by weak commodity prices are cutting back, the rest of the business sector is merrily rolling along, adding jobs, expanding output and making money. However, the losers seem to be setting the tone of the discussion. But you don’t get 3.9% GDP growth one quarter and have that followed up by something in the 2.5% range that is the current consensus for the third quarter if most firms are not doing well. And should we really worry about firms that might have had decent foreign sales but because of currency translation issues, their reported earnings are down? I don’t think that really matters, except for some quarterly numbers. Consumers are holding in there and that is driving domestically-oriented business activity. The economy is in good shape, no matter what is happening in Wall Street and I suspect the Fed members recognize that. Indeed, the Gang that Can’t Communicate Straight seems to getting its act together as another FOMC member, San Francisco Fed President Williams, has come out and indicated he thinks rates should rise this year. The ducks are getting in line, even if there are still some who are off on their own. While the markets expect a rate hike next year, most economists are now in the December camp, and that includes me.