KEY DATA: Sales: +2%; Prices (Over-Year): +6%/ Phil. Fed (NonMan.): -10.7 points; Orders: +6.9 points; Hiring: +5.8 points

IN A NUTSHELL: “The strongest housing market in nearly a decade is another clear sign this economy is in solid shape.”

WHAT IT MEANS: I know that in four years, America will be great again, but right now, it is not that bad. The National Association of Realtors reported that in October, existing home sales hit their highest pace since February 2007. The increases were spread fairly evenly across the nation, which points to a broad based expansion in the housing market. Condo sales were flat but single-family activity, which is about 90% of the market, was up decently. With demand rising, not surprisingly, prices were also up solidly. The price increases were similar for both single-family and condos. The supply of homes on the market is still relatively low and that points to further strong gains in prices.

The Philadelphia Federal Reserve reported that nonmanufacturing activity in its district continued to expand in November, but at a muted pace. This report was actually quite solid. New order growth accelerated sharply, as did sales, and firms were able to push through solid price increases for their own products. As a consequence, hiring of both full-time and part-time workers picked up quite nicely. In other words, the details were really good even if the headline wasn’t.

MARKETS AND FED POLICY IMPLICATIONS: The housing market has recovered and is nearing a more reasonable level of activity. Construction and sales are back to 2007 levels and we don’t need a whole lot more to get to levels that are consistent with long-term trends. Indeed, don’t look at 2005 as a standard: One bubble was one bubble too many. Can the market continue to improve now that interest rates are moving upward? Undoubtedly yes. First of all, rising rates tend to get the attention of fence sitters, who actually have to now start making decisions. The rising prices should allow those that didn’t have enough equity to start putting their homes up for sale, boosting inventory. And really, a 4% mortgage rate just isn’t very high. In 2005, at the peak of the housing boom, mortgage rates averaged nearly 6%. In the 1990s, when home sales were strong, mortgage rates hovered around 7.5% – and that is when 20% down payments were the standard! We have been spoiled and buyers will just have to get used to more normal levels of rates. Yes, some may not be able to get a mortgage, but prices will adjust, so I don’t expect a significant dislocation in the housing market even if rates rise another one percent. Of course, I am biased (or dumb), as my first mortgage was 17.5%. I did get a great price for the house, though. Barring something unexpected, the Fed is raising rates on December 14^th. With rising long-term rates telling the Fed that inflation is going to accelerate and with the possibility that expansionary fiscal policy, which once was a dirty phrase to the Republicans now becoming a mantra, the economy, inflation and interest rates are all slated to accelerate. And the Fed needs to get going before it is way behind the curve.  

KEY DATA: Payrolls: +161,000; Private: 142,000; Revisions: +44,000; Unemployment Rate: 4.9% (down 0.1 percentage point); Wages: +0.4%/ Trade Deficit: $36.4 billion ($4 billion narrower)

IN A NUTSHELL: “The tightening job market is finally showing up in higher wages, which should make Janet Yellen and lots of workers happy.”

WHAT IT MEANS: Not that facts matter to politicians, but the last major economic report before the election, the October employment report, was really good. Yes, total payroll gains were a little less than expected, but there were significant revisions to the previous two months. Over the past three months, job increases averaged 176,000, which is clearly enough to keep the unemployment rate filtering downward. The October rise was driven by solid increases in the service-producing sector. Health care and professional and business led the way. In contrast, retailers reduced their payrolls. This sector usually adds 20,000 or so jobs and the decline was a major reason this report was only solid, not strong. In addition, manufacturing continues to hemorrhage positions. The recent reports from the Institute for Supply Management point to stabilization in hiring, so hopefully that number will be flat or even positive in the months to come. Government payrolls swelled at both the federal and state and local levels.

With firms adding more workers, the unemployment rate ticked downward. The so-call “real” unemployment rate, which I call the “really stupid” unemployment rate, hit its lowest level since spring, 2008. It is also not far above the average during the last expansion, so it cannot be said (even if it will be) that the unemployment rate is still high. You can see that in the hourly wage gain, which was quite strong. The 2.8% increase over the year was the highest in this expansion.

The trade deficit narrowed sharply in September, which was a surprise as well. Exports rose and imports fell. This report could lead to an even smaller trade deficit for the third quarter, so don’t be surprised if the first revision to the report shows that growth was above 3%.

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report, especially when you consider the upward revisions to August and September. Of course, politicians live in their own reality, which sometimes bears no relationship to the world or even galaxy that the rest of us live in, so the spin on this report should be fascinating. That said, I have noted in the past that we needed at most 150,000 jobs per month to keep the unemployment rate falling and we are above that. The three month average, which smooth’s out the volatility in the data, is about as good as can be expected given the tightness in the labor market and the inability of firms to find qualified workers to hire. And with the hourly wage number beginning to accelerate, the Fed will have all the cover it needs to raise rates in December. Of course, the November jobs numbers come out before the next meeting, so I cannot say with any level of confidence that the FOMC will indeed tighten next month. But barring a financial market melt down as a result of the election, look for that to happen.

KEY DATA: ISM (Manufacturing): +0.4 points; Orders: -3.0 points; Hiring: +3.2 points/ Construction: -0.4%; Private: -0.2%

IN A NUTSHELL: “While the manufacturing sector continues to rebound, non-residential construction remains in the doldrums.”

WHAT IT MEANS: The FOMC meeting is today and tomorrow morning and the incoming data are not likely to change any minds. The Institute for Supply Management’s reading on October manufacturing activity index rose in October, its second consecutive increase. The malaise that gripped the sector in August seems to have dissipated. The details don’t tell a particularly consistent story. While production and employment expanded faster, new orders grew more slowly and order books thinned. The decline in orders occurred in spite of rising export and import demand. Strangely, there is a growing inability to get goods out the door. So, what exactly is happening is unclear, but it does look like this sector is not only growing again but is likely that activity is accelerating.

The oddities in the manufacturing sector may be, at least in part, a function of the issues in the construction sector. Total construction spending fell in September, but the major problem was nonresidential activity. If businesses are not building, demand for the goods that go into the construction process and into the offices and plants is not going to increase either. Key segments, such as office and manufacturing, were down. The government was also doing its best to keep growth from accelerating as it too cut back spending on almost every major category. Thankfully, there was some rise in highway construction and health care. On the other hand, residential construction spending rose solidly. Residential investment was down sharply in the initial GDP estimate and I wouldn’t be surprised if that was revised to show a much smaller decline. CoreLogic reported that home prices rose sharply in September and are up 6.3% over the year. It was also noted that “home-equity wealth has doubled during the last five years”. That should mean more homeowners can list their houses for sale, which should lead to greater sales of both new and existing homes, even if price increases slow going forward.

MARKETS AND FED POLICY IMPLICATIONS: The only major number that left to be released before the Fed issues its statement at 2:00 PM on Wednesday is the ADP October private sector job gains estimate. But this is not a government figure and it can differ sharply from the Bureau of Labor Statistics number. In other words, the economy we already see is the economy the FOMC members will be discussing. There is nothing that screams, “raise rates”, and it is highly unlikely the Fed will do that. With the October employment report coming out on Friday and the election next week, there is no reason to go out on the limb. Look for the statement to hint at a December rate hike. The strength of the hint will determine the reaction of investors. But given the political mess, I am more interested in what is said in the first set of Fed members’ speeches after the election than in tomorrow’s statement.

KEY DATA: Consumption: +0.5%; Disposable Income: +0.3%; Prices: +0.2%; Excluding Food and Energy: +0.1%

IN A NUTSHELL: “Incomes are rising and people are spending that money.”

WHAT IT MEANS: On Friday, we saw that the economy grew at a solid pace during the summer, though consumption increased more moderately. Today, we got the details on how spending was distributed over the third quarter. It was a roller coaster ride, driven in no small part by vehicle sales. July was a pretty good month as people bought lots of goods and services. A solid rise in vehicle demand did help things out. But in August, despite continued spending on services, a cut back in vehicle sales led to consumption actually dipping. Well, that decline was reversed quickly enough as vehicle and services spending popped again in September. Why am I spending so much time on that pattern? Simple, the Fed claims it watches incoming data. Well, the incoming data can be volatile, so watching any month’s numbers is a dangerous thing to do. What we learned from the September report is that household are buying goods and services, except maybe some soft-goods, at a moderate pace.

What happens to consumption going forward depends largely upon income growth and to some extent confidence. Consumer confidence has been bouncing around, but generally trending upward. Still, the election is creating a ton of angst. So the burden for better household spending falls on income gains, which right now are basically just okay. Disposable personal income, which is what we have left after taxes, rose moderately in September and for the third quarter as a whole. Importantly, wage and salary gains are beginning to improve. Still, when inflation is added into the mix, the rise has not been anything special.

As for inflation, it still isn’t a major threat. Since September 2015, overall consumer costs were up just 1.2%. When food and energy were excluded, the rise jumped to 1.7%, not that far from the Fed’s 2% target. Importantly, the negative impact of the collapse in energy costs is starting to dissipate and that should lead to faster yearly rises in the overall inflation measure going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed meeting starts tomorrow and ends on Wednesday and today’s report really doesn’t tell the members anything new. They continue to face an economy that is growing at 2% or so with inflation slowly rising toward their target. There is no compelling reason to increase rates. Given the tightness in the labor market and slow rise in inflation, there is also no great argument to be made that a rate hike would be problematic. But if the Fed was even thinking of doing anything before the election, the FBI Director’s action shows just how perilous it would be to raise rates right now, especially since it is totally unclear which candidate, if either, would be helped or hurt by a rate hike. It will be interesting to read the statement. I had been expecting it to signal clearly that the economy was strong enough (if not strong) and with inflation moving in the right direction, if conditions kept improving, a rate hike before the end of the year would be warranted. But even that largely nondescript comment would probably be attacked by the political spinmeisters, so who knows what the statement will look like.

KEY DATA: Durables: -0.1%; Less Aircraft: +0.5%/ Pending Sales: +1.5%/ Claims: -3,000

IN A NUTSHELL: “The economic data don’t require the Fed to do anything at next week’s meeting.”

WHAT IT MEANS: If the Fed members are being driven by the data, they really don’t have to worry that the numbers are pushing them to do anything. Durable goods orders were largely flat in September as sharp declines in demand for computers, communications equipment and especially defense aircraft were mostly offset by a rise in demand for civilian aircraft, machinery, motor vehicles and electrical equipment and appliances. Basically, some sector did well while other didn’t, which has been the story of this recovery. There was one disturbing aspect of the report: Private sector capital spending broke its winning streak as businesses cut back on their investment activities.

Meanwhile, there were more signs that the housing market is improving. Pending home sales rose solidly in September led by a jump in demand in the West and a solid rise in the South. However, contract signings were down in the Northeast and Midwest. Both new and existing home sales have been trending upward and this report indicates that pattern should continue.

New claims for unemployment insurance eased last week. Given the size of the economy and the dynamic nature of the labor market, we are basically at the bottom. We could have numbers below the current levels but it is hard to see that they would stay that way for very long.

There were two other numbers released today that point to a better economy. The Richmond Fed’s manufacturing index posted its second consecutive rise in activity. This part of the country had been hurting and its turnaround is good to see. Also, the homeownership rate rose in the third quarter. The rate has been trending downward since 2004 and maybe Millennials, who are entering their thirties, are finally starting to buy houses.  

 

MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen and her band of fearless monetary policymakers skate into next week’s FOMC meeting with little worry about having to raise rates. With a rate hike having become a political issue, if the Fed fiddled while the economy burned, there would be a problem. But this economy simply continues to grow at a trend rate meaning the Fed has the option to do what it wants – which is likely nothing. As for investors, while it is still all about earnings, the election is a cloud hanging over everything. In two weeks, we should be done with this horror, but until then, don’t expect any great movement.