All posts by joel

September New Home Sales

KEY DATA: Sales: +3.1%; Over-Year: +29.8%; Prices: +1.9%

IN A NUTSHELL: “Housing sales are rising decently despite the lack of homes for sale.”

WHAT IT MEANS: Housing is a critical component of the economy and the new home sector is the most important part of this key segment. It looks like conditions are steadily improving as new home sales rose moderately in September. Of course, there was a huge downward revision to the August numbers, so the increase did come from a smaller base. The gain was driven by a sharp rebound in Northeast sales and a solid rise in the Midwest. Sales were up more moderately in the South but in the West they fell. For the first nine months of this year, demand has creased by 13% compared to the same period in 2015. I think that pretty much tells the story. As for prices, they were up modestly over the year, which is a puzzle. The supply of homes is nearing the lowest levels we have seen in the last forty years, which should be causing prices to rise faster. The percentage change over the year has bounced around lately, so this may just be a data volatility issue. With homes under construction not rising, it is doubtful that the supply/demand mismatch will be eliminated anytime soon. Those looking to buy a new home will either have to settle or wait for new product to be built.  

MARKETS AND FED POLICY IMPLICATIONS: The housing market may not be booming but it is clearly moving forward at a steady pace. New home sales in the third quarter were up solidly from the second quarter. While total housing starts were off slightly in the third quarter, single-family construction was up a bit. That implies housing may be a wash in the GDP report. Since residential investment reduced growth by 0.30 percentage point, that is good news for growth. But the big problem is still the lack of inventory. Builders are cautious and tend to do very little speculative construction. The number of homes under construction or completed that are for sale is rising but is way below what had typically been the case over the previous forty years. Part of that may be finance issues, but a lot is the unwillingness of developers to take a lot of risk. As a consequence, buyers don’t have a lot to choose from. This report is not going to affect the thinking at the Fed or in the investor world. It really isn’t a change from the pattern. And with the election less than two weeks from now, it makes a lot of sense for everyone, be they monetary policymakers or investors, to sit back and watch.

September Existing Home Sales, Leading Indicators, October Philadelphia Fed Survey and Weekly Jobless Claims

KEY DATA: Home Sales: +3.2%; Prices (Over-Year): +5.6%/ LEI: +0.2%; Phila. Fed: -3.1 points/ Claims: +13,000

IN A NUTSHELL: “Another day of data, another round of decent economic news.”

WHAT IT MEANS: The economy is doing okay, despite what some may be saying. Take the housing numbers. While the housing starts data were soft on the surface, the details made it clear that construction was not weakening. Today, the home sales numbers support that view. The National Association of Realtors reported that existing home sales rose solidly in September. The gains were across all regions, which hasn’t happened often lately. Prices increases remain strong as well. Maybe the most interesting part of the report was the break down between single-family and condos. Similar to the housing starts numbers, the single-family segment is becoming the driving force for growth in the sector.

On the manufacturing front, the Philadelphia Fed’s manufacturing index fell in October. But the details show that the sector is not weakening. While respondents indicated the region’s economy softened a bit, their businesses did better. New orders jumped, shipments surged and order books essentially stopped thinning. While hiring did not turn positive, employment cut backs and the reduction in hours worked slowed sharply. The future looks good as manufacturers expect orders to grow even faster, hiring to pick up and hours worked to expand.

Other forward-looking numbers are also pointing to further strength. The Conference Board’s Leading Economic Indicator Index rose moderately in September. The report summarized things best: “The U.S. LEI increased in September, reversing its August decline, which together with the pickup in the six-month growth rate suggests that the economy should continue expanding at a moderate pace through early 2017”.

Finally, the weekly jobless claims number jumped, but that is hardly a worry. Most economists, including myself, were mystified at how low the new claims had fallen. The current level – or slightly lower – is where we think claims will settle in. That number of new claims is consistent with solid job gains and indicative of a tight labor market.

MARKETS AND FED POLICY IMPLICATIONS: We are getting a clearer picture of the state of the economy and it looks fine. Okay, it isn’t soaring along, but given that trend is in the 2% range, we need a mindset reset on what is good growth. It is not 3.5% to 4%. That is not a reasonable range for any extended period of time. Housing is in good shape, manufacturing seems to be coming out of its funk, consumers continue to spend, third quarter earnings seem to be solid and the election is less than three weeks away, so investors should be heartened. And Fed members should have less fear of the economic future. But the election is creating uncertainty. Trump has indicated he will not reappoint Yellen, first saying she is not a Republican and then criticizing her for seemingly running monetary policy to aid Clinton. Hillary has stayed quiet about the Fed, but most expect her to reappoint Yellen when her term expires in February 2018. That means there is some disquiet about the direction of the Fed, as it is not likely Yellen will resign if Trump wins. Worse, given Trump’s political attacks on the Fed, would the person he might appoint be viewed more as a politician than a central banker? The previous two Fed Chairs worked for presidents of both parties. Politicizing the Fed is a dangerous thing to do.

September Housing Starts and Permits

KEY DATA: Starts: -9%; 1-Family: +8.1%; Permits: +6.3%; 1-Family: +0.4%

IN A NUTSHELL: “Home construction is in decent shape, despite the volatility in the multi-family segment.”

WHAT IT MEANS: At the end of next week, we get the first guess, excuse me, estimate, of third quarter growth, so it is important to see what the current data are telling us. One sector that had been expected to add to growth was residential construction. Weakness in the key single-family segment had dragged down activity in the spring and residential investment reduced GDP growth by 0.3 percentage point. While it doesn’t look as if housing added much over the summer, the restraint may be minimal. Housing starts did drop sharply in September, but as usual, it’s all about the details. Single-family construction surged to its third highest pace in nine years. Strong increases were posted in all regions except the West. However, the multi-family segment cratered, declining nearly 30%. The biggest issue was the Northeast, where multi-family construction was off nearly 70%. This is a relatively small region when it comes to total starts and a few large projects can skew the data. A similar large decline was seen in February, but it totally unwound in March. That is likely to happen going forward. In other words, don’t take the starts data at face value. Understand the details.

Looking forward, permit requests, which had been running behind starts, played catch up in September as they rose solidly. For the quarter, there is a now a backlog of permits and we know that firms are now taking out permits only when they expect to begin construction in the near future. Thus, look for a rebound in construction in October, but maybe not a huge one. The number of home under construction is at the highest level in nearly nine years.

MARKETS AND FED POLICY IMPLICATIONS: If you skip the headline number, the housing report was a fairly good one. Activity is growing in the key single-family segment and permit requests are strong. That points to more homes being built going forward. And it also reminds us that data are volatile and one month of strange numbers can create oddities even in quarterly reports, such as GDP. A weird pattern in starts due to weather, a surge in vehicle sales because of incentives, a rise in inventories because a dock strike ends or whatever, can create large increases or decreases in overall growth rates. That is also a problem for the Fed. When you base decisions on incoming data and those numbers are volatile and can be revised significantly, you are really flying without a gyroscope. Good luck with that. Meanwhile, investors will continue to follow oil prices and earnings releases, which look pretty good so far. There are still lots of numbers that will be released before the election, including third quarter GDP and October payrolls, but who knows if anyone will be listening. One thing we do know, no matter what they look like, they will be spun into something that bears no resemblance to reality.

September Consumer Prices, Earnings and October Home Builders Index

KEY DATA: CPI: +0.3%; Less Energy: +0.1%/ Real Earnings: -0.1%/ NAHB: -2 points

IN A NUTSHELL: “Inflation may be slowly accelerating, but it is also cutting into consumer spending power.”

WHAT IT MEANS: The Fed members are wishing and hoping (and thinking and praying – sorry Dusty) that inflation will start approaching their target of 2%. That could happen this year, but largely because of the rise in energy costs, not a generalized increase in consumer prices. The Consumer Price Index rose solidly in September, led by sharp increases in energy commodities. Gasoline, fuel oil, natural gas and electricity prices all jumped. In addition, shelter costs continue to soar, medical commodity prices are up and if you eat out, it is costing a lot more as well. On the other hand, if you are buying a vehicle, new or used, prices are going nowhere or even down. And the cost of eating at home is also falling. Over the year, the CPI has not yet reached the Fed’s target, though excluding food and energy, it has been there for ten months now.

While the Fed may think higher inflation is good, I doubt that most households would agree. With wages still rising modestly, the acceleration in inflation is cutting into the spending power of workers. Adjusting for prices, hourly earnings declined in September and have been on a decelerating trend since January 2015. That will not generate stronger consumer spending or growth.

The National Association of Home Builders’ Housing Market Index declined in October, but don’t take that as a weakening in the housing market. There was a sharp rise in September (due to an outsized gain in the West) and the modest October reversal gets us to a more realistic level. That said, the national level is still high, indicating the housing market is in good shape in all regions except maybe the Northeast.

MARKETS AND FED POLICY IMPLICATIONS: Housing is in good shape, inflation is on a slow but steady upward trend and job gains are decent. So, what is the Fed waiting for? I am sure they would like to see a report where inflation is near or even above their target, but that may not happen before the last FOMC meeting of the year. October is when energy costs should turn flat from the year before. They are likely to add to inflation afterward. Unfortunately for the Fed, the November CPI report comes out after the meeting. Also, the Fed’s preferred measure, the Personal Consumption Expenditure price index is running a little cooler than the CPI and it may take a longer for that index to break the 2% barrier. So, the Fed members will have to fudge it if they are to say the data support an increase, which I still think is likely in December. As for investors, as long as earnings are good, they will worry about the economy later, such as after the election – which cannot come soon enough.

September Industrial Production and New York Fed Survey

KEY DATA: IP: +0.1%; Manufacturing: +0.2%/ NY Fed: -4.8 points

IN A NUTSHELL: “Manufacturing remains soft but there might be some signs that the bottom is being reached.”

WHAT IT MEANS: It is hard to have a full-blown, strong economic expansion if the manufacturing sector is hurting and that has been the case this year. It cannot be said that conditions are good, but they may not be deteriorating any more. Industrial production rose modestly in September after a sharp decline in August. Manufacturing output was up a little faster, but a major drop in aerospace restrained activity. Boeing still has a huge backlog, so that is not likely to continue. More worrisome was continued weakness in machinery. That may indicate uncertainty on the part of businesses about the future direction of the economy and an unwillingness to make any major bets. Overall activity was restrained by declining utility production. It’s tough to seasonally adjust for the weather when there is climate change. (No, I don’t think it is a hoax perpetrated by the Chinese.) But the most optimistic number in the report was the robust gain in petroleum production. Output is now actually up over the year.

While there may be some hints at conditions improving in the Industrial Production release, conditions in the New York Fed’s regional manufacturing sector faltered further. Orders are still declining, but less so. However, optimism about the future is improving. This part of the country is not a hot bed of industrial activity, but a decline there is another indication that manufacturing has a way to go before it can start adding greatly to the economy.

MARKETS AND FED POLICY IMPLICATIONS: While manufacturing has been soft, that doesn’t mean the domestic economy is falling apart. Remember, we are in a global economy and world growth and the value of the dollar matter. Those factors have been working against the sector. In addition, the collapse of the oil complex has hurt firms that provide goods, much of them manufactured, to the energy companies. But as Nobel Laureate Bob Dylan wrote: The times, they are a changin’. Energy prices are no longer sinking like a stone and firms are starting to swim again (apologies to those who know the lyrics). Indeed, rig counts are rising consistently and are up sharply from the bottom reached in the spring. We might even see some investment in the industry in 2017. That would be a great turnaround that could help the manufacturing sector. But that remains a hope, not a reality. For the markets, though, today’s reports probably will not have much of an impact. We are in earnings season. But for the Fed, which produces the industrial production data, the recent data provide a little for everyone. The production rise was modest enough so those that want to wait can say economic conditions are still not great. Meanwhile, those who want to hike rates can say the worst looks to be over, especially with the dollar off its highs and reasonably stable. Which means, we are still nowhere when it comes to having data that demands a Fed rate hike. Of course, that is only a concern to those who actually think the Fed is data driven.

September Retail Sales and Producer Prices

KEY DATA: Sales: +0.6%; Excluding Vehicles: +0.5%/PPI: +0.3%; Less Energy: +0.2%; Goods: +0.7%

IN A NUTSHELL: “The summer lull in spending is over and with inflation moving upward, the argument against a rate hike is getting weaker and weaker.”

WHAT IT MEANS: Remember how people feared households had decided to stop spending? Well, it’s time to chill. Retail sales rebounded in September, led only in part by stronger vehicle demand. Indeed, excluding vehicles, sales were up almost as solidly. There were strong increases in spending on furniture, home building supplies and sporting goods. People ate out, ate in and shopped online. There was also a rise in gasoline purchases, but that may have been due to a jump in prices. The were some weaknesses in this report. Sales of appliances and electronics were soft, people didn’t visit department stores and despite the political campaign, they cut back on their health care purchases.

On the inflation front, the news keeps getting better for the Fed, at least for those pushing to raise rates. Wholesale costs rose solidly in September and the increases were broadly based. The real eye-opener was the jump in goods prices. Yes, energy costs were up, but it wasn’t just oil or even food, which also increased sharply. Almost every major category of wholesale goods posted at least a small gain. Goods price declines had been keeping inflation well in check, but that is no longer the case. On the services side, costs rose more modestly, the pattern most of the year. But with services price increases over-the-year in the 1.5% range and goods prices closing in on the zero mark, overall producer costs have a chance of turning positive for the first time in two years. Looking down the road, business cost pressures are slowly building. Intermediate product prices rose solidly and the year-over-year decline is the smallest in two years.

MARKETS AND FED POLICY IMPLICATIONS: The consumer is spending and cost pressures are slowly building. Sounds pretty good to me. We are not out of the woods on either the consumption or inflation front, but we are moving in the right direction. The September 20-21 FOMC minutes show that members are getting antsy about keeping rates so low. There were worries that future rate hikes might have to be faster than expected if a move upward was not done soon. On the other side, members still believe there is some slack left in the labor market and that trend growth has slow sharply, so a move right away wasn’t necessary. But what the FOMC really needs if it is to raise rates is inflation to move to its target rate of 2%. Then it can say that it is just about at full employment and inflation is at its desired level. A Fed tethered to data would have every reason to hike. That world is just about here. As for investors, it is earnings season and while today’s data should buoy confidence that the economy is not heading downhill, the supposedly forward-looking indices will be adjusting for the results of the backward-looking profit numbers.

September Import and Export Prices and Weekly Jobless Claims

KEY DATA: Imports: +0.1%; Non-Fuel: 0%; Exports: +0.3%; Farm: -1%/ Claims: unchanged

IN A NUTSHELL: “With the labor market tight and inflation soon to reach the Fed’s target, a rate hike is looking likely.”

WHAT IT MEANS: Of the Fed’s two mandates, inflation has been the one that has not been reached. That could change soon. Import prices rose modestly in September, but the big story was a pop in fuel costs. Keep in mind, the energy price decline has reduced the overall inflation gain by roughly 0.5 percentage point. While September energy costs were still about 10% below 2015 levels, by the end of October, that decline could have been totally wiped out. That would put the overall inflation rate closer to 1.5% or a little higher and excluding food and energy, it would be above the Fed’s 2% target. Still, inflation is hardly a scourge that the Fed must meet head on with vigor. Excluding fuel, import prices were flat, so don’t expect domestic prices to rise sharply. Yes, imported food costs moved upward and capital goods prices rose modestly as well. But with imported consumer goods costs flat, inflation excluding energy, is not likely to surge. On the export side, the farm sector is still reeling from weak pricing power, but many of the other export industries are showing some ability to raise prices.

On the labor front, unemployment claims remained at record low levels. The desire to hold on to workers is great and that should keep job gains at solid levels.

MARKETS AND FED POLICY IMPLICATIONS: The Fed released its “minutes” of the September 20-21 meeting yesterday and it is clear that some members are pushing very hard for a rate hike as soon as reasonably possible. Normally, I would say that could occur at the next meeting, but since it ends the Wednesday before Election Day, the FOMC will likely pass but make it clear that an increase in December is quite likely. If I am correct, the Fed could have the cover to move in December as the labor market is clearly tight while inflation should be near if not even above the 2% target. In other words, barring some shocking news and given the dissension on the Fed, a December rate hike should be viewed as highly likely. The weak Chinese trade data, though, is a warning sign that the global economy is not in great shape and the Fed seems to look for any reason to hold back, so an increase isn’t a given.

September Employment Report

KEY DATA: Payrolls: 156,000; Private: 167,000; Unemployment Rate: 5% (up 0.1 percentage point)

IN A NUTSHELL: “A lack of qualified applicants is limiting hiring while growing job openings are bringing people back into the market, all signs of a labor market near full employment”

WHAT IT MEANS: If Fed members were hoping for a strong September jobs number, they didn’t get it. Yet the employment report neither put the kibosh on a December rate hike nor provided cover for one. Payrolls increased a little less than expected, but the private sector hired people at a solid pace. It was the government that restrained job growth. Remember, a job is a job, no matter who does the hiring. As for the details, manufacturers continue to slice payrolls. Despite near record sales, the vehicle sector downsized. There was also the usual oddity. This time it was a huge 14,000-worker reduction in the transit and ground transportation sector. Did someone go out of business while I was not looking? Back that out and the number comes in right at expectations. Indeed, there were few other surprises as just about every other sector added workers at a reasonable pace. Hiring may not have boomed but wages and hours worked were up solidly, implying that personal income was up strongly.

As for the tick up in the unemployment rate, it was more a rounding issue than an increase. The rate was 4.92% in August and 4.96% in September. That is well within the margin of error. But more importantly, there was a large rise in the labor force, which led to an increase in the participation rate. That is expected at this point in the cycle. Indeed, I commented yesterday that a tick up in the rate shouldn’t be a surprise if the labor force surged.

The so-called “real” unemployment rate, the U-6, stayed at 9.7%. But let me say once again, this is meaningless number. It includes people who want full-time jobs but can only get part-time jobs. The problem is that businesses have shifted hiring strategies and now prefer more part-timers than in the past. People might want to work full-time, but if businesses don’t want full-timers, there is nothing workers can do. This is a structural shift and comparing today’s U-6 rate with those of the past is pointless. It is not the economy that has caused the rate to be high, but business hiring decisions. So, either blame businesses for profit maximizing by hiring more part-timers or dump the number. I say just dump the number.  

MARKETS AND FED POLICY IMPLICATIONS: I am sure this report will be spun in so many ways that we will all be dizzy by day’s end. My take is simple: The lack of available workers is limiting the ability of firms to hire. It is not that they don’t want to, it is that they cannot find qualified workers at wages they are willing to pay. Thus, moderate job gains are likely to persist and are not a sign of economic weakness but are a sign of a tight labor market. Expect to see the unemployment rate bounce around, but slowly decline. This is also a normal pattern. Most economists thought this would happen a year or even two years ago, but that pattern was delayed. When job openings are high and the amount of “excess” or readily available labor is low, people who have given up come back into the market. That is happening now and is slowing the decline in the unemployment rate. As for the Fed, this report neither screams “hike” nor forces the FOMC to punt again. With the members leaning toward a hike this year, even mediocre reports like this one are still good enough to allow for a rate hike in December. That is what I expect.  

September Layoff Notices and Weekly Jobless Claims

KEY DATA: Layoffs (Over Month): +37.7%; Over Year: -24.7%/ Claims: -5,000

IN A NUTSHELL: “If the September jobs report is lacking, the lack of available workers may be the major reason.”

WHAT IT MEANS: Tomorrow is Employment Friday and today’s data point to a tightening labor market. Whether that shows up in the September data is another story, but regardless, there is every reason to think we are close to or at full employment. First, layoffs are slowing. Yes, Challenger, Gray and Christmas reported that notices were up in September from the August level. But there is no way to seasonally adjust these data as the announcements are largely random. What we do see is that third quarter layoff notices were down from second quarter as well as from 2015 levels. Importantly, the energy sector, where nearly a quarter of the notices have originated, is starting to stabilize. With oil prices breaking $50 per barrel, that trend should continue. I expect the last quarter of the year to show an even better improvement from 2015.

A second indication of how tight a market firms are dealing with comes from the continued decline in unemployment claims. We are at record lows, given the size of the workforce, as the inability to find qualified workers is forcing firms to do almost everything (except is appears, raising wages) to hold on to their current employees.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow’s employment numbers have the potential to create a lot of confusion. First, it is totally unclear what should be considered a strong number. Many economists are coming to the belief that given the low unemployment rate, job gains above 150,000 would be really good, while really strong would be above 200,000. That seems odd since we have averaged about 200,000 per month for the past five years. But if firms cannot find qualified workers and/or are unwilling to pay up to get them, hiring will be sluggish. Gone are the days that you just advertise an opening and presto, a surfeit of qualified applicants show up at your door (or your inbox). While HR heads understand that reality, CEOs and CFOs don’t seem to want to accept it. They still ask why should they pay for new workers. Duh, because you cannot get quality workers these days without getting them to change jobs and they will not do that unless there is a clear financial advantage to move. That said, given the surprisingly soft private sector employment increase in August, we could see businesses adding close to 200,000 new positions. That would be a great number, no matter what the headline says. As for the unemployment rate, it’s a toss up whether there is a decline to 4.8% or the rate remains at 4.9%. The unemployment rate normally falls slowly when we are at or below full employment, as fewer positions are filled but discouraged workers come back into the market. Indeed, it is not unusual for it to rise in any given month if the labor force has one of its periodic surges. As I like to say, the economic reality is in details, so focus on the factors that drove the headline numbers.  

September Private Sector Jobs, Non-Manufacturing Activity, Help Wanted and August Trade Deficit

KEY DATA: ADP: 154,000/ ISM (Nonmanufacturing): +5.7 points; Orders: +8.6 points/ HWOL: -93,800 / Trade Deficit: $40.7 billion ($1.2 billion wider)

IN A NUTSHELL: “On this big day for data, it likes like the economy is strengthening even if job gains may not be great.”

WHAT IT MEANS: With Friday being the day we get the September employment numbers, hints at what they may look like are analyzed carefully. ADP’s report on private sector job gains came in a little lighter than expected, as increases in small businesses were soft. That may be due to some volatility in those numbers, but it could also be a warning about some softer economic growth. That said, the numbers don’t imply a weak jobs report. ADP’s average for August and September was about 165,000 per month. With only 126,000 being created in August, the government’s number on private sector gains could be between 175,000 and 200,000, which is where I have it. One warning, government education jobs have been running above trend, so watch for that segment to restrain job growth. Also, the soft manufacturing sector could also lower the September number.

Adding to the uncertainty over Friday’s report was the drop in help wanted ads online. The Conference Board’s measure was down after being largely flat August. Still, the third quarter average was up from the second quarter, a turnaround from the large declines in the spring. That seems to imply the market has firmed, or firms are feeling the pressure, again, to fill all those open positions that they had decided not to bother filling.

On the economic front, The Institute for Supply Management’s NonManufacturing Index surged in September. The report was strong across the board as orders jumped, hiring increased sharply and order books started filling again. This reinforced the gains that were seen in Monday’s manufacturing report, which was also up nicely, led by a major rebound in new orders. The strong rise in services hiring and the almost neutral manufacturing employment index holds out some hope that Friday’s report could be better than expected.

The trade deficit widened slightly in August. The major reason for the increase was payments for the broadcast right of the Summer Olympics, which disappears until the Winter Olympics starts. In other words, that was a temporary issue. Exports rose because of a surge in nonmonetary gold. Meanwhile, overseas sales of food and capital goods (aircraft) were down while the increases in vehicle and consumer goods shipments were relatively modest. We imported more of most things except consumer goods and industrial supplies (mostly nonmonetary gold, again). Adjusting for prices, trade could add to third quarter growth.

MARKETS AND FED POLICY IMPLICATIONS: The recent economic data seem to show that whatever malaise the economy was in during the first half of the year was reversed in the summer. But jobs matter, so watch Friday’s number, which I expect to be around 190,000but only because the private sector job gains in August were well below normal. It will be make up time, not a shift to better job gains. With the unemployment likely to decline slightly, there are few people out there looking for jobs who aren’t already employed. Firms need to either poach workers from other companies or move their part-timers into full-time positions. Given the reluctance to pay up to attract workers, it is likely that job growth in the 150,000 range will become normal. That might appear disappointing, but slower job growth is what happens in tight labor markets. How investors read today’s data-dump is unclear, but the numbers point to decent economic growth with job gains about as good as can be expected under the circumstances.