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.

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.

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.

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.

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.

KEY DATA: Consumption: +0.4%; Income: +0.2%/ Home Prices: +1.1%; Year-over-Year: +5.7%

IN A NUTSHELL: “The disconnect between Main Street and the C-Suite continues as the consumer alone continues to shoulder the burden of keeping the economy going.”

WHAT IT MEANS: Leadership can be lonely and the consumer is one lonely leader. While CEOs hunker down and wait for the sky to fall, households continue to spend money quite solidly. Consumption was up in June as sales of soft-goods and services jumped. The only thing holding down spending was a sharp drop in vehicle sales that led to a decline in durable goods demand. On the income side, earnings rose a little less than expected, given the sharp increase in payrolls. Wage and salary reductions in the manufacturing sector restrained the gain as compensation was up decently in services. With incomes expanding slower than spending, the savings rate dropped to one of the lower rates since the Great Recession took hold. As for inflation, it was modest whether you included or excluded food and energy.

As we have seen in the many sales numbers that were recently released, the housing market remains in very good shape. CoreLogic reported its numbers on June home prices and they rose solidly both over the month and over the year. The pace is not so great that it should create worries that a housing bubble is forming. Only two states, New Jersey and Connecticut, posted declines over the year.  

MARKETS AND FED POLICY IMPLICATIONS: The income and spending data were not a major surprise as they could be largely inferred from the second quarter GDP report. But they do remind us that households are more than willing to part with their hard-earned income. They are buying all types of goods and services and investing in housing. Meanwhile, CEOs have hunkered down and are refusing to invest in their businesses. Capital spending is soft and restraining growth. Even if you exclude the energy sector and its related industries, the level of investment growth is nothing special. That raises the question: Why the disconnect between Main Street and the C-Suite? Has the world economy totally taken over thinking at the top of the corporate ladder? If businesses don’t invest, future economic growth and productivity will be lowered and that is what is happening. Earnings may not be great right now, but they will not get a whole lot better if businesses don’t improve their productive capacity – and they are not doing that. Propping up current earnings by limiting capital spending is shortsighted. That failure is something that should concern the Fed, even as the members gain solace from the solid consumer spending and income numbers.

KEY DATA: ISM (Manufacturing): -0.6 point; Orders: -0.1 point; Hiring: -1 point/ Construction: -0.6%

IN A NUTSHELL: “Manufacturing continues to expand and there are signs conditions may be firming.”

WHAT IT MEANS: Manufacturing has been the weakest link over the past year and the softness continues. The Institute for Supply Management’s reading on manufacturing activity eased in July. That said, the sector is growing, not declining. Indeed, the overall activity index was above the average for the past year and was the second highest since last August. Only the June reading was greater. That is good news and may be pointing to a rebound in the sector. The new orders index was off a tick in July, but the level is still quite solid and only 15% of the respondents indicated demand fell. Both import and export orders remain in good shape, even if they are not growing faster. Production is also good and growing. Still, there were warning signs in the report. Backlogs declined and thinning order books don’t point to a future acceleration in activity. Worse, hiring is softening again. The sector has been shedding workers for much of the past year and it may be doing so again.

Construction is another area of concern as spending declined in June for the third consecutive month. That is the first time that has happened in 5½ years. Both public and private construction activity were down, but the real weakness was in nonresidential spending. Manufacturers reduced their spending sharply. Surprisingly, private health care and educational construction was also off a lot. These are areas where we would expect construction to be solid and that it isn’t, is a worry.

MARKETS AND FED POLICY IMPLICATIONS: The headline ISM number was down but the details of the report really don’t point to a softening in manufacturing. Of course, this has not been a sector that is strong, so any easing in momentum has to be watched carefully. For me, a growing manufacturing is the only thing I want to see and it is doing that. Unfortunately, the recent decline in energy prices is not going to help that sector or the manufacturers that supply machinery and equipment to it. Also, the dollar has started to trend upward slowly. That too is a worry for manufacturers. For the Fed and investors, there are some important numbers released this week, such as spending and income, but the big number is, as usual, the employment report. So, while other numbers may cause some optimism or pessimism, don’t expect the markets to move sharply until we get the payroll data. After the June surge, it is expected that the gain will be back toward trend, which is somewhere in the 150,000 to 175,000 range. That is enough for the unemployment rate to decline slowly over time and we could see that happen in this report. Regardless of the data, don’t expect any major reaction from the Fed until they see the job numbers. And then, the members seem to stuck in neutral, so even a second strong jobs report in a row is not likely to cause a sudden discussion about near-term rate hikes.