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Labor capacity and an economy that doesn't stop
Simply Economics - January 5, 2018
By Mark Pender, Senior Editor



The week's economic news is uneven but not the underlying message: momentum is building despite labor scarcity. We'll look at employment, manufacturing, construction and cross-border trade where the various headlines, in a fair warning to the reader, may mask the key trends underneath.


The economy

Hiring cooled in December though employment levels are very high and there's also a hint of wage inflation in the month's employment report. Nonfarm payrolls rose 148,000 which was lower than expected but still favorable and more than enough to absorb new entrants into the jobs market. The unemployment rate is steady at a 17-low of 4.1 percent and it is definitely an applicant's market as the number of unemployed who are actively looking for work, at 5.308 million, is well under the roughly 6 million job openings as tracked in the separate JOLTS report. Yet December's headline payroll growth was still no better than moderate which raises the question that the Federal Reserve has been repeatedly asking in its Beige Book: whether scarcity of available labor, particularly skilled labor, is holding back business expansion -- that employers simply can't find the people they need.


Scarcity of labor, according to the iron-fisted laws of economics, is consistent with rising wages. The absence of wage traction, as it was last year, is the conceptual anomaly at play right now. Have the laws of economics expired or is the economy on the precipice of an overheated wage spike? December's wage data did show a little pressure as average hourly earnings rose a noticeable 0.3 percent on the month though November was downgraded by 1 tenth to only a 0.1 percent gain. Year-on-year this reading, as tracked in the graph, is beginning to move in the right direction though very slowly, up only 1 tenth to a modest looking 2.5 percent. How long wage growth can remain subdued is still the central question for economic policy makers.


Manufacturing is increasingly becoming a driving force for the economy, posting payroll growth of 25,000 vs 31,000 in November and the fifth straight month of solid growth. This is the best run for manufacturing payrolls in 3-1/2 years. The blue line in the graph tracks year-on-year percentage change in manufacturing payrolls and its curve, pointing higher but still in the low single digits, definitely has a ways to go. The green line of the graph tracks factory orders also in yearly percentage terms and growth here is more favorable, trending in the high single digits for the best showing since 2014. That's just before oil fell in half from $100 and began taking down sales of energy equipment and the factory sector in general.


The factory orders report is in fact another highlight of the week, jumping 1.3 percent and showing strength for commercial aircraft, vehicles, petroleum, chemicals, primary metals and furniture with the latter a reminder of the sharp upturn underway in the housing sector. But not all the data in the report are strong. Unfilled factory orders, up only 0.1 percent in November, remained stubbornly flat for a fifth straight month with the year-on-year rate, as tracked in the green line of the graph, struggling to hold positive ground. Yet given the strength in new orders, it would seem only a matter of time before unfilled orders begin to build which would really give a lift to manufacturing payrolls and, reasonably enough, manufacturing wages as well.


Factory orders lag by a month which opens space for private data like the ISM which issues reports on the more immediate month. ISM's results for December generally show some slowing from November but not for the most important reading of all as new orders posted their 7th straight plus 60 score and nearly broke 70 at 69.4. The graph tracks the red line of ISM's new orders index, where 52 is the zero line for monthly growth, against the blue columns of actual monthly change in factory orders. ISM has been trending higher over the last year while the growth curve for factory orders is in fact flat. Yet one thing that the ISM is clearly correct on and that's growth itself.


Construction payrolls, like manufacturing payrolls, are also on a five-month winning streak, contributing 30,000 to December's nonfarm total. Even more so than manufacturing, data on housing have been accelerating suddenly and sharply led by sales of new homes and including permits and starts. Payroll growth for the construction sector as a whole is still in the low single digits on a yearly percentage basis but, given the strong demand in the new home market, the curve could very well begin moving higher. Construction spending on a year-on-year basis, which is the green line, also has yet to take off but also appears certain to begin a move.


Construction spending, up 0.8 percent on a monthly basis, was very strong in the latest report which was for November. The gain would have been higher if not for extending weakness in multi-family construction where spending fell 1.3 percent for a third straight decline and a year-on-year rate, as tracked in the green line of the graph, that's below zero for a second month. But spending on single-family homes, which is the bulk of the housing sector, rose a monthly 1.9 percent for a sixth straight increase and the largest since November last year. This yearly rate is near the 10 percent line. The decline in multi-unit demand does in fact follow enormous rates of growth in prior years but it also might say something about rents which have been gradually fizzling to dead flat based on data in the consumer price report. Rounding out the construction spending report is a strong 0.7 percent monthly gain for home improvements, again evidence of housing strength, and a 0.9 percent gain for private nonresidential construction which is evidence of commercial strength.


International trade is another report where strength is hidden. The headline deficit swelled to $50.5 billion in November following a $48.9 billion deficit in October. The monthly average two months into the fourth quarter is $49.7 billion which compares very unfavorably with the third-quarter monthly average of $45.1 billion. This will be a sizable negative for fourth-quarter GDP. The nation's trade deficit is clearly deepening but weakness in exports isn't the cause.


Imports are a negative in the GDP calculation and it's the increasing gains here -- that in fact point to strength in domestic demand -- that are responsible for the deficit. Imports, at $250.7 billion in November, jumped a monthly 2.5 percent and show a sizable and welcome gain for capital goods, one that points to new business investment in what will help U.S. productivity. Imports of consumer goods, however, also rose and very sharply as did oil imports. Now let's look at the report's unquestionable sign of strength and that's exports which rose 2.3 percent in the month to $200.2 billion led by 3.4 percent expansion in total goods, to $134.6 billion, with service exports, at $65.7 billion, still impressive though managing only a 0.1 percent increase. Exports of capital goods and especially aircraft were very strong with solid gains also posted for vehicles and even consumer goods which all offer more evidence of strength in the factory sector.


Markets: Oil showing steady push

Oil is moving its way over $60 in what are the highest prices since 2014. And though higher oil prices will inflate imports, it will boost retail sales, specifically at gas stations, and also boost an array of totals in manufacturing, especially for energy equipment. News that the Trump administration is lifting offshore drilling restrictions could also prove a positive for energy equipment though, for the price of oil, it points to an expansion of supply and with that a theoretical long-term negative for West Texas Intermediate. The graph tracks WTI against weekly U.S. inventories which have been falling sharply and are very likely the central reason for oil's current climb.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2017 29-Dec-17 5-Jan-18 Change Change
DJIA 24,719.22 24,719.22 25,295.87 2.3% 2.3%
S&P 500 2,673.61 2,673.61 2,743.15 2.6% 2.6%
Nasdaq Composite 6,903.39 6,903.39 7,136.56 3.4% 3.4%
Crude Oil, WTI ($/barrel) $60.15 $60.15 $61.61 2.4% 2.4%
Gold (COMEX) ($/ounce) $1,305.50 $1,305.50 $1,320.80 1.2% 1.2%
Fed Funds Target 1.25 to 1.50% 1.25 to 1.50% 1.25 to 1.50% 0 bp 0 bp
2-Year Treasury Yield 1.89% 1.89% 1.96% 7 bp 7 bp
10-Year Treasury Yield 2.41% 2.41% 2.47% 6 bp 6 bp
Dollar Index 92.29 92.29 91.98 -0.3% -0.3%


The bottom line

Hiring is the ultimate litmus test and the strong payroll gains for manufacturing and construction are concrete confirmation that housing and the factory sector accelerated into year end. And another of the week's reports, ISM's non-manufacturing, showed leading strength for the retail sector which may be a hint of something special for the December's retail sales report which will be a highlight of the coming week. The trade deficit is definitely a negative and the absence of wage inflation is an ongoing mystery, but a third straight quarter of 3 percent GDP growth looks like a real fourth-quarter possibility.


Week of January 8 to January 12

Updates on the consumer and inflation highlight a busy week for economic data. Consumer credit on Monday will offer the latest on credit-card use while Friday's retail sales report will offer conclusive data on the holiday shopping season. Inflation data for December begin on Wednesday with import and export prices followed on Thursday by producer prices, where strength for both is the call, followed on Friday by consumer prices where strength, however, is not the call. Expectations for retail sales point to broad and solid gains.




Consumer Credit for November

Consensus Forecast: $18.0 billion

Consensus Range: $14.0 to $22.5 billion


Revolving credit has been on the rise indicating less reluctance among consumers to run up their credit cards. Revolving credit rose $8.3 billion in October for the biggest monthly gain since November 2015. Nonrevolving credit, which tracks vehicle financing and also student loans, rose $12.2 billion. After October's $20.5 billion increase, consumer credit is expected to rise $18.0 billion in November.




Small Business Optimism Index for December

Consensus Forecast: 107.9

Consensus Range: 105.8 to 109.5


The small business optimism index jumped in November to its best level of the expansion, since November 2004. Strength was broad based including rising confidence in economic conditions and sales expectations. Econoday's call for December is 107.9 vs November's 107.5.


JOLTS: Job Openings for November

Consensus Forecast: 6.038 million

Consensus Range: 6.000 to 6.200 million


The unemployment rate, at 4.1 percent, is very low and consistent with full employment which has also been the continuing the signal from the JOLTS report. Job openings in the report have been running at 6 million and have been exceeding hires which supports concern that business expansion is being limited a scarcity of qualified workers. Econoday's consensus for November job openings is 6.038 million.




Import Prices for December

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.2% to 0.8%


Export Prices

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%


Cross-border price pressures picked up sharply in November, rising 0.7 percent for import prices on higher petroleum costs and up 0.5 percent for export prices on industrial supplies where petroleum prices were also a factor. But November's pressures did not pass through as finished prices remained dormant. Econoday's consensus for December import prices is 0.4 percent with export prices at 0.3 percent.


Wholesale Inventories for November

Consensus Forecast, Month-to-Month Change: 0.7%

Consensus Range: 0.6% to 0.7%


Wholesale trade inventories are expected to rise 0.7 percent in line with advance data which showed a 0.7 percent build. Inventories in general, including at the wholesale level, have been on an orderly climb in response to strong demand.




Initial Jobless Claims for January 6 week

Consensus Forecast: 245,000

Consensus Range: 240,000 to 270,000


Initial claims are expected to come in at 245,000 in the December 30 week vs 250,000 in the two prior weeks. Claims have been very low and favorable and consistent with very strong demand for labor.


PPI-FD for December

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.5%


PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


Consumer inflation has been very subdued but not at the wholesale level, rising 0.4 percent in each of the past three producer price reports that included gains for service prices which are considered an advanced indication of wider pressures ahead. Prices for legal services showed special pressure in November as well as oil, fruits and vegetables and also light trucks. For December, forecasters see the PPI-FD rising a more subdued 0.2 percent, the less food and energy rate also up 0.2 percent, and again up 0.2 percent for less food, energy and trade services.


Treasury Budget for November

Consensus Forecast: -$32.0 billion

Consensus Range: -$54.0 billion to -$23.0 billion


Two months into fiscal 2018, the Treasury's deficit was $201.8 billion or 10.6 percent deeper than two months into fiscal 2017. The deficit for the month of December is expected to come in at $32.0 billion.




Consumer Price Index for December

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.3%


Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.1%

Consensus Range: 2.0% to 2.3%


CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.7%

Consensus Range: 1.6% to 1.8%


Gasoline prices gave a 0.4 percent headline boost to the December CPI which for this key series was an outsized gain. Other prices were flat or weaker including apparel, medical care, and housing. For December, forecasters see the overall CPI rising only 0.1 percent with the less food & energy rate at 0.2 percent. Year-on-year, the consensus gain for the CPI is 2.1 percent with the core at 1.7 percent.


Retail Sales for December

Consensus Forecast: 0.5%

Consensus Range: 0.2% to 0.7%


Retail Sales Ex-Autos

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.8%


Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.5%

Consensus Range: 0.2% to 0.6%


Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.3%

Consensus Range: 0.3% to 0.6%


November's opening of the holiday shopping season proved very strong as retail sales showed broad strength with a 0.8 percent gain. Nonstore sales rose sharply and pointed to a fast holiday opening for e-commerce. Electronics and appliance stores along with restaurants also posted strong numbers that speak to discretionary strength. Retail sales in December are expected to rise a solid 0.5 percent with ex-auto sales at 0.4 percent. Two core readings -- less auto & gas and control group sales -- are expected to post respective increases of 0.5 and 0.3 percent.


Business Inventories for November

Consensus Forecast,  Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%


Business inventories have been rising in line with underlining sales though October did see a 0.1 percent draw. Forecasters are expecting a 0.3 percent build for November inventories.


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