The labor market continues to tighten
The unemployment rate dropped more than expected in September, down 2 tenths to 3.7 percent, which is a 49-year low. The number of people who are actively looking for work is marching lower at 5.964 million in September. This is the lowest total since December 2000. In direct contrast to the declining labor pool, job openings forged higher, totaling 7.136 million in the latest release in August. While noting the one-month dispersion in the two data series, there are now 1.172 million more job openings than people looking for work.
Even with strong demand for labor, wages are not showing much momentum
Average hourly earnings for September grew at a year-on-year rate of 2.8 percent. Wages are not far above core consumer inflation, which increased 2.2 percent in September. Recent remarks by Fed Chair Powell indicate that he believes that, despite the rise underway in job openings, there is no immediate threat that wages will move high enough to affect overall price inflation. Powell suspects that globalization and the advanced use of technology are helping employers manage labor costs and produce with greater efficiency.
Consumer confidence is at cyclical highs and may be warning of peak economic conditions
The rebound in the Conference Board’s consumer confidence measure to a 17-year high of 133.4 in August is primarily a reflection of current strength in the economy. The present situation component rose to 172.2 in August, from 166.1, evidence of healthy labor market conditions. The expectations index did not rise as far, but the increase to 107.6, from 102.4, more than reversed the declines seen over the past two months.
The details of the survey suggest that labor market conditions have continued to steadily tighten. The net share of respondents reporting that jobs are hard to get fell again, consistent with further declines in the unemployment rate.
Tight labor market conditions, however, have not fed through to a significant rise in income expectations – the share of households expecting higher incomes over the coming year rose in August, but the underlying trend in expectations has leveled off.
Capital Economics points out that, in recent years, the present situation index has increased at a faster rate than the expectations index. The gap between the two, which has often hit its widest point in advance of past economic downturns, has reached its broadest level since 2001. So, while strength of confidence is an encouraging sign that consumption growth will remain strong over the rest of this year, it reinforces the warning signal from the yield curve (which may likely invert next year) that an economic slowdown may be forthcoming.
The Institute for Supply Management's non-manufacturing survey jumped to 61.6 in September
The ISM non-manufacturing index set its strongest reading on record. The business activity index surged to 65.2 with new orders rising and delivery times lengthening. Employment reached a record high, increasing to 62.4.
Looking ahead, the ISM non-manufacturing index could get a lift from the new NAFTA trade agreement. The deal has reduced trade tensions and given exemptions to Mexico and Canada if the US decides to move forward with auto tariffs.
Regarding capacity constraints in the service sector, transportation is exhibiting extreme tightness. A big jump in transport service prices was seen in September’s PPI release. Transport prices surged 1.8 percent in the month with the yearly rate up 5.9 percent. Constraints in shipping are growing due to lack of trucks and especially lack of truck drivers.
Construction spending and payrolls are advancing on a year-over-year basis
Construction spending managed only a small gain of 0.1 percent in August. This follows a 0.2 percent gain in July and a 0.7 percent decline in June. But year-on-year growth is up a very healthy 6.5 percent.
Construction payrolls advanced 4.5 percent on the year. Potential growth in payrolls is being limited by labor shortages in construction. This has been cited in the ISM non-manufacturing survey and in the Federal Reserve's Beige Book of economic conditions.
Within construction spending, the increase is being primarily driven by a 14.0 percent yearly rise in public spending. Private construction grew by a smaller 4.4 percent yearly increase. It was split between a 4.8 percent rise for nonresidential and a 4.0 percent gain for residential.
Inside private residential, new single-family home spending is 4.2% higher than a year ago, while new multi-family homes are 0.6% lower. Housing in general, including home sales, have been flat this year. The recent sharp rise in interest rates will be a headwind for housing. In addition, weather is expected to impact construction data in the coming months as the effects of Hurricane Florence and Hurricane Michael drag on construction spending into year-end.
The housing market is seeing an erosion in sales
Existing home sales fell to a 5.34 million annualized rate in August, which is the lowest since August 2016. The pending home sales index, which tracks initial contract signings for resales, declined to 104.2. This is the weakest result since December 2014.
Rising mortgage rates are hurting sales. The average level of 30-year loans climbed 20 basis points to 4.72% in the month of September. Housing is losing momentum because of a combination of low supply, increasing mortgage rates, and reduced tax deductibility for homeownership.
The government’s deficit is growing
The Treasury's deficit for the 2018 fiscal year ending in September totaled $779 billion, which is 17 percent deeper than the $666 billion deficit in fiscal year 2017. The 5.6 percent rise in defense spending is a major reason for the deepening, along with rising social security outlays. In addition, interest on Treasury debt jumped 14.1 percent, over double the rise in defense spending.
Looking at the tax revenue side of the equation, from January through September, individual tax receipts improved $63 billion (5.1%) to $1.297 trillion. Tax reform has helped add jobs, increase pay and grow the economy.
But lower taxes on the corporate side is not having the same effect. Receipts are down $80 billion (36%) to $141 billion.
The net result is $17 billion less tax revenue, which is not helping the growing deficit. Government outlays this past fiscal year reached $4.108 trillion, a 3.2 percent increase from fiscal year 2017.
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