The Business News Week In Review

Manufacturing reports dominated the week but they showed the split that has been apparent all year, between the strength of private and regional surveys and the mixed results of national data from Washington. We'll look at the differences and trends in the manufacturing data and also at housing which is another sector where readings are no better than mixed. The latest in jobs and inflation round out the numbers that are summed up best by the Beige Book, which also came out in the week, and its general assessment of the economy: modest to moderate.

The economy

Let's first look at Washington's data on manufacturing. Factory orders are publlished by the Commerce Department and their showing over the last 12 months has been favorable but uneven which is due to monthly swings for aircraft orders. Yet the trend, despite weakness in August and July, is above the zero line and climbing. The dollar total is a seasonally adjusted $472 billion for an annual gain of 5.7 percent — which is a very respectable mid-single-digit pace.

Another definitive set of data is the manufacturing component of the industrial production report. This tracks volumes based on a host of inputs and is published by the Federal Reserve in Washington. Momentum was building going into the year but production has since stumbled with four declines in seven months. The message is soft with the trend line under zero. Vehicle output has been a negative though a year-end ramp up to meet hurricane-replacement demand could be a coming plus.

Now let's look at diffusion reports. These are based on small samples, in the low hundreds vs 5,000 in the case of factory orders. And responses are not specific totals but rough month-to-month estimates: Are volumes higher, lower, or unchanged from a month ago? The question asks not the degree of change but the direction of change — and on this question the ISM is pointing with certainty to upward direction whatever its degree. This is an accurate call for factory orders but not manufacturing production.

High diffusion scores simply point to good chances that monthly change will be moving higher, whether sharply higher, moderately higher, or slightly higher. The Empire State index, at 30.2, has been sending the same signal as the ISM. And delivery times in this report slowed abruptly in September and offered an early signal of hurricane effects. Empire State's October data then showed a reversal with delivery times quickly returning to normal.

Timelinesss is in fact the reason that diffusion reports exist in the first place. They're easy to produce, costs are low, samples are small, respondents are dependable and the reports come out weeks if not a month before Washington's data. The Philly Fed was the first of the diffusion surveys to signal strength this year. Its readings are at record levels in 48 years of data. But remember, higher diffusion scores only mean a better chance that hard data will increase. There's no guarantee how much.

Housing also has a diffusion index, the housing market index which which has been very strong. Yet when comparing it to hard data, the results are once again mixed. Two pluses in this week's data were a 2.4 percent rise in single-family permts to an 849,000 annualized rate and a 4.6 percent gain in completions to a 781,000 rate. These will help the housing market. The bad news is sharp downturns for multi-family units where starts, along with permits and completions, are also lower.

Lack of housing supply is one of the negatives in the Fed's Beige Book which warns that low inventories are constraining sales. Existing home sales peaked early in the year and have trended down since, to a 5.390 million rate in September. Here too, single-family homes are doing better than condos. New home sales also peaked early and are down since. New home sales will be a highlight of the coming week with Econoday's consensus calling for a slight dip to a 555,000 rate.

One area of the economy where there's no question of direction is employment which continues to rise. After only brief disruptions from Hurricanes Harvey and Irma, initial jobless claims are at 222,000 for the lowest level in 44 years. The 4-week averages at mid-month October and September (highlighted in the graph) hint at strength for the October employment report. And another of the Beige Books warnings is a new one, that shortages of labor may be restraining economic growth.

But there's still a wildcard in play at least for jobless claims. Puerto Rico continues to show no effect from Hurricane Maria. Claims in the territory initially fell, not rose, following the hurricane and, at 1,820 in the latest week, are only slightly above where they were before the storm. Broken roads and communications may well be keeping this total low. In contrast, claims in the Virgin Islands spiked quickly following Maria. Note that neither territory are counted in the payroll data of the monthly employment report.

We end on a bit of a dark note and that's inflation expectations. Year-ahead expectations are down in the business sector as tracked by the Atlanta Fed, falling to 1.8 percent. And a nose dive is also underway for year-ahead expectations in the consumer sentiment report, down 3 tenths to 2.3 percent. Thinking that prices will remain flat will not speed up anyone's spending plans and, on the employment side, may perhaps make workers complacent and content with small gains.

Markets: It can't go any higher, can it?

Stocks moved sharply higher all week breaking closing records along the way. The Dow, at 23,328, rose 2.0 percent in the week and is up 18.0 percent so far this year. The more the bears say the market is overpriced, the higher the market goes. Yet it is true that records are coming at a time when the Fed is lifting rates and just beginning its withdraw from the bond market. The Fed may not want to burst anyone's bubbles but asset prices, and whether they're too high, could be a topic at the month-end FOMC.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2016	13-Oct-17	20-Oct-17	Change	Change
DJIA	19,762.60	22,871.72	23,328.63	18.0%	2.0%
S&P 500	2,238.83	2,553.17	2,575.21	15.0%	0.9%
Nasdaq Composite	5,383.12	6,605.80	6,629.05	23.1%	0.4%
Crude Oil, WTI ($/barrel)	$53.71	$51.36	$51.66	-3.8%	0.6%
Gold (COMEX) ($/ounce)	$1,152.50	$1,305.90	$1,282.60	11.3%	-1.8%
Fed Funds Target	0.50 to 0.75%	1.00 to 1.25%	1.00 to 1.25%	50 bp	0 bp
2-Year Treasury Yield	1.21%	1.51%	1.57%	36	6 bp
10-Year Treasury Yield	2.45%	2.28%	2.38%	-7	10 bp
Dollar Index	102.26	93.08	93.73	-8.3%	0.6%

The bottom line

The economy is chugging along but there may be signals that demand for labor may be outstripping the supply of labor. This was the message several weeks back from the wage spikes in September's employment report and one repeated in the latest week by the Beige Book. Would the hard data on manufacturing and housing be higher if not for labor shortages? Caught between the need for labor and the lack of labor, the economy may be facing a new headwind.