The Business Week In Review

t was a week of soaring economic headlines that, however, were the results of hurricanes. Behind the headlines were mostly softer details whether for inflation or consumer spending. Yet even at the core levels, there lurks the prior week's September employment report and its echoes of full employment and wage increases.

The economy

Core inflation has been coming alive but slowly with a 0.1 percent gain in September, well actually 0.13 percent looking at 2 decimal places which is common for this reading given its importance for Fed policy. The core came alive in August with a 0.25 percent gain on an uptick in housing which is the biggest component of consumer prices. The 3-month average is 0.16 percent which, in a small plus, is the best since February. The core excludes energy which spiked on hurricane effects driving up total prices by a distorted 0.5 percent.

Turning to year-on-year rates, the core isn't living up to its monthly progress. The Fed's stated target for total prices is 2 percent which the overall CPI, at 2.2 percent, managed to breach for the 1st time in 5 months. But without energy effects, which may prove one-time effects tied to Harvey's strike on Texas, prices wouldn't have made it over. In fact the core rate didn't accelerate at all, holding at the 1.7 percent line for the 5th month in a row. Note the Fed's target is tied to its own inflation index, not the CPI, but let's not quibble.

Housing makes up more than 40 percent of the CPI and though it popped higher in August, it didn't keep up in September with the yearly rate edging down 1 tenth to 2.8 percent. The most closely watched subcomponent is owners' equivalent rent (a measure that tracks what renters think it would cost to own their own home), but this slowed after an August uptick. Medical costs, which are nearly 10 percent of consumer costs, have been also been holding down prices, here sliding prescription costs are a key factor.

Moderating costs keep money in our pockets which may be one reason why retail sales proved strong in September, jumping 1.6 percent for the biggest gain in 2-1/2 years. The main reason though is hurricane effects: replacement demand for autos and price-inflated sales at gasoline stations. Yet even with September's spike, growth in total retail sales has been no better than flat over the past year, trending at the 0.4 percent monthly line. Yet 0.4 percent over 12 months makes for a nearly 5 percent annual rate.

But when stripping out autos and gasoline sales, 2 components that can distort the underlying picture, retail sales don't come in at the 5 percent line at all but just below 4 percent as tracked in the blue line of the graph and the red trend line. The graph's columns track monthly change which did come in at a very solid 0.5 percent in September. Restaurant sales were a key plus though the strength here follows a run of weakness in prior months. Trends for most subcomponents are in fact flat at moderate rates of growth.

Clearly not flat is the consumer's sense of well being which, in contrast to retail sales, has been unusually strong this year. The consumer sentiment index spiked 6 points in mid-October to 101.1 for the best score in 13 years. But the trend for sentiment has been running well behind another reading, the consumer confidence index which has been at 16 year highs all year. Confidence in income is behind all the strength reflecting full employment, low inflation, stock gains, and now perhaps even wage acceleration.

Lack of wage punch has been a big issue but maybe not so much anymore. Those 0.5 percent gains in average hourly earnings from the prior week's employment report (a new one in September and an upward revision for August) are worth returning to. They apparently didn't spill over into September's consumer prices but they do help explain the gains in confidence and do hint at what FOMC hawks fear most: a wage burst tied to full employment. And full employment is the story of the week's job data including the JOLTs report.

August Job openings held steady at 6.082 million while hirings remained far behind, at 5.430 million. This gap appeared 2-1/2 years ago signaling that employers are either not offering enough pay to fill empty slots and/or can't find applicants with the right skills. For comparison, the number of job seekers actively pounding the pavement is 6.911 million which is very near the total number of available openings. And the spread between openings and hirings, at 652,000, is one of the widest on record.

Jobless claims are also pointing to full employment. Hurricanes did push initial claims sharply higher though the effect, given easing in Texas and Florida, has almost entirely faded. Never showing any effect are continuing claims which have moved lower all along and with the latest reading, for the September 30 week, at a new 44-year low of 1.889 million. And this low is at a time when the U.S. workforce numbers 161 million, nearly twice as large as the 90 million back in 1973. Are we at full employment? This series says yes!

But a time bomb's ticking and that's Peurto Rico. Washington had been estimating claims after Maria but now that the territory's San Juan unemployment office has reopened there aren't any claims to report, barely over 100. Why? Because the unemployed, due to the devastation, can't get to the office and make their claims. What will happen when they do? Anybody's guess. Claims in the Virgin Islands, also hit by Maria and home to about 100,000, have surged 10 fold to 1,000 plus. Puerto Rico's population: 3.5 million.

Markets: When immoderate gains enter into the debate

The Fed's focus is keeping employment high and inflation at a constructive level. But there's in fact a quiet 3rd focus – and that's stability of the financial markets. Will rising stock values, always a hush-hush topic at the Fed, enter into the open debate at the coming FOMC meetings? GDP this year, at 1.2 and 3.1 percent in the 1st and 2nd quarters and probably somewhere between for the 3rd quarter, has really been no better than moderate. The year-to-date gain for the Dow is a less-than-moderate 15.7 percent.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2016	6-Oct-17	13-Oct-17	Change	Change
DJIA	19,762.60	22,773.67	22,871.72	15.7%	0.4%
S&P 500	2,238.83	2,549.33	2,553.17	14.0%	0.2%
Nasdaq Composite	5,383.12	6,590.18	6,605.80	20.9%	-1.3%
Crude Oil, WTI ($/barrel)	$53.71	$49.32	$51.36	-4.4%	4.1%
Gold (COMEX) ($/ounce)	$1,152.50	$1,277.40	$1,305.90	13.3%	2.2%
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%	1.53%	1.51%	30 bp	–2 bp
10-Year Treasury Yield	2.45%	2.37%	2.28%	–17 bp	–9 bp
Dollar Index	102.26	93.81	93.08	-9.0%	-0.8%

The bottom line

"As informed by incoming data" is how guidance has ended in each of the last 15 FOMC statements, a refrain that helps us to assess recent economic data and order it in importance. The lack of punch in the core CPI does reinforce this year's overall trend of weak inflation. But the indications of full employment, more emphatic than ever and led by the 16-year low for the unemployment rate at 4.2 percent, together with the pop higher for average hourly earnings, may be pointing to a Fed that will become increasingly more concerned with the risk of inflation.