The Business Week In Review

The latest signals from the factory sector are positive but do show a bit of slowing while the latest from the housing sector points to the opposite, and that is acceleration. Indications on the labor market remain very strong and support expectations for a successful holiday shopping season. But first let's take an overall view of where the economy is after the bumps of a rough hurricane season.

The economy

The national activity index offers the broadest composite available of economic indicators and the October reading is one of the best of the expansion, at 0.65 for a 6-year high. This however follows August which, at minus 0.37, was the poorest month in a year and reflected Hurricane Harvey's impact on Texas. Oil output, electricity output and factory output were all pulled down by Harvey but then all swung higher as activity got back on line.

The 3-month average helps to smooth out the index and allows us to step back for a clearer look. At 0.28, the average is at a 3-1/2 year high but it does follow (putting hurricane swings aside) no better that moderate growth for most of the past year. The report's three other components have been steady with employment making solid contributions but with sales, orders & inventories making no more than modest contributions. The personal consumption & housing component has been flat.

Economic growth hasn't been soaring but it has been steady and moderate. So what are the indications as year-end approaches? Let's turn to the index of leading economic indicators for a clue. Hurricanes have also made their mark on the LEI which was held down in September then surged in October with an unusually strong gain of 1.2 percent. Unemployment claims are a major factor in this report, jumping sharply as those put out of a job by the hurricanes filed claims but then quickly moving back lower to pre-hurricane levels which was a major positive for October. Strengths in October also included gains in building permits and the factory workweek, the latter also reflecting a hurricane reversal. ISM new manufacturing orders were strong positives in both months as were still low short-term interest rates. Even if October's big surge is overstated, the LEI is nevertheless pointing to accelerating strength.

Now let's turn to specific indications on the month of November. These come from Markit Economics' manufacturing and service sector samples. Manufacturing is considered a leading indicator for general economic movement so let's look at this first. Markit's manufacturing PMI has slowed this month, to 53.8 as tracked by the blue line in the graph which however is still a very respectable reading. New orders continue to rise at a solid rate while backlogs are up for a fourth month running. Business optimism is the strongest it's been in this sample since early last year. Inventories of finished goods are down reflecting sustained pressures on capacity that are holding back production, while efforts to build inventories of raw materials continue to be constrained by lengthening delivery times. Input prices are very hot this month, at the highest in five years and are being passed through to finished goods prices which are at a 3-year high. Though the 53.8 composite score is moderate, the details of this report, especially the building signs of capacity constraints that include price pressures, point to accelerating conditions. The green line in the graph is ISM manuafcturing which has been unusually strong and, as was noted for new orders, has been giving a big lift to the LEI.

There's nothing more important than new orders and they are the highight of Markit's service sector  sample, though here too the PMI is slowing, to 54.7 in November which is nevertheless a very solid rate of growth. Service sector employment is the bread and butter of the nation's labor market and the measure in this report is at a 3-month high. Business optimism, though easing slightly, is very strong as it is in manufacturing. Both input costs and selling prices are also increasing for this sample. The green line in the graph is ISM's non-manufacturing index which, like it's ISM manufacturing counterpart, has also been much stronger than Markit's sample. Here, however, a differing industry make up may explain the separation as ISM's data include the construction and mining industries, the latter of which has had an especially good year. Though Markit's readings aren't as spectacular as ISM or the national activity index or the LEI, they are very positive.

But one reading in the week that has the pessimists talking is a 1.2 percent monthly decline in durable goods orders. The dip reflects an understandable 33 percent reversal for commercial aircraft orders which were very strong in the prior two months. And pointing to strength for the coming months was Boeing's major success at this month's Dubai Air Show where record orders were posted. A positive in the report is a 1.7 percent rise in vehicle orders which follows the post-hurricane spike in vehicle sales. Yet there was one key weakness that is raising talk of slowing and that is a 0.5 percent decline for core capital goods orders (nondefense ex-aircraft). But this October dip masks an important positive and that's an 8 tenth upward revision to September's gain which now stands at a very robust 2.1 percent.

Stepping back and looking at capital goods compared to the balance of the factory sector shows just how strong growth for this reading is. Core capital orders, which again exclude aircraft, are up a year-on-year 8.2 percent which next to September's 8.7 percent is the best showing in 5-1/2 years. Business investment has been bouncing back this year and the latest orders on capital goods, despite the monthly dip in October, don't point to much of a let down. If this strength continues, it will combine with the coming Dubai order surge and could make the durable goods report one of the big headliners in coming economic data.

Housing is another sector that may well show strength going into year end. Existing home sales proved stronger-than-expected in October, up 2.0 percent to a 5.480 million annualized rate. Strength shows for both single-family resales, up 2.1 percent to a 4.870 million rate and up 1.7 percent for condos to a 610,000 rate. Discounting was limited in October with the median price down only 0.2 percent to $247,000 for 5.5 percent year-on-year appreciation. But supply is yet again a negative for resales, falling 3.2 percent to 1.800 million homes on the market. On a sales basis, supply is at a very thin 3.9 months following five straight readings at 4.2 months. Supply is a little bit better in the new home market where sales absolutely surged in September. October's new home sales report will open next week's calendar with Econoday's consensus calling for a step back to 620,000 in what would still be a strong annualized rate.

Attention in the coming weeks will increasingly focus on holiday shopping. Consumer sentiment in November edged higher from mid-month but down slightly from October, closing out at a  solid 98.5. This report, like other confidence readings, has been holding firmly at expansion highs all year. The report noted strong certainty among consumers for gains in income and employment. Looking at components, current conditions end November at 113.5 which is slightly below October's 116.5. This is a marginal decline and doesn't point to acceleration for consumer spending which is important given the start of holiday shopping. The expectations index also edged lower to 88.9.

The consistently best news on the economy continues to come from employment. Demand for labor remains unusually strong with initial jobless claims, after spiking following this year's run of hurricanes, now holding near historic lows, down 13,000 in the November 18 week to 239,000. Puerto Rico, still recovering from Hurricane Maria in September, continues to inflate the total but only modestly, remaining about three times as high as normal but contained, at 6,944 vs 6,690 in the prior week. Continuing claims are also holding at lows, at 1.904 million with the unemployment rate for insured workers ticking 1 tenth higher but also remaining near historic lows, at only 1.4 percent. Puerto Rico is not a part of monthly payroll data so the outlook for the November employment report points to another month of strong growth.

Markets: Froth for the holidays

Stocks aren't the only market having a good year. Bitcoin has jumped over $8,000 and prices at art auctions are exploding with Leonardo da Vinci's latest going for $450 billion. The Dow, even before a possible Santa Claus rally, is up 19.2  percent so far this year with the Nasdaq, getting a special boost from the web economy, up 28.0 percent. How does this compare with actual economic growth? GDP has been holding the 3 percent line the last two quarters and when adding in the inflation rate (let's be generous and call it 2 percent to make the math easier), it comes out to 5 percent. Not bad but does it justify this year's outsized stock gains? Perhaps, if the gains are in anticipation of major acceleration in the coming years. Well, the Keynesian juice of fiscal stimulus never did make an appearance this year but a big corporate tax cut still could. But if taxes don't come through we really shouldn't expect the outsized gains to go on forever, especially if the Fed continues to raise interest rates.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2016	17-Nov-17	24-Nov-17	Change	Change
DJIA	19,762.60	23,358.24	23,557.99	19.2%	0.9%
S&P 500	2,238.83	2,578.85	2,602.42	16.2%	0.9%
Nasdaq Composite	5,383.12	6,782.79	6,889.16	28.0%	1.6%
Crude Oil, WTI ($/barrel)	$53.71	$56.58	$58.97	9.8%	4.2%
Gold (COMEX) ($/ounce)	$1,152.50	$1,294.10	$1,292.60	12.2%	-0.1%
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%	1.73%	1.74%	53 bp	1 bp
10-Year Treasury Yield	2.45%	2.35%	2.34%	–11 bp	–1 bp
Dollar Index	102.26	93.67	92.76	-9.3%	-1.0%

The bottom line

Indications have been scrambled a bit from the hurricanes but the consistent theme from the economic numbers is strength. Not all data are moving higher but none are moving lower. The outlook for a very successful holiday shopping season, one underpinned by the labor market, appears to be in place.