Simply Economics is taking the September 16 week off. Simply will return on September 23.

Introduction

Don't blame the poor messenger, but August was really not a super great month for the economy's go-to sector, the service sector. One month is only one month of course but the news could definitely knock FOMC policy hawks off of their game.

The economy

The ISM non-manufacturing report was, and maybe who knows still is, in the running for the strongest U.S. data set of 2016. But what was looking like a possible perfect 12 and 0 year was tripped up by a very ugly rout in month 8. The headline index fell more than 4 points to 51.4 to signal the lowest rate of composite growth of, yes, the whole cycle, going back to February 2010. And it was a real disaster through and through. New orders fell a shocking 8.9 points to 51.4 which is their worst score since December 2013, and likewise for export orders which fell exactly 9 points and into sub-50 contraction at 46.5 for their worst score also since December 2013. And the disappointment unfortunately is confirmed by a separate report, the U.S. services PMI which could do no better than 51.0. New orders in this report slowed as did business activity with employment gains at their weakest rate since December 2014. In a bit of syllogism, the services PMI report continues to blame the general weakness on weakness in client demand and, unlike the ISM report, also cites uncertainty over the presidential election as a negative (ISM in contrast said there were only a handful of comments about the election). Of course we're all optimists at heart and there is a silver lining in the service slump. Composite scores in both reports are still, as tracked in the graph above, holding over the breakeven 50 level to signal month-to-month growth, but just not very much of it right now.

The bad news keeps going, this time with the Federal Reserve's labor market conditions index, an experimental index that is looking like an experiment going nowhere. Despite respectable strength in the government's August employment report, where nonfarm payrolls rose 151,000 and the unemployment rate held at a very thin 4.9 percent, this index came in at minus 0.7 to end its 2016 winning streak at a grand total of 1 month. This is the 7th contraction in 8 months at a time when the labor market is actually strengthening. This may be leaving Federal Reserve officials wondering whether they should just go ahead and do everyone a favor, especially themselves, and pull the plug on this unlikely composite of 19 separate indicators, a composite that Janet Yellen herself has all but dismissed in importance. The hodgepodge includes isolated components from private surveys where sample sizes and methodological rigor are very unlikely, to say the least, to match that of the Labor Department.

One reading not included among the 19 components (please don't ask why) is the number of job openings in the JOLTS report, a government data set that stands for Job Openings and Labor Turnover Survey. And this is where the week's good news finally starts. The number of openings in this report has been going up, not to 5.8 million nor 5.87 million but to the third decimal place at 5.871 million in July, up from June's 5.643 million for a new top spot in the record book. Not a record, however, are the number of hires in this report, at only 5.227 million as tracked in the graph. Openings continue to exceed the number of hires in what for hawkish ideologues at the Fed can only mean one thing: Full Employment. The separation also underscores what anecdotal reports including the Fed's own Beige Book have been warning about, that openings are increasingly hard to fill. This isn't so much about a lack of hands and feet in the labor market, but more that skilled workers are hard to find. And one way of course for employers to finally fill these positions (I'm actually going to say it) — is to bid up wages!

With the ISM's non-manufacturing report having stumbled badly, jobless claims are now clearly out front when it comes to this year's strongest data set. Jobless claims have been at historic lows all year in definitive confirmation that layoffs are down and the labor market healthy. Initial claims fell 4,000 in the September 3 week to a lower-than-expected 259,000, pulling the 4-week average down 1,750 to a 261,250 level that is solidly in line with trend. The reporting week was a shortened holiday week for Labor Day and made for a number of state estimates, pointing to the risk of revision in next week's data. Revisions or not, initial claims are very low. Continuing claims, in lagging data for the August 27 week, fell 7,000 to 2.144 million with this 4-week average down 4,000 to 2.154 million, also in line with trend. The unemployment rate for insured workers remains at a very low 1.6 percent (and that's no misprint).

Markets: Year-to-date scorecard

Markets were quiet in narrow trade throughout until Thursday, showing little reaction to the week's news and of course awaiting the coming FOMC meeting later this month. However, on Friday, FedSpeak sent equities tumbling for the day and down for the week. Stocks are still up for the year with Treasuries still holding onto the bulk of their gains following the New Year fireworks in the Chinese markets and the sub-$30 scare for oil. But oil of course has since rebounded and is up in the mid-20 percent area as is gold which, like Treasuries, made the bulk of its move early on. A plus for both exporters and also policy makers who are trying to revive inflationary pressures is weakness in the dollar, which was down in the week and in the lower single digits for the year.

The bottom line

The service sector needs to be accelerating not slowing so we can probably just forget about a rate hike at this month's FOMC, it's all talk. The best that the hawks can hope for is a distant split decision, at 9 to 1 as in the July meeting, or who knows, 8 to 2 at the very most.

Week of September 12 to September 16

One week's load of economic data will be packed into Thursday and led by the retail sales report where only unusual strength would raise the chances for a rate hike at the September 21 and 22 FOMC meeting. Factory data are also Thursday's highlights led by the Empire State and Philly Fed early in the morning, two reports that have been weak, and followed later that morning by industrial production which in contrast has been showing recent strength. Consumer prices, the last make-or-break report for the FOMC, will be posted Friday as will consumer sentiment.

Tuesday

Small Business Optimism Index for August

Consensus Forecast: 94.8

Consensus Range: 94.0 to 96.0

Since March, the small business optimism index has been climbing from a 2-year low. Employment readings have been leading the report and capital outlays have been strong. But expectations for the economy, though improving, are still in the minus column with earnings trends deeply negative.

Treasury Budget for August

Consensus Forecast: -$105.0 billion

Consensus Range: -$109 to -$95.0 billion

The red ink in the Treasury budget has been deepening, up a fiscal year-to-date 10 percent to just over $500 billion at last count which was for July. And calendar timings for outlays and receipts have been understating the deficit, adjusted for which the increase in the government's deficit has been approaching 20 percent. Corporate tax receipts have been down sharply while individual tax receipts have been flat. The outlay side of the ledger has been showing sharp increases in net interest payments and moderate increases for social security. The August report will cover the 11th month of the government's fiscal year which ends in September.

Wednesday

Import Prices for August

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

Consensus Range: -0.4% to +0.2%

Export Prices

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

Consensus Range: - 0.2% to +0.1%

Cross-border price pressures have been showing life, offering some reason for optimism that overall inflation may begin to track higher. Import prices in July did rise only 0.1 percent but were held down by a downdraft in petroleum prices, excluding which prices rose a sizable 0.5 percent. Export prices rose 0.2 percent in July but were up 0.3 percent when excluding agricultural prices which have been soft this year. Despite improvement in core readings, pressures in this report have been modest with no pressure yet visible for finished goods prices.

Thursday

Initial Jobless Claims for September 10 week

Consensus Forecast: 265,000

Consensus Range: 261,000 to 265,000

Initial jobless claims have been tracking at historic lows and pointing to lack of layoffs and healthy conditions in the labor market. Continuing claims have likewise been very low.

PPI-FD for August

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

Consensus Range: -0.2% to +0.2%

PPI-FD Less Food & Energy:

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

Consensus Range: +0.1% to +0.3%

Producer prices did show pressure in both May and June but the gains proved isolated as prices fell sharply in July, down 0.4 percent overall and down 0.3 percent less food & energy. Goods prices, including for finished goods, were weak in July as were both service prices and final service prices which are a special concern.

Retail Sales for August

Consensus Forecast: 0.0%

Consensus Range: -0.3% to +0.2%

Retail Sales Ex-Autos

Consensus Forecast: +0.3%

Consensus Range: +0.1% to +0.4%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: +0.4%

Consensus Range: +0.3% to +0.5%

Retail sales, which during the second quarter proved very strong and broadly based, slowed sharply in July when total sales came in unchanged with ex-auto ex-gas sales down 0.1 percent. If not for autos which were strong, sales in July were clearly negative, at minus 0.3 percent for the ex-auto reading. Auto sales for August, based on unit sales reported by manufacturers, fell sharply from July in what is a clearly negative signal for the August retail sales report.

Philadelphia Fed Manufacturing Index for September

Consensus Forecast: +2.0

Consensus Range: -3.0 to +4.9

The Philadelphia Fed index has been flat at the headline level with details clearly negative. Both new orders and backlog orders contracted at their steepest rate of the year in August with employment sinking to its lowest reading of the whole cycle, since July 2009. Contraction in the workweek together with shortening delivery times have been further indications of weakness. Note that recent strength in actual factory orders and manufacturing production has not been signaled by this report.

Empire State Index for September

Consensus Forecast: -1.00

Consensus Range: -1.50 to +0.50

The Empire State index has been flat all year as have the report's details including new orders. Employment has likewise been soft as has the general 6-month outlook. Hit by weak global demand and weak demand for capital goods, the factory sector has yet to get into gear this year. Note that recent strength in actual factory orders and manufacturing production have not been signaled by this report.

Current Account Deficit for Second Quarter, First Estimate

Consensus Forecast: -$122.8 billion

Consensus Range: -$130.0 to -$118.0 billion

The current account deficit widened in the first quarter to $124.7 billion from $113.4 billion in the fourth quarter. A narrowing in the primary income surplus and a widening in the secondary income deficit were main negatives in the second quarter, offsetting slight improvement for net exports. As a percentage of GDP, the deficit came in at 2.7 percent in the first quarter, still moderate but up from the fourth quarter's 2.5 percent.

Industrial Production for August

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

Consensus Range: -0.4% to +0.4%

Manufacturing Production

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

Consensus Range: -0.4% to +0.2%

Capacity Utilization Rate

Consensus Forecast: 75.7%

Consensus Range: 75.5% to 76.0%

Industrial production showed solid life in both June and July with respective gains of 0.4 and 0.7 percent and including gains for manufacturing production of 0.3 and 0.5 percent. The latter included strong gains for vehicle production and hi-tech production along with promising gains for business equipment. Broad strength in the July durable goods report should support further improvement. Apart from manufacturing, utility output has been strong with mining beginning to trend higher. Capacity utilization, at 75.9 percent in July, has also been on the rise.

Business Inventories for July

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

Consensus Range: -0.1% to +0.2%

Tight management has been keeping in check business inventories which are now becoming leaner as the economic pace picks up. Retail demand is the central factor for inventories and as long as retail sales remain solid, the risk of inventory overhang is limited.

Friday

Consumer Price Index for August

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

Consensus Range: 0.0% to +0.2%

CPI Core, Less Food & Energy

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

Consensus Range: +0.1% to +0.3%

Consumer prices have been stubbornly flat and yet to show any effect from sporadic signs of pressures in import prices and producer prices. The CPI was unchanged in July following two prior months of only 0.2 percent gains. The less food & energy core reading has been little better, rising 0.1 percent in July and also following two 0.2 percent gains. Transportation costs have been coming down and most goods prices, including for food and apparel, have been flat. What strength there is continues to be centered in medical care and, to a lesser extent, housing.

Consumer Sentiment Index, Preliminary September

Consensus Forecast: 90.8

Consensus Range: 89.4 to 92.0

Consumer sentiment has been steady and respectable, ending August with a final reading of 89.8. The expectations component has been solid which points to confidence in the jobs outlook. But current conditions, the report's second component, have been edging lower to indicate easing strength in the current jobs market. Inflation readings, reflecting the summer's downdraft in gasoline prices, have been unusually low.