Introduction

If you want more of Jerome Powell, you're in luck! He's testifying on Wednesday in Washington and maybe we'll find out what he's really thinking, that is exactly how many 1/4-point rate hikes he suspects are still down the road. This past week Powell said the federal funds target is "just below neutral", leaving the impression that normalization is suddenly at hand and sparking a giant rally in the stock market. But wait! Exactly how much below neutral is "just below"? Funds are at 2-1/8 percent and were scheduled to move to 2-3/8 percent at December's FOMC than to 3-1/8 percent through the course of next year. But that was based on FOMC forecasts back in September. The next set of forecasts that come out in December may look much different. The neutral rate isn't fixed in stone and actually appears to be a fast moving target as some on the FOMC, apparently even more dovish than Powell, wondered if it hadn't already been reached at the November meeting. In any case, whatever Powell says or doesn't say at midweek will only be tracks in the sand given the Fed's data dependency and the ever unfolding assessment and re-assessment of economic activity.

The economy

For monetary policy, the week's most important readings were the PCE price indexes. The yearly overall rate held unchanged and, at least for now, is right on target at 2.0 percent. The core, however, went into reverse, down 1 tenth to 1.8 percent and further under target. The FOMC last changed their policy guidance in June to state the "symmetry" of their inflation objective, that policy will act not only to boost inflation when its down but to slow it when it climbs too far too fast. But that was earlier in the year when PCE prices were going up. Now the indexes look soft and with oil suddenly $20 lower at $50, they could be coming down and perhaps quickly. The red columns of the graph track a major reading of wage pressures, average hourly earnings which jumped sharply to 3.1 percent in last month's employment report. But much of that gain reflected an easy comparison with the huricane distortions of October last year. November last year is a more difficult comparison yet Econoday's consensus is looking for increasing pressure to a 3.2 percent rate in a result that could warm back up rate-hike talk.

The vigor of the fourth-quarter will turn on how healthy consumers are and how heavily they spend on Christmas. Consumer spending was strong going into the holiday, rising 1 tenth in October to a 2.9 percent year-on-year inflation-adjusted rate. Spending growth in October was broad-based and marks a strong opening for the consumer component of fourth-quarter GDP. Policy makers at the November FOMC specifically cited consumer spending as an upside wild card for the year-end economy. The abundance of jobs along with moderate-to-respectable wage growth are the major pluses for the holiday outlook. Like spending, real disposable income also rose 1 tenth in October to 2.8 percent.

A factor that is not supporting spending growth is the slump underway in home prices. Case-Shiller's 20-city index cooled another 4 tenths to 5.1 percent with FHFA's index down 3 tenths to 6.0 percent. These readings are at 2-year lows. Gains in the West have been shrinking despite strong acceleration in Las Vegas, at 13.5 percent, which is way out in front in Case-Shiller's data. But prices in Seattle, Portland and San Diego have been slowing sharply with price growth in many of the Northeast urban centers, especially New York and Washington DC, remaining below 3 percent. Growth in home prices has been slowing visibly this year for a housing sector, where demand is flat and mortgage rates going up, that is the big disappointment of the 2018 economy.

How big of a disappointment appears to be the main risk for the fourth-quarter economy. New home sales have been falling sharply amid price weakness and now rising inventory. Year-on-year sales were down 12.0 percent in October which is bad news for the nation's Realtors and home builders. More bad news comes from the report's price indications where the median, at $309,700, fell 3.6 percent in October for a year-on-year result that falls in the minus column, at 3.1 percent. Yet this contraction is still far short of the decline in sales and hints at further price erosion ahead. Supply, up more than 4 percent to 336,000 units, did come into the market during the month but didn't appear to help sales. And given the sharp decline in October sales, supply relative to sales suddenly hints at a glut, jumping to 7.4 months vs 6.5 in September and 5.6 in October last year.

The drop underway in new home sales is unmistakable. Looking at the 3-month average, sales are at a 577,000 annualized rate which is down from a 660,000 peak at the beginning of the year. That's a 12.6 percent reduction in sales. Sales of existing home sales have been flat all along and are also now slumping, to a 5.233 million annualized 3-month average vs a recent peak of 5.593 million last December, that's a 6.4 percent sales reduction. And price indications in this report are also weak, at a median $255,400 which is up 3.8 percent from a year ago but sizably above the 5.1 percent contraction in sales, a mismatch that doesn't point to any price traction ahead. The news actually gets worse. Pending home sales, which track initial contracts for resales, fell a very steep 2.6 percent in October which was far below Econoday's consensus range. This is an advance indication that points very strongly to another leg down for resales.

What this means for fourth-quarter residential investment is not encouraging. Construction spending will be released on Monday of the coming week amid expectations for a 0.4 percent gain. Previously released data on starts were positive in October, up 1.5 percent to a 1.228 million annualized rate but the gain was centered in a bounce-back for multi-family units that masked a second straight decline for the larger single-family category. Year-on-year rates underscore the weakness in housing with total starts down 2.9 percent overall and with total permits, which offer indications on next year's activity, down 6.0 percent. Rising mortgage rates, tied directly to Federal Reserve rate hikes, are proving a major headwind for housing as are material and labor shortages. Again, however strong the 2018 economy has been, housing is not part of the success story.

Residential investment has held back GDP all year long while a drag from net exports may be just beginning. The goods portion of October's trade deficit was deeper than expected, at $77.2 billion vs a third-quarter monthly average of $74.6 billion. This opens fourth-quarter net exports on a negative note following the third quarter when trade pulled GDP down by nearly 2 percentage points. October exports opened the fourth quarter down 0.6 percent to $140.5 billion with possible tariff effects appearing in food products, which fell sharply to $10.3 billion for the lowest monthly showing in 2-1/2 years and year-on-year contraction of 2.8 percent. October's import side totaled $217.8 billion with imports of consumer goods jumping to $57.4 billion and with auto imports also climbing. Imports of capital goods fell sharply in the month in a negative sign for business investment.

Business investment like consumer spending is actually another possible source of unexpected year-end strength, according to minutes from November's FOMC. But orders for capital goods, which are a main component of business investment, have been flat and in fact are not pointing to much of a rebound for fourth-quarter nonresidential fixed investment. Core orders (nondefense ex-aircraft) were unchanged in October with September revised sharply lower to a 0.5 percent decline. Shipments in October, which will be a direct input into fourth-quarter GDP, did rise a respectable 0.3 percent yet whether shipments keep pace, given the weakness in orders, doesn't seem that likely. Orders for machinery, which are at the center of the capital-goods group, fell 0.5 percent in October following lifeless gains of 0.1 and 0.2 percent in September and August. Factory orders will be released on Thursday of the coming week and will fill out the final data on October's factory results.

But October is already feeling like ancient history, especially given the approach of holiday shopping and the steep and sudden decline in oil prices which will produce its own effects. One place to look for the initial impact of lower oil prices will be the manufacturing report from the Dallas Fed which slowed noticeably in the November report. General activity came in far below consensus at 17.6 vs 29.4 in October. The production index also slowed, to 8.4 vs a 17.6 score in October with new orders also falling in half to 9.7 and the lowest reading in nearly two years. Shipments and hiring slowed as well as the workweek while capacity utilization fell. Inflation measures in the report all eased sharply. But the drop for oil didn't pick up pace until late in the month and it won't be until Dallas' next report for December when oil's impact will be more fully felt.

An unknown wild card for the fourth quarter could once again prove to be inventories which really added strength to the third quarter, pulling GDP up by 2.3 percentage points. That gain reflected restocking following a heavy draw down in the second quarter. Though the restocking doesn't position inventories favorably for the fourth quarter, the first indications are very positive. Retail inventories opened the fourth-quarter up a very sharp 0.9 percent in October to $649 billion. Wholesale inventories meanwhile rose 0.7 percent to $650 billion. The missing piece for October will be inventories at manufacturers which will be posted with Thursday's factory orders report. A solid contribution from inventories would be an unexpected plus for fourth-quarter GDP.

But the biggest question of all for the fourth-quarter will be the labor market, whether it keeps strengthening and keeps the Fed on a rate-hike path. Increasing strength is not, however, the signal from unemployment claims which are on the climb and which point to slowing gains for November's employment report. Initial claims rose for a third straight week, 4,750 higher on the 4-week average to 223,250 which is suddenly the highest reading since July. Also moving higher were continuing claims, with this 4-week average up 20,000 to 1.668 million in lagging data for the November 17 week. These are still very low readings and consistent with great demand for labor, yet the pivot higher appears unmistakable and, of course, does echo the recent cutbacks announced by General Motors as well October's doubling in Challenger's layoff count that reflected cutbacks at Verizon. And moderation is the consensus for November's employment report with nonfarm payrolls seen rising 190,000 vs October's outsized 250,000 increase.

Markets: Profits march higher, but not government revenues

The initial estimate for third-quarter corporate profits was also released in the week showing a rise in profits but a fall in tax revenues. Corporate profits were already strong before any effects from this year's tax cut, up a year-on-year 10.3 percent to an annualized level of $2.318 trillion. When including the lower tax rates, after-tax profits came in with a 19.4 percent gain to $2.074 trillion. These are very bullish results and suggest that the sell-off in the stock market isn't related to ongoing profit performance. The 9.1 percentage point difference between the pre-tax and after-tax profits rates is the tax on corporate income which fell 33 percent from a year ago to $245 billion. That might be a plus for shareholders but for the Treasury's annual balance, that comes out to $120 billion less going to Uncle Sam.

An interesting note to Powell's "just below neutral" comment was that he also said valuations in the stock market are not excessive, in fact he called them "moderate". This should give investors reassurance but it also suggests that volatility in the stock market isn't one of the factors keeping the Fed from raising rates. That is if employment does surprise on the upside and wages finally do heat up, the FOMC would see the stock market as able to withstand higher rates. The graph tracks the path of the Dow against the Conference Board's consumer confidence index which continues to hold in the mid-130s area and not far from the all-time high of 144.7 reached in 2000. And this report offered a favorable indication for Friday's employment report as jobs-hard-to-get fell a sizable 1.2 percentage points to 12.2 percent which is very low for this sample. Another positive was a greater share saying jobs are currently plentiful, at 46.6 percent for a 1.2 percentage point gain. The volatility of the stock market isn't really hurting this index though the percentage of bulls did fall noticeably in November, to 35.0 percent vs 43.6 percent in October.

The bottom line

Consumer spending has been solid and consumer income has been respectable and could begin to climb. Corporate profits are also very strong. But mortgage rates are on the climb and an increasing headwind for what is an exhausted housing market. And tariff effects, though still elusive, may now be appearing in the trade data, and the initial results may be holding down GDP. And for inflation? The drop in oil will prove an immediate factor, not an academic one. This softness underscores the dovish sounds coming out of the Fed, whether Jerome Powell's speeches or the minutes from the last meeting. The economy's lack of punch appears to be making the Fed think twice about rate-hike plans.

Week of December 3 to December 7

A very heavy week of data will touch all the major bases beginning on Monday with manufacturing and a November update from the ISM which cooled noticeably in the prior report for October. Tuesday gets an update on consumer spending with unit vehicle sales for November with the focus turning on Wednesday to the service sector and ISM's non-manufacturing report for November which in October held near record levels. Wednesday morning will also highlight the latest from Fed Chair Jerome Powell who, after dovish comments in the prior week, will be testifying before Congress's joint economic committee where his views on the economy and outlook for monetary policy could once again have outsized effects on the financial markets. The Beige Book will be published on Wednesday afternoon and though it has consistently understated the strength of the FOMC's economic assessments it will, like Powell's testimony, offer a reminder of this month's pending event -- the still expected rate hike at the mid-month FOMC. The nation's trade deficit, which has been deepening sharply in recent months, will be Thursday's focus and forecasters aren't looking for any improvement. The week culminates on Friday with the November employment where payroll growth is expected to cool but not average hourly earnings which are expected to show increasing pressure.

Monday

PMI Manufacturing for November Final

Consensus Forecast: 55.4    

Consensus Range: 55.2 to 55.4

Held down by slowing production and inventory growth, PMI manufacturing eased in the November mid-month flash despite acceleration in new orders and employment. No change is expected for November's final with Econoday's consensus at November's flash level of 55.4. This index ended October at 55.7.

ISM Manufacturing Index for November

Consensus Forecast: 57.2

Consensus Range: 56.0 to 58.3

Steady to easing strength is what Econoday's forecasters see for the November ISM manufacturing index where the consensus is 57.2 vs 57.7 in October, a month that, despite mostly strong readings throughout, missed low estimates and broke a long 60-plus string for new orders.

Construction Spending for October

Consensus Forecast, Month-to-Month Change: 0.4% 

Consensus Range: 0.2% to 0.6%

Forecasters see a modest bounce higher for construction spending in October which looks to get a boost from a very easy comparison with September which came in unchanged. Econoday's consensus is a 0.4 percent gain following a September report where weakness in both residential and non-residential construction offset strength in public spending.

Tuesday

Total Unit Vehicle Sales for November

Consensus Forecast, Annualized Rate: 17.2 million

Consensus Range: 16.7 to 17.3 million

Despite only a marginal rise in unit sales during October, the motor vehicle component in the month's retail sales report proved very strong. For November unit sales, forecasters see a 17.2 million annualized rate vs October's 17.5 million in what would signal retail weakness for motor vehicles.

Wednesday

ADP, Private Payrolls for November

Consensus Forecast: 175,000

Consensus Range: 161,000 to 195,000

Econoday's consensus for ADP's private payroll estimate in November is 175,000 which would compare with 227,000 for ADP's October estimate and against 246,000 in the government's data for October.

Nonfarm Productivity, 2nd Estimate, 3rd Quarter

Consensus Forecast, Annualized Rate: 2.3%

Consensus Range: 2.2% to 2.8%

Unit Labor Costs

Consensus Forecast, Annualized Rate: 1.1%

Consensus Range: 0.8% to 1.2%

Following the modest revision to GDP, little change is expected for the second estimate of third-quarter nonfarm productivity, at a consensus 2.3 percent vs the first estimate's increase of 2.2 percent. Unit labor costs are expected to be revised to 1.1 percent vs an initial plus 1.2 percent.

PMI Services for November Final

Consensus Forecast: 54.4

Consensus Range: 54.1 to 54.4

Moderation in both new orders and employment pulled back PMI services slightly to 54.4 in the November flash. The consensus for November's final is no change at 54.4. This index ended October at 54.8.

ISM Non-Manufacturing Index for November

Consensus Forecast: 59.0

Consensus Range: 57.0 to 60.1

A slightly less robust rate of growth is the call for ISM's non-manufacturing index for November, at a consensus 59.0 vs 60.3 in October that followed September's record 61.6. This indicator has beaten Econoday's consensus for the last three reports. New orders and new export orders were October's greatest strengths.

Beige Book

Prepared for the FOMC Meeting on December 18 & 19

The Beige Book's assessment of economic conditions has been noticeably softer this year than the FOMC's. Instead of "strong", which was the FOMC's assessment of most economic factors in November, "modest-to-moderate" remained the Beige Book's refrain. Yet the Beige Book's and the FOMC's assessment of the jobs market were the same, "strong" which is very likely to be repeated in the updated edition prepared for December's FOMC. Given the strength of demand for labor and scarcity of quality labor, comments on wage inflation will be closely watched.

Thursday

International Trade Balance for October

Consensus Forecast: -$54.9 billion

Consensus Range: -$55.4 to -$52.7 billion

Based on advance data for the goods portion of the trade report where the deficit deepened, forecasters see the October international trade balance at a consensus deficit of $54.9 billion. This would compare with a $54.0 billion deficit in September and a monthly average deficit of $52.4 billion in the third quarter.

Initial Jobless Claims for December 1 week

Consensus Forecast: 225,000

Consensus Range: 222,000 to 230,000

Initial jobless claims have been pivoting higher from historically low levels. But forecasters see a turn lower for the December 1 week at a consensus 225,000 vs what was a stronger-than-expected 234,000 in the November 24 week.

Factory Orders for October

Consensus Forecast, Month-to-Month Change: -2.0%

Consensus Range: -2.2% to -1.9%

Advance data for the durables side of the October factory orders report showed a very sharp 4.4 percent drop, reflecting a reversal for defense aircraft and step backwards for primary metals and machinery. Forecasters see factory orders in October, which will include initial data on non-durable goods, falling 2.0 percent.

Friday

Nonfarm Payrolls for November

Consensus Forecast: 190,000

Consensus Range: 150,000 to 220,000

Unemployment Rate

Consensus Forecast: 3.7%

Consensus Range: 3.6% to 3.7%

Private Payrolls 

Consensus Forecast: 185,000

Consensus Range: 150,000 to 215,000

Manufacturing Payrolls 

Consensus Forecast: 20,000

Consensus Range: 10,000 to 25,000

Participation Rate

Consensus Forecast: 62.8%

Consensus Range: 62.8% to 63.0%

Average Hourly Earnings

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

Consensus Range: 0.2% to 0.4%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.2%

Consensus Range: 3.1% to 3.3%

Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.4 to 34.5 hours

A 190,000 rise in nonfarm payrolls is Econoday's consensus for the November employment report with the unemployment rate seen holding at a 49-year low of 3.7 percent. Average hourly earnings, after a subdued monthly showing in October, are expected to rise a solid 0.3 percent with the year-on-year rate expected to climb 1 tenth to a new expansion high of 3.2 percent. Private payrolls are seen rising 185,000 with manufacturing payrolls expected to increase a solid 20,000 on top of October's 32,000 surge. The workweek is seen unchanged at 34.5 hours with the labor participation rate seen slipping to 62.8 percent vs 62.9 percent in October.

Consumer Sentiment Index, Preliminary December

Consensus Forecast: 97.5

Consensus Range: 93.0 to 98.2

At a consensus 97.5, the consumer sentiment index is expected to hold steady in the preliminary reading for December. November's final reading was 97.5 with the month's preliminary reading at 98.3.

Wholesale Inventories for October

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.4% to 0.7%

Wholesale inventories, which have been lean relative to sales, are expected to rise 0.6 percent in October vs the month's advance reading of 0.7 percent.

Consumer Credit for October

Consensus Forecast: $15.3 billion

Consensus Range: $10.0 to $19.5 billion

Rising growth of $15.3 billion is expected for consumer credit in October following September's moderate increase of $10.9 billion that showed a slight decline in revolving debt.