INDICATOR: September Consumer Prices, Real Wages and Weekly Jobless Claims
KEY DATA: CPI: +0.1%; Ex-Food and Energy: +0.1%/ Real Wages: +0.3%; Over-Year: +0.5%/ Claims: +7,000
IN A NUTSHELL: “The heat is off the housing market and that is helping keep inflation in check.”
WHAT IT MEANS: After a tumultuous day of trading, it was good that we didn’t get a threatening inflation report. Consumer prices rose modestly in September, helped along by a softening housing market that is starting to restrain shelter costs. Easing energy costs also softened, but that may have been only temporary. In addition, the glut of used vehicles led to a sharp decline in prices and that should continue. And food prices were also down, though cakes, cupcakes and cookie prices jumped. Oh, well. The surge in clothing prices needs to be watched as most of our apparel comes from overseas. Health care services costs picked up, which is also a concern. Basically, consumer costs are not accelerating significantly, which should make the Fed members happy.
With inflation low and wage gains picking up, there was a sharp rise in real, or inflation-adjusted, hourly wages in September. Still, over-the-year, the increase was a minimal. With hours worked rising, at least average weekly earnings managed to break the 1% barrier. Put simply, household spending power is still going nowhere.
Jobless claims jumped last week. Big deal. They are so low that even a surge would not change the perception that the labor market remains tight.
MARKETS AND FED POLICY IMPLICATIONS: As we survey yesterday’s carnage, we need to put the decline behind us and start asking if this is a trend or a just a temporary correction. Over the past decade, each correction has been fairly quickly followed by a reversal of fortune and the markets took off. But this time it could be different. I know, you cannot believe I just wrote that, but for nine years, we were not in a rising rate environment, so conditions have changed. But it isn’t just the Fed. The central bank has been conservative in its tightening and thinking that a one percentage point increase in rates is enough to kill the economic expansion is absurd. The optimists after the tax cuts were arguing that the economy could grow by 3% or more for years. If that is the case, is it really logical to believe that the supposedly robust expansion was so delicate that a 100 basis point increase, to rates that are still low on an historical basis, would cause growth to crash and burn? Really? Another interpretation is that the future earnings potential was overestimated because too many investors actually believed that a sustained 3% growth pace was possible. Most economists doubted that and they still do. If investors get their economics from politicians, they get the investment results they deserve. The economy is not falling apart, inflation is not surging and interest rates are getting closer to more normal levels. Over the next year, I expect inflation to accelerate slowly, the Fed to keep pushing up short-term rates and long-term rates to also filter upward. Is that enough to create a bear market? Got me, but if the taxes cuts don’t create an extended stimulus and trade issues keep pressuring the world economy, all bets on continued economic growth after next year are off.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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