This week stocks jumped around in reaction to earnings reports and the Trump tax plan. Treasury bond yields fell on the rumor that Federal Reserve Governor Jerome Powell would replace Janet Yellen as Chair. Powell is less of an inflation hawk, so I expect easy monetary policy to continue. The markets are happy but will the Senate agree and confirm him? We’ll see, says Lance Gaitan, Dent Research, November 3, 2017.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of November 3, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
The U.S. Economy Created 261,000 Jobs in October... The unemployment rate dropped to 4.1%, a 17-year low.
What it means – The number of jobs created fell well short of the 325,000 expected, but the Bureau of Labor Statistics (BLS) revised the previous two months up by 90,000. And there’s no doubt that the hurricane effects are still in play. The same goes for average hourly earnings, which came in flat for the month.
It makes sense that employers would shed lower-paying jobs immediately after the storms, which would drive up the average hourly income. As businesses add those positions back, the average falls.
Overall, there wasn’t much to get excited about in this report, but our old friend, the birth/death adjustment, did play a part. The BLS’ guessed-at statistic added 216,000 jobs to the non-seasonally adjusted figures, making up the bulk of job gains in October.
No matter what people try to tell us, the economy is still slogging along at a very modest speed.
July S&P CoreLogic Case-Shiller Home Price Index Up 5.9% Over Last Year... The gain is the highest in three years.
What it means – Home prices continue marching upward, with few existing homes for sale and relatively few new homes hitting the market. As it has for years, the trend is exacerbating an already difficult situation – the lack of affordable housing available for the next generation of first-time homebuyers.
The best outcome would be for homebuilders to create more inventory, giving young buyers more choices, and potentially competing with existing homes to put downward pressure on prices. But that doesn’t look like it’s in the cards anytime soon. For now, young, aspiring homebuyers will have to make due with older homes that they purchase and renovate. That should be good for all the home-flipping shows on HGTV, but it’s no way to grow an economy.
Federal Reserve Holds Rates Steady... The central bank kept overnight rates at 1.00% to 1.25%.
What it means – Few expected any rate changes this month; instead, it was all about the language. The Fed revised its description of economic activity from “rising moderately” to “rising at a solid rate.” Fed officials also dismissed broad impacts from the hurricanes, which they believe won’t affect the economy long-term. Overall, they’re expected to raise rates next month. They do so at their own risk.
The Fed should wait at least until February to hike rates. By that time, all the replacement buying after the hurricanes should be through the system. If they hike rates too early and then GDP falls off, they risk looking like they impeded growth.
President Trump Appoints Federal Reserve Governor Jerome Powell As Next Fed Chair... Trump had vowed on the campaign trail to replace current Fed Chair Janet Yellen.
What it means – The markets can breathe a sigh of relief, or frustration, depending on what they wanted. Powell has echoed Yellen’s comments in many speeches over the years.
Investors expect him to keep up her dovish policies and to go a step farther, reducing regulation. This doesn’t put the Fed on the path to a mathematical rule for setting interest rates, but it does give investors a sense of what they can expect in the
future – more of the same.
October Auto Sales Remain Elevated at 18.1 Million Units... After posting the highest monthly sales numbers since 2005 in September at 18.6 million units, auto sales continued at a blistering pace in October.
What it means – It’s interesting to read that the Fed governors don’t see much of an economic impact from the hurricanes, and then note that auto sales are running near a record pace for the last two months after being in the doldrums for much of the year. It’s almost – almost - as if people who lost vehicles in Hurricane Harvey are spending tens of thousands of dollars on credit to replace their rides. But then, that would be an economic impact.
We’ve covered this ground before. Just as quickly as sales jumped, expect them to fall off in the weeks ahead. Falling auto sales will negatively impact durable goods orders and factory orders, and then take a chunk of out GDP growth.
Atlanta Fed GDPNow Model Forecasts Fourth-Quarter GDP Growth at 4.4%... The new forecast is a 60% jump from the previous estimate of 2.8%.
What it means – The Atlanta Fed’s GDPNow model is the most accurate GDP forecasting tool I’ve found, but it has to be used as intended. The model is dynamic, incorporating new data as it comes out. With several key metrics running hot based on Hurricane Harvey replacement spending (as noted above), you can expect this GDP model to show incredible strength. But over the course of the economic quarter, I think the economic reports will fall back to earth and bring this model down with them.
When it’s said and done, I think GDP will drop back to the long-term average of about 2%, but that’s the good news. Since we’re pulling forward demand for vehicles and some other durable goods, it’s likely that GDP growth will suffer after the first quarter of 2018, which will be just as the Fed is trimming its balance sheet and after it raises rates, putting the institution in an awkward position.
The GOP Released the Tax Cut and Jobs Act for Review... The tax reform cuts corporate taxes dramatically while keeping the top income tax rate for individuals.
What it means – There’s something here for everyone to hate, which seems to be the case with any tax initiative.
The proposal cuts the corporate rate to 20%, eliminates the alternative minimum tax, and gets rid of the estate tax. To pay for it, the act calls for eliminating deductions for the energy and pharmaceutical industries as well as cutting out mortgage interest and state and local tax deductions for individuals.
There are lots of other details in the 429-page proposal, but you get the idea. It’s going to be a fight.
Tesla Produced Fewer Cars than Expected in October, and Spent More Money... The electric car company built only 260 Model 3 sedans, less than 20% of the 1,500 it had forecast. Tesla also ended the month $200 million more in the red than anticipated.
What it means – Gee, Tesla lost a lot and produced less than founder and CEO Elon Musk said it would. No surprises there. The company and its larger-than-life leader have made a habit of over-promising and under-delivering, which is usually a recipe for disaster. For whatever reason, so far investors have given the company a pass. That might come to an end soon.
As I outlined in Economy and Markets earlier this week, Tesla will soon have massive competition from traditional car companies that have production scale, supply lines, dealer networks, and gobs of cash. If Musk and company don’t right the ship soon, they could find themselves falling from the front of the electric car race to the back of the pack.
Next Week – The first full week of November is very quiet on the economic front. There are no major economic releases, just a few minor reports such as consumer credit and small business optimism.
The proof is in the planning.
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