Introduction

The mid-term elections may have extended Republican control of the Senate but, more immediately for economic policy, they also put the Democrats in control of the House. Recent talk of a middle-class tax cut, suggested by President Trump, seems to have suddenly gone silent and the possibility of new stimulus for business investment, apart from infrastructure, may now be more distant. Yet targeted stimulus could in theory be justified given the Federal Reserve's latest economic assessments where business investment, after surging in the first half of the year following the corporate tax cut, is now described as having moderated. We'll use the Fed's various assessments from their November FOMC statement to work our way through the week's economic news.

The economy

One FOMC assessment that did get an upgrade was unemployment, moving from already low to declining further. This reflects the 2 tenth downtick to 3.7 percent in October's unemployment rate released in the prior week. Employment data in the latest week were headed by a JOLTS report that shows a still elevated level of job openings and a stubborn imbalance relative to hiring. Openings did edge lower to 7.009 million in data for September but follow August's record at 7.293 million. And hirings also fell, to 5.744 million from August's 5.906 million. The gap between openings and hires has exceeded 1 million in six of the last seven months with September's gap at 1.265 million. That's a lot of jobs that are waiting to be filled and the lack of success at finding the right people for these openings points to the possibility that employers could begin to raise their offers. Yes, wage pressures have of course remained subdued in the hard economic numbers but there are plenty of anecdotal reports, centered especially in the Fed's Beige Book of economic assessments, that employers are indeed offering higher wages to attract quality candidates. The separation between the rate of growth in job openings and the rate of hires has stabilized in recent months but remains sizable, at 12.5 percent year-on-year growth for openings vs only 6.9 percent growth for hires.

And the gap between job openings relative to people looking for work also remains wide. The 7.009 million in openings during September compares with 5.964 million Americans who were actively pounding the pavement in the month. This latter number has since moved to 6.075 million with October's employment report but the separation remains roughly the same, at nearly 1 million. Simply, employers are trying to fill an increasing number of openings from a sinking pool of labor. No wonder that hires are lagging. If the laws of supply and demand still apply to the labor market, then the lack of supply against the strength of demand will eventually trigger a rise in the price of labor. This is really at the crux of why the Federal Reserve is on its rate-hike mission, to slow demand for labor and limit the imbalance with supply. Job openings data and the number of unemployed are both produced by the Labor Department with JOLTS standing for Job Openings and Labor Turnover Survey.

Demand for labor isn't easing any based on the most immediate data which are initial jobless claims for the November 3rd week. Initial claims held little changed with the 4-week average down slightly at 213,750, and though this level is slightly higher than early October, the results nevertheless offer a positive initial indication for the November employment report. A slight rise in this average over the past couple of months is visible in the accompanying graph and reflects the temporary effects of this year's hurricane season, first Florence in September and then Michael in October. These effects proved limited and are now clearing and they were never apparent in continuing claims which are the green columns of the graph where data lag by a week. This 4-week average, at 1.633 million, has been making a long unbroken run of 45-year lows. The October employment report proved remarkably strong with unemployment not only falling but payrolls jumping by 250,000. The trends in the claims data hint at no let up for the November employment report.

The FOMC's assessment of general economic activity held at the "strong" ranking and the week's data that touch on the wider view are the services PMI and the ISM's non-manufacturing report. Plus-50 growth in the services PMI, at 54.8 for October, has been lagging the degree of strength of the ISM but the trends, as tracked by the dotted lines of the graph, are going in the same direction and that's higher. Strength in new orders led October's PMI results with building backlogs, rising input costs, and rising selling prices all underscoring capacity pressures for the sample. The ISM index has been on a tear, coming in at 60.3 in October following September's record at 61.6. Capacity stress in this sample has also been apparent but in goldilocks results for October they generally eased, led by a slowing build for backlogs, an easing in cost pressures and only a modest lengthening in lead times. The service sector represents the great bulk of the economy with the ISM report also tracking two additional sectors, mining and construction. Again, judging by the resutls of these reports, the economy opened the fourth quarter in stride and the trend going into November is definitely favorable.

One area of the economy where trends are less favorable, however, is business investment  which the FOMC downgraded in line with its marginal contribution to third-quarter GDP. There were no reports in the week on business investment so let's turn to the prior week and the third-quarter productivity report for clues. The graph tracks year-on-year percentage change in output per person which, at growth of no more than 1 to 1-1/2 percent the last couple of years, has been much more subdued than the prior expansion starting in 2001. Two important factors for growth in output are the skill levels of individuals and also the equipment that individuals have access to. And the softening in business investment described by the FOMC will not be a positive for future output. How can economic policy improve business investment? Tax incentives tied to new equipment and structures is one possibility. For the economy to be in its finest form, output per person has to improve. Note that growth in individual output spiked to 5 percent during the deep downturn of 2009 and 2010. This sharp improvement reflected the culling of the workforce as businesses cut costs by dismissing their least productive workers while holding onto the most productive.

One of the central benefits of improved productivity is a downpull on inflation, that it will take less time to produce goods and services. The FOMC's inflation assessment was unchanged with both overall inflation and ex-food ex-energy core inflation said to be holding on target near 2 percent. Nevertheless, there are unexpected hints of pressure in the latest producer price report which clearly jumped in October. Overall prices rose 0.6 percent, which is the highest monthly reading in six years, with core prices up 0.5 percent for the hottest showing in nearly seven years. The pressure was tied to a sudden jump in trade services which track wholesalers and retailers and where costs in November could easily turn back lower. The gain in the overall rate also reflected an outsized contribution from energy prices which are since going down dramatically, from over $70 for oil last month to just barely $60 this month. But there are inescapable pressures in the report including for construction costs, which are being driven higher by shortages and tariffs, and also for finished consumer goods which may begin to affect the consumer price report. The coming week will highlight the consumer price report where October expectations, driven higher by producer prices, are looking for a noticeable 0.3 percent overall rise.

Markets: Oil suddenly no inflation risk at all

Oil was one of the week's big surprises, falling nearly 5 percent to just under $60 and pushing the year-to-date change suddenly into the negative column, at minus 0.5 percent. This decline is unexpected given this month's imposition of U.S. sanctions on Iran which is a leading producer of oil. The price drop is in line, however, with rising inventories in the U.S., climbing nearly 6 million barrels in the November 2nd week to 432 million. The outlooks for oil supply and oil prices are as unclear as ever but if the current trends holds up, inflation pressures from energy could become more subdued and – regardless of wage growth – offer the Fed less justification for higher interest rates.

The stock market had a solid week showing a big rise for the Dow and S&P, up 2.8 and 2.1 percent respectively, but less strength for the Nasdaq which rose 0.7 percent. Stocks seemed to rally on the mid-term election where the results, if anything, point to less dramatic economic policy over the next two years. Still, both parties are talking about infrastructure investment including for streets and highways where benefits would be similar to an increase in business investment though played out in slow motion over the course of many years.

The bottom line

Household spending was also touched on by the FOMC and here the assessment, like the general assessment, remains strong, a view supported in the week by the Redbook report where year-on-year growth in same-store retail sales is holding at expansion highs. It's the consumer, backed by enormous demand for labor, that's the economy's central strength and unless unexpected cracks begin to appear here, it seems unlikely that the Federal Reserve, however soft business investment could become, would veer from its path of raising interest rates.

Week of November 12 to November 16

The week's data will be headlined by consumer prices and retail sales which, however, may well be overshadowed by Jerome Powell who will address economic issues late Wednesday in Texas. Monday is Veterans Day so the week's data won't begin to unroll until Tuesday which will be highlighted by the Treasury budget and the opening of the government's new fiscal year. October's CPI will be posted Wednesday morning amid some expectations for pressure with Powell to speak later that afternoon beginning at 5:00 p.m. ET. Retail sales will top a heavy slate on Thursday that will also include both the Empire and Philly Fed reports for November and one more look at October inflation with import and export prices. Industrial production will close the week on Friday where headline weakness, the expected result of Hurricane Michael's strike, is the call.

Tuesday

Small Business Optimism Index for October

Consensus Forecast: 108.0

Consensus Range: 107.5 to 108.0 

The small business optimism index is expected to hold steady at 108.0 in October vs September's 107.9 which was just off August's record at 108.8. September saw a little less optimism on the economy and sales.

Treasury Budget for October

Consensus Forecast: -$111.8 billion

Consensus Range: -$124.0 billion to -$98.0 billion

Fiscal year 2019 is expected to open with a Treasury deficit of $111.8 billion for October. Fiscal year 2018 ended with a 17 percent deepening in the government's deficit to $779 billion.

Wednesday

Consumer Price Index for October

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

Consensus Range: 0.1% to 0.4%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.5%

Consensus Range: 2.3% to 2.6%

CPI Core, Less Food & Energy

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

Consensus Range: 0.2% to 0.3%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.2%

Consensus Range: 2.1% to 2.3%

Moderate but noticeable pressure is what forecasters see for October's consumer price index, at a consensus gain of 0.3 percent following a very subdued 0.1 percent rise in September in a report that showed broad weakness including for energy prices, food, vehicles and also housing which is the report's largest component. The consensus for the ex-food ex-energy core rate is a modest 0.2 percent gain vs marginal increases of only 0.1 percent in the past two reports. Year-on-year rates for October are seen at 2.5 percent overall, vs 2.3 percent in September, and 2.2 percent for the core which would be unchanged from September.

Thursday

Initial Jobless Claims for November 10 week

Consensus Forecast: 215,000

Consensus Range: 210,000 to 215,000

Hurricane effects have increased claims over the past couple of months but only very slightly. Forecasters see little change for the November 10 week at a consensus 215,000 for initial claims vs 214,000 in the November 3 week.

Philadelphia Fed Manufacturing Index for November

Consensus Forecast: 20.0

Consensus Range: 18.3 to 22.0 

Slightly easing strength to 20.0 is the call for November's Philly Fed manufacturing index which in October posted a stronger-than-expected 22.2. October's report proved especially favorable showing continued strong inflow of new orders together with easing supply-side constraints including an outright drawdown in backlog orders and sharp moderation in delivery delays.

Retail Sales for October

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.7%

Retail Sales Ex-Autos

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.7%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.3%

Consensus Range: 0.2% to 0.4%

A solid 0.5 percent increase is the forecast for October retail sales which proved flat in both September and August at only 0.1 percent gains. But there has been underlying strength in this report as control group sales, which exclude autos, restaurants, gasoline, and building materials, have been very solid and posted a 0.5 percent rise in September. October's call for control group sales, which are inputs into personal consumption expenditures, are a 0.3 percent gain. Excluding autos, a gain of 0.5 percent is the call that reflects flat October results for unit vehicle sales with a 0.4 percent increase seen for ex-auto ex-gas sales.

Empire State Index for November

Consensus Forecast: 20.0

Consensus Range: 18.5 to 22.2

At a consensus 20.0 vs 21.1 in October, strong and steady growth is the expectation for the November Empire State index. October showed very good results as capacity stress eased including a sharp drawdown in unfilled orders and only a fractional increase in the workweek.

Import Prices for October

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -0.2% to 0.2%

Export Prices

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

Consensus Range: -0.1% to 0.3%

Forecasters see October import prices unchanged after an oil-inflated 0.5 percent increase in September in what was an otherwise subdued report. Export prices have been consistently weak, down 0.2 and 0.5 percent in the prior two reports with October's consensus at only a 0.1 percent gain.

Business Inventories for September

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

Consensus Range: -0.1% to 0.4%

A moderate 0.3 percent increase is the consensus for September business inventories in what would be the sixth straight monthly build.

Friday

Industrial Production for October

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

Consensus Range: -0.1% to 0.4%        

Manufacturing Production

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

Consensus Range: -0.5% to 0.4%

Capacity Utilization Rate

Consensus Forecast: 78.2%

Consensus Range: 77.9% to 78.4%

A consistent strength has been mining but weakness in utility output is likely for October's data following outages across six Southeast states from Hurricane Michael. The consensus for October industrial production is a 0.2 percent gain vs 0.3 percent in September with manufacturing seen rising 0.3 percent following September's moderate 0.2 percent increase. Pressures on capacity utilization are expected to tighten 1 tenth to 78.2 percent.