Introduction

However volatile the stock market may be, the economic data coming out of Washington during the past week was very steady, neither too hot nor too cold. Unwanted acceleration that could overstretch capacity and raise talk of Federal Reserve rate hikes doesn't appear to be a risk right now. The assessment from the Fed's Beige Book at midweek marked a slight downgrading for the economy, whether in the economic assessment, the description of employment growth, or the state of inflation. And sustainable non-inflationary strength proved to be the theme of Friday's employment report as payroll growth proved favorable and wage pressures modest.

The economy

Nonfarm payrolls rose 155,000 in November which was on the low side of Econoday's consensus range but safely above the roughly 100,000 or so new payroll jobs needed each month to absorb newcomers in the labor market. The results fit well with the Beige Book's assessment, that the labor market continues to tighten but that employment growth is more modest than it is moderate. The unemployment rate in November, at 3.7 percent, was unchanged as was the labor participation rate at 62.9 percent. And a sign of moderation came from average weekly hours which, at 34.4, was at the low end of expectations. This hints at an easing in capacity stress. And manufacturing hours and overtime proved soft which point to moderate results for the coming week's industrial production report.

The wild card in the employment report was average hourly earnings which were supposed to rise 0.3 percent according to the consensus. But they rose only 0.2 percent for a second month in a row. The year-on-year rate for earnings held unchanged at 3.1 percent, yes at an expansion high but again on the low side of expectations. The night before the employment report was released Fed Chair Jerome Powell described wages as "gradually rising" which seems fair enough. Subdued wage gains are of course nothing much to brag about but at least they aren't raising any urgency for Fed rate hikes.

Turning back to payrolls, manufacturing rose a very solid 27,000 in November in the only reading that topped Econoday's consensus. However soft November's industrial production may or may not prove, manufacturing has been the economy's standout sector, adding 249,000 jobs this year with one month still to go. This is up from 207,000 new payroll jobs in 2017 and a decline of 9,000 in 2016. Trade & transportation, where capacity stress has been evident all year, added a very strong 53,000 jobs in November which may help ease ongoing material shortages and delivery delays. This grouping, which also includes utilities, has added 316,000 jobs this year.

Though November's employment report doesn't raise any urgency for the Fed to tighten monetary policy much further, there is nevertheless one area of caution: the increasing scarcity of available labor. The blue line of the graph tracks the number of unemployed who are actively out there looking for a job, at 5.975 million in November and trending clearly lower. The green line is the number for job openings, at just over 7 million in October with November's update opening the coming week on Monday. This is the central risk for policy makers, that a lack of workers could not only trip wage inflation but could also slow the economy as a whole. The former of these effects has of course proven mysteriously absent but the latter began to pop up at about mid-year. And just this last week, over half of the districts in the Fed's Beige Book said the inability to find quality labor is limiting business expansion.

A more immediate risk for growth, however, comes not from a lack of workers but a lack of foreign buying. Exports have been soft while imports have been rising, making for a deeper-than-expected trade deficit of $55.5 billion in data for October. This is the fifth straight report where the deficit has worsened, moving steadily deeper from $42.8 billion in May. October's $55.5 billion deficit compares with a monthly average in the third-quarter of $52.8 billion which unfortunately marks a very weak opening for fourth-quarter net exports.

China of course is the central focus in the nation's trade picture and here the deficit, at $43.1 billion in October, has deepened for seven straight months. Month after month, China represents the bulk of the nation's total deficit. At a year-to-date $420.8 billion, the deficit with China is 23 percent deeper than this time last year. Much of this extended deepening, however, may be tied to U.S. pre-buying of Chinese goods in anticipation of tariff actions and higher prices when 2019 rolls around the corner. Unlike other trade statistics, country data in this report are not adjusted for calendar or seasonal effects. Adjusted or not, the pattern is clear.

However severe tariffs may or may not become next year, their effects on the government's economic data were elusive in 2018. Bursts of volatility in steel and aluminum data have been easing over the past five months and other areas of disruption are hard to pin down. But food is another story. Exports here peaked at $14.1 billion in May just when tariff talk on agricultural products began to heat up and they have declined ever since. In October, soybean exports fell in half from $1.8 billion to only $0.9 billion in a shortfall that's being blamed on China. Agriculture hasn't been one of the economy's strengths this year, underscored by the Beige Book which warned that farm incomes are being constrained not only by excessive rainfall but also this year's tariffs.

Another not-so-hot spot of the economy has been construction where spending in October fell 0.1 percent for the third straight decline and the fourth decline in five months. Spending on new single-family homes fell 0.5 percent with home-improvement spending down 0.9 percent, both offsetting a strong 1.0 percent rise for multi-family homes. Spending on nonresidential construction fell 0.3 percent in October with declines sweeping the power, manufacturing, transportation and commercial components. But one area of strength, and a reminder of the positive effects of fiscal stimulus, has been public building, rising 0.8 percent in October to an annualized rate of $310.2 billion as tracked in the graph. Areas of 2018 strength have been state & local spending on health care, amusement & recreation, water supply, and transportation. Federal spending has been surprisingly subdued with strength here centered mostly in transportation.

Markets: The slow motion spectacle of inversion

The implosion of the stock market is coinciding with a creeping inversion underway in Treasury yields. The yield curve has been flattening dramatically, at 2.32 percent for 1-month T-bills to 3.15 percent for 30-year bonds. That comes out to a term premium of only 83 basis points for holding a security 29 years and 11 months! There is plenty of demand at the long-end of the yield curve, the result of outflow from the stock market into the serene peace and safety of long-term U.S. Treasuries. There were brief inversions during the week in the 3-year to 7-year belly of the yield curve but the most closely watched pairing, the 2-year and 10-year, have yet to cross. But it appears to be only a matter of time and perhaps a short time at that. Should the Fed raise rates on December 19 as planned and should they keep in place their call for three more rate hikes next year, the 2-year yield would seem an easy bet to move sharply higher. And such a decision by the Fed probably won't sit well with the stock market where another exodus could find itself invested once again in long-dated Treasuries, in turn driving the 10-year yield lower. The spread between the 2-year and 10-year ended the week at 13 basis points, having started the year at an already narrow 52 basis points.

The bottom line

However much the yield curve is flattening and however much a rate hike is expected, the outlook for the December FOMC is perhaps open. Jerome Powell has already cracked the door for fewer hikes following his message last month that the funds rate may be closer to neutral than previoulsy thought. And the economic data are not raising many warning signs, whether for excessive growth or a burst of inflation. Given the jolts underway in the stock market and against the backdrop of the economy's steady performance, the Fed could well think twice about the need for too many more rate hikes.

Week of December 10 to December 14

Monday opens with the JOLTS report and the latest update on job openings which have been climbing sharply at the same time that job seekers, due to full employment, are declining sharply. Price data are one of the week's themes beginning on Tuesday with producer prices where the effects of lower prices are expected to hold down pressure. Consumer prices follow on Wednesday and are expected to yet again show no more than modest pressure at the most. Import and export prices follow on Thursday in a report in which energy prices and food prices can have significant effects. The latest on the government's widening budget deficit will be posted on Wednesday afternoon with the Treasury budget. The week winds up with key indications on Friday: first November retail sales which will offer the first definitive indication on holiday spending, and strength in the details is the expectation, followed by industrial production and the first definitive data on November's manufacturing sector.

Monday

JOLTS: Job Openings for October                            

Consensus Forecast: 7.000 million

Consensus Range: 6.995 to 7.200 million

Strong totals for job openings are raising the risk of wage inflation that has, however, yet to appear. Forecasters see job openings holding steady at 7.000 million vs 7.009 million in September.

Tuesday

Small Business Optimism Index for November

Consensus Forecast: 107.0

Consensus Range: 106.0 to 107.0 

The small business optimism index is expected to ease slightly to 107.0 in November vs October's 107.4. October saw a little less optimism on expansion plans and earnings trends.

PPI-FD for November

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

Consensus Range: -0.1% to 0.2%

PPI-FD Less Food & Energy

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

Consensus Range: 0.0% to 0.3%

PPI-FD Less Food, Energy, & Trade Services

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

Consensus Range: 0.1% to 0.3%

Producer prices did post substantial increases in October but the subsequent reversal in oil prices points to limited pressure in November. Following October's 0.6 percent jump, no change is expected for November producer prices. When excluding food and energy, prices are expected to rise only 0.1 percent while excluding food, energy and trade services, a 0.2 percent increase is expected.

Wednesday

Consumer Price Index for November

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

Consensus Range: -0.1% to 0.3%

Consumer Price Index

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

Consensus Range: 2.1% to 2.4%

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: 2.2% to 2.3%

Easing pressure tied to lower energy costs is what forecasters see for November's consumer price index, at a consensus no change following a 0.3 percent rise in October that reflected that month's increase in energy prices. The consensus for the ex-food ex-energy core rate is a modest 0.2 percent gain. Year-on-year rates for November are seen at 2.2 percent overall, vs 2.5 percent in October, and 2.2 percent for the core vs October's tame 2.1 percent.

Treasury Budget for November

Consensus Forecast: -$165.0 billion

Consensus Range: -$204.0 billion to -$93.0 billion

Fiscal year 2019 opened with a $100.5 billion shortfall in October and a deficit of $265.0 billion is expected for November's Treasury statement. Spending on Medicare, net interest, and defense all showed sharp year-on-year increases in October.

Thursday

Initial Jobless Claims for December 8 week

Consensus Forecast: 228,000

Consensus Range: 228,000 to 240,000

Initial jobless claims have been pivoting higher from historically low levels. Forecasters see little change for the December 8 week at a consensus 228,000 vs what was a higher-than-expected 231,000 in the December 1 week.

Import Prices for November

Consensus Forecast, Month-to-Month Change: -0.7%

Consensus Range: -1.5% to -0.1%

Export Prices

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

Consensus Range: -0.5% to 0.3%

Forecasters see November import prices falling 0.7 percent after an oil-inflated 0.5 percent gain in October. Export prices are seen up just 0.1 percent after a relatively sharp 0.4 percent October rise that, however, didn't include strength for agricultural prices which were once again weak.

Friday

Retail Sales for November

Consensus Forecast: 0.1%

Consensus Range: -0.1% to 0.4%

Retail Sales Ex-Autos

Consensus Forecast: 0.2%

Consensus Range: -0.1% to 0.9%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.6%

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

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.5%

October, at a 0.8 percent gain, proved stronger than expected and moderation, due to soft auto sales and falling gasoline prices, is the expectation for November retail sales where Econoday's consensus is calling for only a 0.1 percent increase. Details in October's report were not as strong as the headline particularly control group sales which rose a solid 0.3 percent with a 0.4 percent gain the call for November. Excluding autos, a gain of 0.2 percent is the consensus for November with a 0.4 percent increase seen for ex-auto ex-gas sales. November's results will offer the first hard indication on the strength of the 2018 holiday shopping season.

Industrial Production for November

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

Consensus Range: 0.1% to 0.5%         

Manufacturing Production

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

Consensus Range: 0.1% to 0.4%

Capacity Utilization Rate

Consensus Forecast: 78.5%

Consensus Range: 78.2% to 78.8%

The consensus for November industrial production is a 0.3 percent rebound vs a marginal 0.1 percent rise in October that was held down by hurricane disruptions in utility output and rare contraction in mining. Manufacturing production is also seen rising 0.3 percent. Pressures on capacity utilization are expected to tighten 1 tenth to 78.5 percent.

Business Inventories for October

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.2% to 0.6%

A sizable 0.5 percent increase is the consensus for October business inventories in what would be the seventh straight monthly build.