Employers Can’t Find Qualified Workers?

The chart below is blurry, but it still gets the job done in terms of showing you the most important trend in the labor market. The chart shows the spread between those finding jobs ‘plentiful’ vs ‘hard to get’ according to FactSet. As you can see, the ratio is above the level prior to the 2008 recession, but is below the level in 2001. The ultimate question policymakers are trying to answer is when the labor market is going to be overheated. There are some areas in manufacturing where businesses can’t find qualified workers. The question is when this situation spreads to more sectors in the economy. That will boost inflation, causing the Fed to raise rates. It will also cause margins to decline. Wage growth is important, but it will quickly get out of control, hurting the economy. It’s not great for businesses to be in a situation where they can’t find workers, so don’t think that high wage growth is nirvana. Nirvana is where we are now because the economy is in Goldilocks mode. It’s growing, but not in a way that’s causing too much inflation.

Now let’s look at some of the economic reports which were released Tuesday. The first report was Redbook which measures retail sales on a weekly basis. As you can see from the chart below, the same store sales growth in the August 26th week increased to 4.3% which is the fastest growth since June 2015. Month to date sales are up 0.2% which is the first positive reading in 8 weeks. August’s full month sales are up 3.2% which is the best growth rate in over 2-years. Clearly the retail environment is strong as workers begin to see wage growth.

The S&P CoreLogic Case Shiller Home Price index was also released Tuesday. The same trends are continuing. The market is tight as not enough houses are being built to fulfill demand. Housing prices were up 5.8% in June. As you can see from the chart below, the yearly growth has been steady while the month over month data vacillates wildly. Speaking of vacillating wildly, the Seattle housing market continues to see the fastest growth in the 20-city index. Seattle’s home prices were up 13.4%. I saw an infographic which showed the cities most and least likely to be hurt by a natural disaster. Seattle was one of the cities with the lowest risk of being hurt by a storm. Houston had high risk which unfortunately was realized this week. On the weak end of the price spectrum, Chicago, Cleveland, New York, and Atlanta came down. As I continue stress, the housing market is regional. It became correlated in the housing bubble and burst, but normally housing is based on local economies.

The Consumer Confidence report also was released Tuesday. It showed consumer expectations accelerating from July which was better than expected as economists forecasted a sequential decline. The index hit 122.9 which is the second highest reading since December 2000. As was mentioned earlier, the number of people who said jobs were plentiful increased to 35.4% to 33.2%.

Debt Ceiling

I see the debt ceiling as the biggest risk to the market this fall which is why I have been discussing it so often. The chart below is a decision tree from Deutsche bank which reviews the possible options. Obviously, there’s no way of perfectly come up with numeric possibilities for a political issue. This is still a good shot at figuring out what will happen. It acts as a good template. When something new is reported on the situation you can alter the odds in your head. You can use excel to get the exact percentages, but that’s only necessary if you plan to trade stocks specifically on this event in late-September and October.

As you can see, the first two possibilities are a clear and dirty attempt. A clean attempt is a deal that only involves the debt ceiling. A dirty attempt is one that includes other measures tacked on. It’s easier to pass a clean bill. Now let’s look at the two options after the clean attempt. The first is Paul Ryan relying on Democratic support. This seems very unlikely given the disagreements and outright vitriol between the parties. However, it’s worth noting that the Democrats support raising the debt ceiling. They would be happy to see the GOP go down in flames, but if there’s a clean bill, they will probably want to support it to avoid being blamed for it not being raised. This new era of compromise would mean this deal creates a new coalition between the moderate Dems and the moderate GOP. Ideologically, that’s possible, but the vitriol prevents this. The next box shows a new era of GOP infighting, meaning tax reform isn’t coming. I think there’s already infighting in the GOP making tax reform tough. That’s why it hasn’t been passed yet. The second option is the Dems needing improvements to Obamacare to pass the debt ceiling increase. If the Dems shoot for this, it won’t pass. I don’t think the Dems will do this because it will make them look bad like when the GOP was blamed for the impasse in 2011.

Now let’s look at the dirty options. The first is the GOP getting something extra which would be spending cuts, tax reform, and Obamacare fixes like eliminating the medical device tax. This is the best possible option because we would get the debt ceiling raised, eliminate the possibility that people see large premium increases next year, and taxes would be cut. Next there is the deal with the Freedom Caucus. This sounds unlikely because how could the GOP get healthcare and tax reform within this package, if they couldn’t get it this summer. Next there is that deal with the border wall funding. That’s what President Trump wants, but it’s yet to be seen if that’s what the Congress wants. I doubt the Freedom Caucus wants to spend more money on a wall. The final option is a failure of the GOP to compromise. I think that will happen if a deal with the Freedom caucus is attempted. I circled the two possibilities I think are the most likely.

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Don Kaufman: Trade small and Live to trade another day at Theotrade.