KEY DATA: ISM (Non-Manufacturing): +1.0 point; Orders: -2.8 points; Employment: +3.5 points/CoreLogic (Monthly): up 0.2%; Year-over-Year: 12.0%
IN A NUTSHELL: "Despite Washington's attempts to kill the golden goose, businesses refused to break sharply in October."
WHAT IT MEANS: Surprisingly, there are indications that the economy didn't slow greatly due to the Chaos in the Capitol. Last Friday, the Institute for Supply Management's manufacturing survey reported that activity improved a touch. Today, the purchasing managers reported that the service and construction portion of the economy also picked up some speed in October. Still, the details of the non-manufacturing report were not quite as solid as the headline numbers. Orders fell sharply even as firms hired more workers. Don't ask me why that combination showed up. It doesn't make a whole lot of sense especially since this was the second consecutive decline in orders. Business activity remains below the levels posted during the summer and order books are not growing. In other words, this is a good report but one that raises real questions about what is actually happening.
In a separate report, CoreLogic indicated that home prices continued to rise but it looks like the gains are clearly slowing. Prices ticked up in September but the gain was nothing special. Part of the reason is that the supply of distressed homes is being whittled down and the average price level is closing in on previous highs. Excluding distressed homes, prices are now just 13.1% below their peak with thirty states less than 10% from their previous highs.
MARKETS AND FED POLICY IMPLICATIONS: Thankfully, and surprisingly, the economy didn't tank too badly in October. There is little doubt that the shut down and other cuts in spending, as well as the uncertainty that was created, caused growth to slow. My guess is as much as 0.5 percentage point. We get the third quarter GDP growth number on Thursday and October's employment numbers on Friday so we will have a good indication of how much momentum was carried into the shut down and how much the chaos hurt employment. But it is clear that growth was not robust during the summer and other than vehicle sales, it doesn't appear to be doing a whole lot better so far this quarter. That is why a number of the Fed members are saying that tapering is well into the future. But with prices so high, the prospect of continued mediocre growth has to be a warning to equity investors. Firms that generate profits domestically may be facing some issues if U.S. economic conditions don't pick up strength soon and with more budget cuts still in place, Washington continues to do its best to keep that from happening.