Less Slack=Self Sustaining Momentum

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The 5.8% civilian unemployment rate in October was the lowest since mid-2008 and is closing in on various estimates of the non-accelerating inflation rate of unemployment (NAIRU). In the past two decades, wages started to accelerate as the unemployment rate was heading toward the sub-5% zone. In the present setting, the inflection point for accelerating wage gains probably is above 5%, as suggested by the relatively high job openings rate through September. We expect wage increases to pick up from around 2% this year to 2 1⁄2% in 2015 and 3% in 2016.

The 79.3% industrial capacity utilization rate in September was nearing the traditional around 80% rate above which there have been sustained business equipment spending gains in the past. In October, the net 26% of small businesses planning capital expenditures in the next three to six months was the highest October reading in the current economic recovery. During the final two months of the year, companies will be firming up capex plans for 2015, and it will be interesting to see if the Republicans recently winning control of the Senate will enhance business confidence and planned capex.

Slack also is diminishing in the residential rental market where the 7.4% national rental vacancy rate in Q3(14) was the lowest in two decades. There has been an accompanying boost in housing units started in multi-family apartment units to high levels.  An also associated acceleration in rents is a positive for single- family home prices. Over the year ending in September residential rents rose 3.3%– approximately double the rise in overall consumer prices.

With regards to possible downside growth risks, at the top of the list is foreign demand. However, we do not see a strong dollar much affecting U.S. exports as exporters trim dollar prices and profit margins in defense of market shares.

The key upside risk is the eventual more complete venting of delayed, pent-up demand. As household formation has remained relatively subdued, there have been a growing number of young adults who have at least temporarily delayed typical living arrangements and family formation and accompanying durables and housing demand. A lower unemployment rate heading toward 5% in 2016 should help boost public confidence enough for more of this pent-up demand to be vented.

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