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April Housing Starts, Permits and Industrial Production

KEY DATA: Starts: -3.7%; 1-Family: +0.1%; Permits: -1.8%; 1-Family: +0.9%/ IP: +0.7%; Manufacturing: +0.5%

IN A NUTSHELL: “Manufacturing continues to expand solidly, but the housing sector seems to be flattening.”

WHAT IT MEANS: With both short and long-term interest rates on the rise, it is time to look at the interest sensitive sectors to see if they will be sensitive to a rise in rates. Housing is the sector always highlighted when the argument is made that rising rates would slow growth. So, what is happening? It is not clear. Housing starts did fall in April, but the decline came from a drop in the always-volatile multi-family segment. Construction of single-family units was essentially flat. Between April 2017 and April 2018, starts were up over 10% and for the first five months of this year compared to last year, they are up over 9%, so it is hard to say that the sector is not doing well. Looking across the nation, there were sharp declines in housing starts in all regions except the South. As for the future, permit requests were also down, again due to a drop in multi-family segment. But the level of permits continues to run above starts, so builders will likely be using those permits in the near future.

The manufacturing sector is in great shape. Industrial production jumped in April as the three major components, Manufacturing, utilities and mining posted solid gains. On a monthly basis, manufacturing output has been up, down and all around over the past six months and over the year, it is up only moderately. While vehicle assembly rates moderated and that led to a slowing in related sectors such as metals. But there was a solid increase in the production of all types of business equipment, led by a surge computer output. It looks like the hoped-for increase in investment spending is happening.   Rising prices are generating a large jump in energy production.

MARKETS AND FED POLICY IMPLICATIONS: How high can mortgage rates go without affecting home purchases and construction? Probably a lot higher than they are currently. In the 1980s, 30-year mortgage rates were around 10%, in the 1990s they were in the 8% range and in the 2000s the rate hovered around 6%, yet housing starts were about 25% higher in each of those periods than their current level. In other words, mortgage rates could move from the near 4.5% rate to 5.5% or 6% before we discern any measureable impact. A better indicator of housing starts is housing price appreciation. When prices rise, builders build, but when they fall, watch out. Of course, home prices are reflective of demand, which is driven by the condition of the economy and income, but we are talking about indicators, not explainers. Nevertheless, prices are up sharply so we should expect home construction to continue to increase, especially since economic growth should be solid over the next year. That is the point that investors should consider when they start to panic about rising interest rates. The Fed is tightening because the economy is solid and inflation is back to where it should be. Thus, short-term interest rates, which are still historically low, should be moving back to more normal levels. Longer-term rates are increasing because stronger growth is triggering the rise in inflation back to more normal levels, so long rates should be higher as well. The point is, “it’s the economy, stupid!” A strong economy means the economy, including the housing sector, can support inflation in 2s and mortgage rates around 6%. Historically low interest rates and inflation are not birthrights and until we stop believing that, we will continue to fear the normal. We shouldn’t.

March Job Openings and April Small Business Optimism

KEY DATA: Openings: +472,000; Hires: -86,000; Quits: +136,000/ NFIB: +0.1 point

IN A NUTSHELL: “Businesses are optimistic and looking for workers, it’s just that they don’t seem to be available.”

WHAT IT MEANS: Another day, another set of good numbers. Let’s start with the labor market. The closely followed JOLTS report, which provides data on job openings, hiring, layoffs and quits, indicated that businesses are looking for workers in just about every nook and cranny of the economy. The total number of job openings hit the highest levels since the report was first released in December 2000. There was a decline in durable goods manufacturing unfilled positions, but that may have been due to the surge in hiring that has taken place this year. Openings were up in every region of the nation. My favorite number in this report is the quit rate, which provides some information on the willingness of workers to leave their jobs. For a long time after the end of the Great Recession, people were fearful and refused to leave positions. It looks like the fear is fading as the quit rate continues to rise. A rising churn in the labor market would likely force businesses to raise compensation faster either to retain workers or replace those that have left. We haven’t gotten to the point where the quit rate would signal surge in wages, but it is getting there.

We all like to talk about the importance of the small business sector in driving economic growth and if we are at all correct, then there is good news for the economy. The National Federation of Independent Business’ April survey showed that small business owner confidence remains extremely high. The index may have only edged up over the month, but it “has been higher only 20 times out of the last 433 surveys”. In other words, we are talking about exuberance. Earnings are at record levels, but the lack of qualified workers is also causing compensation costs to rise faster, which is driving up prices. That is, we have both wage and price inflation at the small business level, something that will surely catch the eyes of the Fed members. The best description of this report is the comment made by NFIB Chief Economist Bill Dunkelberg: “There is no question that small business is booming”.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports contain both good news and bad news for investors and the Fed. They clearly point to a strong economy that is generating profits for businesses of all sizes. But it is also putting greater pressure on wages and prices, which is why we are seeing the steady rise in inflation. For the monetary policymakers, that means the economy can withstand further rate hikes, which may be needed to moderate the building inflationary pressures.  And that is the worry for investors. Large, publicly traded companies are employing most of the tax reductions on stock buybacks, dividend increases and mergers and acquisitions. As of yet, they have not invested heavily in new capital. Unless capital spending picks up, productivity will remain in the doldrums and costs will rise, providing an additional reason for the Fed to continue normalizing rates. How high will interest rates go? It is unclear right now, but there is a very high likelihood they will max out well above what most investors expected as little as six months ago and higher than many still believe will be the top.

April Jobs Report

KEY DATA: Payrolls: +164,000; Private: +168,000; Revisions: +30,000; U-Rate: 3.9%; Wages: +0.1%; Over-Year: +2.6%

IN A NUTSHELL: “The labor market may be tight, but that isn’t doing much for workers, whose wages continue to rise sluggishly.”

WHAT IT MEANS: Has the basic law of supply and demand been repealed for the labor markets or are we using the wrong measures? Businesses added a solid number of new positions in April. While the total was below forecasts, when you add in the upward revisions to February and March, you come out right at consensus. Manufacturing and construction continue to lead the way with outsized increases. Together, they make up about 13% of total payrolls but added 25% of the new positions. It is doubtful that can be sustained for much longer. There were also solid increases in restaurants, warehousing, management firms and health care. Retail, not surprisingly, was weak and state governments cut workers.

 The real eye-opener in this report was the decline in the unemployment to 3.9%, the lowest since December 2000. Only once since January 1970, in April 2000, have we had a lower rate. You have to go back to the late ‘60s to find any extended period where the unemployment rate was lower. That was when the Viet Nam War was raging and many young adults, who have a higher than average unemployment rate, were in the military, not out looking for jobs. Even the so-called real unemployment rate, which adjusts for discouraged workers and those that cannot find full-time work, is below what we saw in the 2000s (when no one complained about its level) and is not that far from the late 1990s low. Thus, we are in uncharted territory here, unless you are willing to go back to the early 1950s, when society and the economy were different and the labor force participation rate was well below the current level.

Despite the appearance of a tight labor market, the average hourly wage ticked up modestly and over the year, it is barely keeping up with inflation. That means spending power is going largely nowhere and that raises questions whether households can sustain their spending. Yes, the tax cut is causing take home pay to rise, but given the distribution of the cuts, it is not going to power a lot of spending at the mid and lower income levels.

MARKETS AND FED POLICY IMPLICATIONS: Job growth in April was right on target. It is unrealistic to expect the large increases we saw early this year to be sustained. There just are not enough workers to fill those positions and the “softening” payroll increases is really not a softening. We are closer to sustainable levels and I expect that businesses will probably add between 150,000 to 175,000 new workers per month over the remainder of the year. That is enough to drop the unemployment rate further. But is it enough to force up wages? First, the hourly wage number may not tell us much. It came into existence in early 2007. We don’t know what is normal, high or low. It is also an average, which doesn’t tell us much since it depends upon the distribution of jobs. That said, we are still not seeing any major compensation increases in either the productivity or employment cost reports. If we really are in a tight labor market, wages should be rising faster. So, either our measures are missing the point or there really isn’t a labor shortage. Or, there is a labor shortage and businesses are willing to do without workers and are lengthening delivery times instead. According to the Institute for Supply Management, manufacturing deliveries have been slowing for 19 months while non-manufacturers have been lengthening their delivery times for 28 months. At what point do customers scream enough? I don’t know, but as long as firms can push out deliveries, the fewer workers they have to hire. Right now, that seems to be working. That doesn’t mean the Fed will not have to tighten. It will, especially if growth accelerates as expected during the second half of the year. The members still think the measures of unemployment mean something.

March Existing Home Sales and Chicago Fed National Activity Index

KEY DATA: Sales: +1.1%; Over-Year: -1.2%; Prices (Over-Year): +5.8%; Inventory: 3.6 months/ CFNAI: -0.88 point

IN A NUTSHELL: “Given the paucity of houses on the market, home sales are doing about as well as can be expected.”

WHAT IT MEANS: Sometimes sellers are in the driver’s seat and sometimes buyers have the upper hand. Right now, sellers are the kings in the housing market. The National Association of Realtors reported that new home sales rose in March, but minimally. Weather suppressed closings in February in the Northeast and Midwest, but that turned around in March. Still, the level of sales remains restrained and compared to March 2017 was either down or up modestly. The problem remains the lack of homes for sale. Adjusting for the sales rate, there are only 3.6 months of supply. Though that is up a little from what we have seen over the past few months, it is about two years less than desirable. The lack of available homes is not only limiting sales but it is also leading to continued high price increases.

The Chicago Fed’s National Activity Index tanked in March, indicating that economic growth slowed during the month. This moderation in activity is consistent with a variety of other indicators and is pointing to a GDP growth rate for the first quarter that may be quite disappointing.

MARKETS AND FED POLICY IMPLICATIONS: The housing market is in decent shape, but it is not in great shape. It is hard to sell homes that are not on the market and there just are not a lot of people willing to let go. That is a real concern since solid demand and low supply leads to higher prices. Yes, higher prices should induce people to list their homes, but the decision to sell is a lot more complicated than just one of price. You then have to move and that means finding another home to buy or finding a rental unit. And that process is difficult if there are not a lot of options available. On top of that, longer-term rates are rising. The 10-year Treasury note is nearing 3% and mortgage rates are following suit. So, we having rising prices and rising mortgage rates, a combination that creates real concern for realtors. In addition, the expected surge in economic growth that was (and still is) expected from the tax cuts has not yet shown up. Estimates for the first quarter are coming down and are approaching 2%. I am a bit more optimistic, but a little shaky about my 2.6% number. The first estimate of first quarter growth comes out on Friday. For investors, the latest economic reports can only create confusion. In general, earnings have been good, but you have to ask what is real and what is tax-created. And if GDP is lower than expected and inflation higher, the markets may not take the news very well. But that is just an economist talking. At the least, we are likely in for more wild days ahead.

February Job Openings and April Consumer Sentiment

KEY DATA: Openings: -176,000; Hires: -67,000; Quits: +19,000/ Sentiment: -3.6 points

IN A NUTSHELL: “The labor market may be strong, but it does have its ups and downs.”

WHAT IT MEANS: The disappointing, but not overly surprising March jobs numbers raised some questions about whether economic growth has moderated recently. Adding a little uncertainty to the situation was the report on job openings and labor turnover, the so-called JOLTS report. This was one of past Fed Chair Yellen’s favorite releases, but it is not clear if current Chair Powell shares the same view. Regardless, job openings shrank in February. Reductions in restaurant, construction and wholesale trade more than offset expanding need for workers in finance and local government. Hiring moderated as well. Now that may seem weird given the huge number of jobs added in the monthly payroll report, but the two don’t have to work in concert because total payrolls are the difference between total new hiring and job reductions. Regardless, for me, the most important number is the quit rate, which reflects the willingness of workers to leave their jobs. While the number of people willingly leaving positions rose, when adjusted for total employment, the quit rate remained constant. Thus, the churn that in the past would force firms to bid for labor is still not rising sharply.

The University of Michigan’s Consumer Sentiment Index moderated in early April, which is hardly a surprise. As noted in the report, a fairly significant proportion of the respondents mentioned the tariff/trade war talk and it doesn’t look as if they think it will be a positive for the economy. Views on current conditions and future activity were both down, reflecting the uncertainty. Finally, it looks as if the index may have peaked and is on a downward trend. Over the year, the sentiment index is and its components are either barely up, or in the case of expectations, actually down. That is not good news for future consumer demand,.

MARKETS AND FED POLICY IMPLICATIONS: While the JOLTS report doesn’t say that labor market conditions are firming, the level of most of the components indicates that conditions remain extremely tight. Though a sentiment decline that is the result of political issue may not have a lasting impact on the economy, with consumer debt levels high and the savings rate low, weakening consumer confidence could affect spending more than normal. The surge in household confidence helped maintain consumer spending and added to the willingness to take on debt. Sentiment is still high, but a continued softening could cause growth to slow. Meanwhile, back in Washington, who knows what will happen next. Really, re-entering the TPP? Wasn’t it supposed to be a total disaster? Coincidentally, at a client meeting on Wednesday, I mentioned that the real purpose of TPP was to isolate China and force it to make concessions. I thought it was a better strategy, even given the faults in the agreement, than tariffs and trade wars. I had no idea that Trump would ask his economic advisor and trade rep the next day to look into possibly joining TPP. But now that he did, maybe we can look at the agreement through less political lenses and see it for its strengths, not just its weaknesses.

March Private Sector Jobs, Non-Manufacturing Activity and Help Wanted OnLine

KEY DATA: ADP: +241,000; Goods: +65,000/ ISM (Non-Man.): -0.7 point; Orders: -5.3 points/ HWOL: up 102,100

IN A NUTSHELL: “Ultimately, the stock markets will reflect the economy and right now, all systems are go.”

WHAT IT MEANS: Another day, another wild ride on the investor equivalent of Disney’s Space Mountain. And like the ride, market participants seem to be operating in the dark. But they shouldn’t be. While a trade war could devastate the economy, conditions right now are quite good. Take the job market. ADP’s look at the private sector always precedes the government’s report, which will be released Friday. If the two are in sync (synchronized, not the boy band), we should get a really strong March employment report. The job increases were spread across the entire economy, with robust increases in construction and manufacturing. Every size firm, but especially mid-sized companies, added workers at a huge pace. The government’s numbers tend to be a bit more volatile than ADP’s, so don’t be surprised if there is a big miss. Even if there is, it is clear the labor market is in great shape.

The Institute for Supply Management’s March reading on the non-manufacturing sector looks just like its report on manufacturing: Conditions have moved from robust to very strong. In other words, things are just fine. Even the large slowdown in order growth is not a major concern. The level of demand remains strong enough that backlogs are growing and hiring is accelerating.

With ADP saying job demand is strong and the Supply Managers indicating that hiring is increasing, it should not have been a surprise to see that the Conference Board’s measure of online want ads surged in March. Every sector, except strangely restaurants, increased their advertising activity. Only in New England did the number of want ads drop. There are a significant number of occupations where the volume of ads exceeded the number of unemployed in that profession looking for jobs. Healthcare and computer sciences are almost devoid of supply and in those as well as a variety of other areas, wage pressures have to be significant.

MARKETS AND FED POLICY IMPLICATIONS: We are entering earnings season and the first quarter reports should be good, if the economy is any factor in creating profits. Where those profits, as well as the gains from the tax cuts are going is not totally clear, but for the first time in history, no S&P 500 company cut its dividend. That says something. Dividends also hit record highs. And stock buybacks are soaring as well, so when you look at the economic and stock fundamentals, it makes you wonder what is going on in the equity markets. Actually, everyone knows. One day, the president is Tweeter-Dee and the next he is Tweeter-Dum and that is creating the looking glass issue for investors. But while equity market volatility may result from the president’s tweet-creating uncertainties, for the Fed members, the fundamentals are clear: The economy is strong. Thus, they will be focusing on the inflation signals. No matter what the headline job number looks like, the data point you want to look for on Friday is wage growth. If that is high, as I expect it to be, start pricing in another rate hike in June. With economic growth so good, the Fed knows it can raise rates without doing damage and that is what the FOMC will do.

February Consumer Confidence, January Durable Good Orders and December Home Prices

KEY DATA: Confidence: +6.5 points/ Orders: -3.7%; Excluding Aircraft: -1.2%; Capital Spending: -0.2%/ FHFA Prices (Over-Year): +6.7%/ Case Shiller (Over-Year): +6.3%

IN A NUTSHELL: “Consumers are exuberant and hopefully that will translate into more spending as firms don’t seem to be cranking up their investment activity.”

WHAT IT MEANS: There are lots of smiles on the faces of consumers these days. The Conference Board’s Consumer Confidence Index jumped in February, reaching the highest reading in over seventeen years. That was when the dot.com bubble started to burst in everyone’s face. The views on both current and future conditions were up sharply, a very positive sign. We will find out Thursday, when the January consumption numbers are released, if the good feelings are translating into better spending.

I suspect that sometime in the future, businesses will spend some of the massive increase in after-tax earnings on capital goods, but as of now, there are no signs that is actually happening. Durable goods orders crashed in January, but that was due to a huge drop off in commercial aircraft purchases. Don’t worry, Boeing is doing just fine. But aircraft was not the only weak sector. Demand was also down for machinery, electrical equipment, appliances and primary metals. Purchases of computers and communications equipment did jump and orders for vehicles edged upward. But the closely watched measure of capital spending, orders for non-aircraft, nondefense capital goods, declined for the second consecutive month and have really gone nowhere for the past three months. Maybe firms were waiting for the tax law to pass and it is taking them time to determine exactly what they should spend their profits on, but it would be nice if this measure were actually rising.

Two reports on housing prices were released today and both tell basically the same story: Housing prices are rising sharply. The Federal Housing Finance Agency’s December and fourth quarter data indicated that prices rose modestly in December but were up quite strongly over the year. The S&P CoreLogic Case-Shiller National Index was up slightly less over the year, but the difference was not huge given the way prices are measured.

MARKETS AND FED POLICY IMPLICATIONS: Feeling good is nice and having corporate coffers filled to the brim could also be good, but those two things have to actually lead to additional business and consumer spending if the economy is to grow more rapidly. So far, there is little indication that has happened. Of course, it has not been that long since the tax bill passed, so we need some patience.   Increasing capital spending only makes sense if it increases earnings and exactly how to invest is not a simple decision. Similarly, for most workers, the increase in after-tax pay will kick in slowly over the year. So don’t expect a sudden surge in either consumer or capital spending. And with the new Fed Chair making it clear that market volatility will not deter the Fed from its rate and balance sheet normalization plan, look for rates to continue to rise. When that is combined with sharply rising housing prices, the outlook for construction becomes a little clouded. In other words, growth this year should be strong, maybe even in the 3% range, but to get there, current business and consumer spending patterns have to change.  

January Existing Home Sales

KEY DATA: Sales: -3.2%; Over-Year: -4.8%; Prices (Over-Year): +5.8%; Inventory (Over-Year): -9.5%

IN A NUTSHELL: “When you add rising mortgage rates to surging prices and a lack of inventory, it is hard to see that home sales will boom anytime soon.”

WHAT IT MEANS: The housing market has been solid and it remains that way, but there are holes developing in the story that residential real estate will be a leading factor in growth this year. The National Association of Realtors reported that existing home sales were off in January, the second consecutive drop. The declines came after a very strong November number, so maybe the easing in sales could have been expected. Sill, if you average the last three months, the sales pace was only slightly above the 2017 rate, which is not a sign of strength. We cannot really blame weather for the January slump as sales were off in all four regions of the country. The problem is that there are simply few homes on the market. While the inventory did rise a bit in January, it is still way off the level seen the previous January, and that was pretty low. With few homes to purchase, buyers are bidding up prices, which continue to rise sharply. They are up by about 7% or more in three of the four regions, with only the South posting a moderate increase.

MARKETS AND FED POLICY IMPLICATIONS: For months, maybe even years now, we have blamed the lack of homes on the market for the relatively low level and modest rise in the sales of homes. And those explanations still make sense. People are just not moving and it is hard for buyers to find the house that they want. And now, interest rates are starting to rise. So, what will happen to the market? First, I do not subscribe to the belief that mortgage rates above 4.5% are a death knell to demand. As I have noted before, the housing bubble formed when rates were between 5.5% and 6.5%. But back then, supply was ample. Now it isn’t. The combination of low inventory and rising rates does not bode well for prices. But not what would be expected: Prices could surge! Buyers have been comfortable biding their time, as rates have been low and stable for so long. But a clear upward trend in mortgage costs would likely cause fence sitters – both those who are already in the market as well as those considering getting into it – to take the leap. That would bid up prices. Hopefully, those higher home values will induce owners to consider selling and given the changing locational preferences of boomers, that is very possible. Without added supply, we could be in for a boom then a bust in housing prices, if mortgage rates jump. I don’t see that happening, though, until late this year or the first half of next.

January Industrial Production, Producer Prices and Weekly Jobless Claims

January Industrial Production, Producer Prices and Weekly Jobless Claims

KEY DATA: IP: -0.1%; Manufacturing: 0%/ PPI: +0.4%; Less Food and Energy: +0.4%; Goods: +0.7%; Services: +0.3%/ Claims: +7,000

IN A NUTSHELL: “Business confidence may be sky-high, but it would be better if actual business activity was growing faster.”

WHAT IT MEANS:   “Watch what I do, not what I say” is the phrase we should be thinking about right now. Surveys are showing businesses are exuberant. According to the National Federation of Independent Business Chief Economist Bill Dunkelberg, “The historically high index readings over the last year tell us small business owners have never been more positive about the economy”. Similarly, the most recent Conference Board Measure of CEO Confidence jumped. Well, what is happening in reality? Apparently, not much. Overall industrial production declined in January and manufacturing output was flat for the second consecutive month. That is hardly a sign of a booming economy. There were some strong sectors. Motor vehicle assembly rates increases, helping power a rise in metals output. There were also solid increases in the production of petroleum, textiles, electrical equipment, computers and appliances. A rebound in business equipment output implies that businesses may be ramping up investment spending. But that is still to be seen.

Meanwhile, the drumbeat of higher inflation is getting louder. The Producer Price Index jumped in January, the fifth time in sixth months the index was up by at 0.3%. Yes, energy prices soared, but excluding that sector, prices still rose solidly. Over the year, wholesale prices increased 2.7% and just about every special segment of producer costs has posted gains in excess of 2%. In other words, the price increases are spread across the entire economy.

Weekly jobless claims rebounded last week, but that was from historic lows, so the rise doesn’t mean much. Businesses want to retain workers and the incredibly low level of claims supports that view.

MARKETS AND FED POLICY IMPLICATIONS: After a short scare, investors seem more than willing to look past things such as accelerating inflation and rising interest rates and focus on what they believe will be the never-ending benefits from the tax cut legislation. But it does appear as if higher inflation is here to stay. The latest surveys by the New York and Philadelphia Federal Reserve Banks found that about half of the respondents expect to get higher prices for their goods in the next six months, while very few thought prices would fall. In the Philadelphia report, a special question on prices and compensation showed that inflation expectations increased from three months ago. This should be a concern for Fed members, who consistently argue that inflation expectation are “well anchored”. Well, maybe that anchor is started to come loose. While equity investors are shrugging off the inflation data, the bond markets are not. The ten-year Treasury note hit its highest rate in over four years while the 2-year note reached a 9½-year high. Just a few months ago, before the surge in rates, many investment “gurus” were saying the economy would crash and burn if we got to 3% on the 10-year. Yet here we are with a rate that is just a few basis points from 3% and the equity markets are rising. So, is the exuberance in the stock markets rational or irrational? Where is Alan Greenspan when we really need him? I hardly expect new Fed Chair Powell will be making any comments that could roil the markets, even if he should be asking some really hard questions.

January NonManufacturing Activity and Employment Trends Index

KEY DATA: ISM (NonManufacturing): +3.9 points; Orders: +8.2; Employment: +5.3 points/ ETI (Over-Year): +5.4%

IN A NUTSHELL: “The non-manufacturing portion of the economy seems to be kicking it up a notch and that bodes well for growth this year.”

WHAT IT MEANS: The economy is in really good shape, which is odd given that investors seem to be suddenly worrying about things. The manufacturing sector, though not booming, is solid while the service sector is getting even better. The Institute for Supply Management’s NonManufacturing Index jumped in January, led by a resurgence in new orders. To meet the growing demand, hiring is accelerating. Even better, order books are starting to fill even further. In other words, conditions are go for this segment of the economy.

The improving condition of the economy, which was already good to start with, is driving up demand for workers. The Supply Managers’ survey was not the only one to show that. The Conference Board’s Employment Trends Index rose strongly in January and is up sharply over the year. The implications are clear: Conditions will only getter better going forward. Or, as was stated in the report, “The Employment Trends Index continues its solid path upwards and shows no sign of slowing down”.

MARKETS AND FED POLICY IMPLICATIONS: The stock markets may finally be starting to focus on the real side of the economy, which may explain some of the current correction. As I have noted, expansions don’t simply fade away. They are caused by either bubbles bursting, such as the tech and housing bubbles, or policy mistakes, such as the Fed jamming on the brakes. But while investors have celebrated, and rightly so, the massive corporate tax cuts, economists have worried that expansionary fiscal policy piled on top of a solid economy and labor shortages could be categorized as a policy mistake. And the Fed members may be seeing that as well as their focus on inflation seems to have intensified. What needs to be determined is whether the acceleration in activity is too much of a good thing and if it is, how much is the ‘too much’. The course of both inflation and wages over the past couple of years has not conformed with normal economic theory. For every theory there is a counter-argument. For example, I have heard the argument that the number of people in the 24-55 age group who are not in the workforce is unusually large and that may represent a major source of potential labor. In rebuttal, it is argued that many of those people cannot pass a drug or background check and have given up looking for work because they know they will not be hired. Which is the correct interpretation? We don’t know, because the data on the characteristics of the unemployed, at least as it comes to drug or background issues, doesn’t exist. Yet it is critical because it speaks to the extent of the actual labor shortage and the impact of the tax cuts not just on economic growth but on wage and price inflation and the potential course of interest rates. The lack of clarity about growth and inflation is likely to create a lot more volatility going forward.