Category Archives: Philadelphia Fed Index

FOMC Commentary, November Leading Indicators, December Philadelphia Fed Survey, Jobless Claims

KEY DATA: Leading Indicators: +0.6%/Philadelphia Fed: 24.5 (-16.3 points)/Jobless Claims: 289,000 (down 6,000)

IN A NUTSHELL:   “The Fed may be shifting into “patience” mode, but the economy is continuing to accelerate.”

WHAT THE DATA MEAN: Today’s economic reports showed that the economy continues to improve.  The Conference Board’s Leading Economic Index jumped again in November and it looks like the increases are pointing to a very strong economy going forward.  Looking at a graph of the index, the rise seems to match the 2003-2004 housing bubble economic surge.  Supporting the view that the economy is picking up steam was another fall in weekly jobless claims.  The jump in claims near Thanksgiving seems to have been a one-week wonder and we are back to record lows, when adjusting for the size of the labor force.   As for the Philadelphia Fed’s Business Outlook Survey, a large decline was expected.  This index can be very volatile and the November number was one of the highest on record.  The December level also points to strong growth, especially since orders remain solid. 

FOMC Commentary: Yesterday, the Fed did and didn’t do what I thought they would and should do: Remove the “considerable time” phrase.  Maybe.  It didn’t do it because it repeated it.  But more importantly, the Committee substituted a new comment,that it can be patient (emphasis added) in beginning to normalize the stance of monetary policy”, and noted that patience and considerable time were similar if not equal.  Getting confused?  No kidding!  The statement seems to be the most tortured attempt at changing the psychology surrounding the timing of tightening I have seen.  I guess that is what happens when you worry more about market reaction than policy clarity.  We know little more now than we did before the meeting and press conference.  So much for better communications.

So, what does patience mean, when it comes to rate hikes?  Chair Yellen said we have a breather for the next two meetings. However, the chart of fed funds rate expectations points to a tightening in 2015, which will likely come at around mid-year.  What would make her lose her patience?  Stronger growth and that is where the data come in.  By the time we get to the April meeting, we will have three more employment reports and GDP numbers for the fourth quarter of 2014 and first quarter 2015.  If the Leading Indicators are pointing to anything it is the string of 3.5% growth rates could be sustained.  If that is the case and the job gains are above 250,000 and the unemployment rate continues to decline, it would be hard to see how wage increases don’t accelerate.  But I am guessing that patience will be tied to compensation and until we actually see large increases in wages, the Fed will continue to dawdle. 

October Existing Home Sales, Leading Indicators and November Philadelphia Fed Index

KEY DATA: Home Sales: +1.5%; Leading Indicators: +0.9%; Phila. Fed: up 20.1 points

IN A NUTSHELL:   “It is looking more and more like the economy is accelerating.”

WHAT IT MEANS:  Where should I start?  How about the outlook for the future?  The Conference Board’s Index of Leading Indicators jumped for the second consecutive month, and the stock market didn’t even help this time!  If this measure has any predictive capacity, and it does, then it is pointing to a lot stronger growth in the months to come.  A second indication that growth may be picking up was the huge increase in the Philadelphia Federal Reserve Board’s Business Outlook Survey’s activity index.  This index does bounce around but the enormous rise points to a clearly improving manufacturing sector.  There was a special set of questions asked about employment and almost 56% of the respondents say that they expect to hire in the next twelve months.  That is up about ten percentage points since January and the major reason is that firms expect sales to rise.  The positive sales outlook should not be a surprise given that only 1.7% of the respondents expect growth to slow over the next six months.

For the economy to really hit its stride, we need the housing market to at least hold up its part of the deal.  Existing home sales rose in October and demand has finally clawed back above where it was when rates spiked.  For the first time since October 2013, the year-over-year change was positive.  The increases across the nation were solid but there was a decline in demand in the West.  Prices seem to firming again, in part because of the inventory is shrinking.  Rising prices is critical if homeowners are to have enough equity to sell their current houses and move into different ones.  That churn has been missing from the market.

MARKETS AND FED POLICY IMPLICATIONS:  What a day for the economic data.  While overall inflation may be restrained, we saw that services inflation is coming back and the level of jobless claims points to additional strong employment reports.  Now it appears that housing is picking up, albeit slowly, while manufacturing may be poised for a large increase.  When you add those numbers the jump in the leading indicators, you really have to feel optimistic about the economy.  The Fed is debating the use of the term “considerable time” when it comes to keeping rates low.  But the members may dump that phrase as early as the mid-December FOMC meeting if the economic numbers continue to show increasing economic and labor market strength.  They may also have to start talking about services inflation, something that really needs to get the attention that has been missing.  But investors like to focus on the positive and the latest numbers only feed the bullish beast.