KEY DATA: IP: +0.9%; Manufacturing” +1.3%/ Import Prices: +0.2%; Export Prices: 0%/ Philadelphia Fed (Manufacturing): -5.2 points/ NAHB: +2 points/ Claims: +10,000
IN A NUTSHELL: “With manufacturing surging, housing solid and inflation near target levels, it is clear the economy can withstand additional rate hikes.”
WHAT IT MEANS: While everyone seems to be focusing on the tax bill as it relates to business spending, I am more concerned that a major tax cut could create enough of a sugar high to cause inflation to accelerate. That could cause the Fed to move next year more often than expected. My worry is based on the already tight labor market and what looks like continued solid economic growth. Industrial production jumped in October led by surges in the vehicle, petroleum, chemicals, computers, apparel and furniture sectors. Put simply, most of manufacturing, whether it was durables or nondurables, was up sharply. This was a broad based increase that really does grab your attention.
Reinforcing the industrial production report was the Philadelphia Fed’s survey of manufacturers. Yes, the index did recede, but it is still high. More importantly, the components were strong as orders rose faster and hiring remained solid, though not as strong as it had been. Looking forward, confidence about not just future activity, but hiring and just about everything else, was up.
On the housing front, the National Association of Home Builders’ index increased to its second highest level in over twelve years. Only this year’s March index was higher. Builders seem to have regained their confidence, though I hope it is not irrational. I don’t think that will be the case. CoreLogic reported that home equity wealth reached its highest level in history. Homeowners have the ability to move, if they want to.
As for inflation, pressures ebbed a bit in October. Import prices rose but not significantly. There is pressure on in the petroleum and related sectors as well as metals. On the export side, farmers got a big gain in prices but that was just about it.
Jobless claims were up last week, but the level remains extraordinarily low.
MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape. The issue is neither growth nor jobs. Growth is solid and firms cannot find workers. So you need to ask what will happen if the economy surges as a result of tax cuts being implemented. Where will the added production come from if firms cannot get the workers already and productivity is in the tank? Maybe inflation doesn’t accelerate, but being an economist, I still think that markets actually work. So remember the old saying: “Be careful what you wish for, you just may get it”. The Fed needs to normalize its balance sheet and interest rates and faster growth and inflation are just the tickets they need to do so as rapidly as they want to.