KEY DATA: IP: +1.0%; Manufacturing: +0.5%/Claims: 264,000 (down 23,000)
IN A NUTSHELL: “Manufacturing is strong and with jobless claims at the lowest level in over fourteen years, it is clear that the economy and Wall Street are in different worlds.”
WHAT IT MEANS: With chaos reigning in the craps table called Wall Street, we need to step back a little and start looking at the underlying economy. The data look pretty good. Industrial production rebounded sharply in September as utility output surged. Manufacturing was up solidly and the increase was actually better than the headline would have you believe, and that number was pretty good. Vehicle sector production dropped for the second consecutive month but it looks like sales and inventories are reasonably balanced, so don’t expect the declines to continue. Manufacturing production rose at a 3.5% annualized pace during the third quarter. In September, more consumer goods, business equipment and supplies and construction supplies was produced. The only industry, other than vehicles, that posted a significant decline was wood products while the gains were spread across both durable and nondurable goods industries.
Supporting the view that manufacturing is improving was the Philadelphia Fed’s October Manufacturing Business Outlook Survey. While activity eased a little, it remained at a level consistent with those posted during the solid growth periods in both the 1990s and 2000s. Also, the percentage of firms indicating activity had declined over the month actually fell.
Maybe the best number today was the jobless claims, which came in at the lowest level since April 2000. Adjusting for the size of the labor force, we are at record low levels for a weekly number and the four-week moving average. Firms are just not cutting their workforces and that points to the possibility that the October employment report could be really strong.
MARKETS AND FED POLICY IMPLICATIONS: The economic reports were really good but investors decided that panic was the better part of valor. Really people, did you think that we could keep piling up huge gains in equities when the U.S. and world economies were growing moderately at best? The Dow and S&P peaked in mid-September. Over the previous two years, those indices rose by 27.3% and 38.7%, respectively. Meanwhile, GDP grew by only 4.5% between 3rd quarter 2012 and 3rd quarter 2014 (assuming a 3% growth rate this past quarter). I don’t know how many times I said it but I will repeat it again: Wall Street and Main Street have become totally disconnected. If you use the equity markets as an indicator of the economy, you are looking at the wrong thing and the Fed should care little about Wall Street when it comes to determining a monetary policy that is best for the economy. I am sure there will those who argue the Fed has to put off tightening so it doesn’t spook the markets even more, but that would be arguing the Fed should use a misleading indicator. Ultimately, equity prices, earnings and the economy will be better in synch but right now, I don’t worry too much about a market correction when the data keep showing the underlying economy continues to grow decently and the pace may actually be picking up.