KEY DATA: Sales: +0.1%; Excluding Vehicles: +0.2%/ PPI: +0.4%; Excluding Energy: +0.5%/ IP: -0.4%; Manufacturing: -0.1%

IN A NUTSHELL: “Higher inflation but modest consumer spending and production gains is not the recipe for an economic acceleration.”

WHAT IT MEANS: Just as I was getting all bulled up on the economy, the November data start showing up. To say the least, today’s reports were disappointing. Start with the retail sales numbers, which barely budged. All the stories coming out of Black Friday weekend and Cyber Monday were that people were shopping like crazy. Yet department store demand fell and Internet sales were up modestly. Another example of false news stories, I guess. And I thought everything I read on the Internet was accurate. Oh, well. The November vehicle sales numbers were off just a touch, but they were still at a very high pace, so the decline was nothing to be concerned about. While people may not have been shopping ‘till they dropped, they did eat until they were stuffed, which is good news for the restaurant industry.

On the inflation front, wholesale costs jumped in November. This occurred despite a decline in energy prices and we know that has reversed quite dramatically in December. Services prices are surging once again and that is only because transportation services costs are relatively tame. If energy costs keep increasing, that too could change. On the goods side, though, prices are rising more moderately. Neither consumer nor capital goods costs are going up at any great pace.

The manufacturing sector has been in a funk for about two years now and there were no signs that changed in November. Output fell again and over the year, manufacturing production is up minimally. The biggest loser was the vehicle sector, as assembly rates tumbled. Given the solid demand, that will likely turn around. But it wasn’t all motor vehicles. Sharp drops in output occurred in the machinery and electrical equipment sectors as well. In contrast, the ramping up of production in oil and gas industry continued. If prices keep rising, we could see this sector in full recovery mode.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data dump probably did little to change the thinking at the FOMC meeting. But the data do raise some questions about the speed at which the Fed will raise rates next year. While the economy is not booming, it is still growing strongly enough to keep the unemployment rate going down. That can only raise wage gains, which are already accelerating. The Atlanta Fed’s wage tracker is the highest it has been in eight years. Inflation is the key for the FOMC. Oil prices are now about 30% above where they were a year ago and in January that could go to 50%. Energy will be adding to not subtracting from inflation and the top line index will be above 2% very soon. If the Trump stimulus plan is passed in any form, by the second half of next year, we could be seeing inflation nearing 3%. If that is the case, and that is my forecast, the Fed will not raise rates just once or twice in 2017. Three to four times looks likely and if there is a major stimulus package, we could see upwards of six increases (or 150 basis points) in 2018. As I like to say, no good economy goes unpunished and real fiscal stimulus will get us a good (or at least better) economy.