January New Home Sales and February Consumer Confidence

KEY DATA: Sales: +3.7%; Over-Year: +5.5%; Prices: +7.5% / Confidence: -2.2 points

IN A NUTSHELL: “Consumers are confident and are buying homes, but builders are not getting their share of that demand.”

WHAT IT MEANS: The economy is solid, consumer confidence is high and growth in the United States and around the world is improving. That is a mess every new president should hope for. Today’s data only add to the belief that while conditions are not booming along, they are accelerating. New home sales rose moderately in January. Still, the level of demand remains less than most builders would like to see. Whereas existing home sales were the highest in a decade, newly built units are still selling at depressed rates. Indeed, sales need to increase between 15% and 20% for the market to be called solid. Looking across the nation, solid gains were seen in all areas except the West. As for prices, they are rose rapidly, though the gains have had their ups and downs. Inventory is also improving, though it is hardly what one would call excessive. There is not a whole lot of speculative building going on.

Consumer confidence has skyrocketed since the election so it was not a great surprise that the University of Michigan’s Consumer Sentiment index eased in February. Household views on current conditions improved but they were more cautious about the future. That also should shock no one. Not surprisingly, Republicans are borderline irrationally euphoric about the future while Democrats are borderline irrationally depressed. That makes clear how the political divide is affecting people’s views on the future economy and possibly spending patterns.

MARKETS AND FED POLICY IMPLICATIONS: The more data we get, the more it is clear that the economy is moving forward solidly. No, we are not going to get 3% growth on an extended basis soon, but we should move back to the 2.25% to 2.50% range that we had seen until the collapse of energy prices shut down the energy sector. It is interesting, though, to see the divide between the new home and existing home sectors. In both places, inventory is low and prices are rising, but the sales pace of newly constructed properties is disappointing. Apparently, the real deals are in existing homes and people are moving in that direction. For construction to rise faster, we need demand to increase, but builders will not put the shovel into the ground unless they have a clear indication the product will move. That is not an easy cycle to break, but it will keep us from revisiting the housing bubble days. We could use a few more homes on the market to spur traffic and ultimately sales. On the consumer front, reality needs to set in. The future is neither a rosy as Republicans think or dark as Democrats believe. But the longer it takes for the replacement of the ACA and for tax cuts and spending increases to be passed, the more concerned households, especially Republicans, will become about the future. This shows how politics could affect economic activity in this highly divided nation. When or if the uncertainty over fiscal policy takes hold in the equity markets is a wholly different question, but for now, optimism reigns.

January Housing Starts and Permits, February Philadelphia Fed Survey and Weekly Jobless Claims

KEY DATA: Starts: -2.6%; Permits: +4.6%/ Phila. Fed (Manufacturing): +19.7 points; Orders: +12 points/ Claims: +5,000

IN A NUTSHELL: “There is not much to complain about the economy as housing and manufacturing are improving and the labor market remains tight.”

WHAT IT MEANS: We know that inflation is on the rise and while energy is a factor in the acceleration of price gains, it is not the only one. The economy is getting stronger and that has major implications for future inflationary pressures. In January, housing starts edged downward, but that came after an upward revision to the December numbers. Single-family construction rose but the volatile multi-family sector fell sharply. More importantly, the level of construction was 10.5% above the January 2016 pace and 6% above the 2016 average. In other words, builders started off the year in good shape. Permit requests jumped, moving back above starts. That points to greater home construction in the months ahead. Regional activity varied widely. Construction soared in the Northeast and South but cratered in the West and Midwest. Weather matters. The number of home under construction continues to rise, though it would be nice if it increased faster. Inventory remains too low.

The Philadelphia Federal Reserve Bank’s survey of manufacturers rose sharply in February. General business activity soared, helped along by a surge in demand. Only 6% of the respondents said new orders fell, indicating that the improving economy is lifting most boats. Hiring was a little slower than it had been. Firms seem to meeting the new demand by working their current employees longer. That makes sense given the labor shortage. This month’s special question had one result that should open Janet Yellen’s eyes. Manufacturers expect inflation to run at a 3% pace over the next ten years compared to a 2.7% average in the fourth quarter 2016 survey. The FOMC keeps noting that “most survey-based measures of longer-term inflation expectations are little changed”. If inflation expectations are rising, the Fed will have to act sooner rather than later.

Unemployment claims rose last week but remain near historic lows. There just aren’t a lot of people who have skills, are between 21 and 55 and can pass a drug and background check who are sitting at home watching The Price is Right. As a result, firms holding onto their employees tightly. I expect they will start moving part-timers into full-time positions, even if that raises costs. It is better than going without and could reduce turnover and improve productivity.

MARKETS AND FED POLICY IMPLICATIONS: While the economy is in good shape, the administration is not. The chaos is raising questions about the ability to push through significant tax cuts and spending increases. Unless revenue increases are found, the proposals will cause the deficit to soar. The political pressure a $1 trillion deficit forecast would put on the Republicans would be hard enough to deal with without political problems. With those issues, action could be either pushed into later this year or only showpieces would be passed. That would not be good news to all those investors who believe that happy days are here again. As for the Fed, the unmooring of inflation expectations that we saw in the Philadelphia Fed survey is a clear warning that the days of doing nothing are over. A large increase in both jobs and wages in the February employment report could put the March FOMC meeting into play. At the minimum, it would support my view that the next hike could come in May. Hey bond market people, are you looking at the inflation numbers?

January Consumer Prices, Retail Sales and Industrial Production

KEY DATA: CPI: +0.6%; Excluding Energy: +0.3%/ Retail Sales: +0.4%; Excluding Vehicles: +0.8%/ IP: -0.3%; Manufacturing: +0.2%

IN A NUTSHELL: “Another inflation number, another reason to for the Fed to hike rates.”

WHAT IT MEANS: Yesterday I noted that any number that shows that inflation is rising is a warning that the Fed is going to raise rates soon. Well, the sharp rise in the Consumer Price Index in January is one of those numbers. Yes, energy costs did surge, but in her testimony, Chair Yellen said that inflation including food and energy matters. Over the year, top line inflation was 2.5% and even excluding food and energy, the so-called core, it was above the Fed’s 2% target. The gains in January were across the board with only a decline in used-vehicle prices keeping the index from rising even faster. Food at home was flat but if you went out to eat, you paid a lot more. Thankfully, fresh donut prices were down.

Rising prices is not keeping consumers from spending. Despite a slowdown in vehicle demand, retail sales rose solidly in January. People hit almost every type of store as sales of clothing, appliances and electronics, building supplies, sporting goods, food and health care products rose solidly. We didn’t buy a whole lot of furniture and interestingly, online sales were flat. That may have been due to the fact that we were eating out like crazy.

Industrial production eased in January, but as usual, the headline number didn’t tell the whole story. We had one of the warmest January’s on record, at least where I live, and utility production tanked as a consequence. But manufacturing output increased moderately and the petroleum sector continues to rebound, with output up significantly. The vehicle sector continued its wild up and down swings as assembly rates tanked after having increased in December. With new models coming out randomly, I suspect it has become hard to seasonally adjust these data.

So far, February hasn’t been a particularly good month for builders. The National Association for Home Builders index slid as traffic declined. That led to a pullback in expectations.

MARKETS AND FED POLICY IMPLICATIONS: The data are becoming clear as to both growth and inflation. Consumers are spending money at a very solid pace and that is putting a floor under growth. But inflation is accelerating. The Consumer Price Index has moved above the Fed’s target, as have a variety of other special measures that a number of Federal Reserve Banks have created. But the Board considers the Personal Consumption Expenditure price index the gold standard and we will not get that until we get the income and consumption numbers on March 1st. I expect that measure to also show inflation over the year rising by 2% or more. So, does that bring the March FOMC meeting into play for a rate hike? I think that is too soon, especially since Chair Yellen commented that fiscal policy will play a role in the Fed’s decisions. We are months away from any clear indication what those tax cuts may look like. I think the May meeting holds out great possibilities and if not then, I would be surprised if they don’t do something in June. So, we are looking at a move in the next three to five months. If that is the case and a decent sized fiscal stimulus package is passed, I expect the Fed to hike again in September and at least one other time before the end of the year. A December half-point increase would not be out of the question if the economy picks up steam and inflation continues to accelerate. I don’t believe equity investors have priced that in and the bond market seems to be just starting the process – but not with a lot of conviction.

January Wholesale Prices, Small Business Optimism and Fed Chair Yellen’s Comments

KEY DATA: PPI: +0.6%; Goods: +1%; Services: +0.3%; Ex-Food and Energy: +0.2%/ NFIB: +0.1 point

IN A NUTSHELL: “With top line inflation driving the Fed’s decision, any increase in costs moves the FOMC closer to its next rate hike.”

WHAT IT MEANS: The Fed intends to raise rates this year and more than likely several times. That much was made clear by Chair Yellen, who commented thatWaiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession“. She also noted that the Fed looks at top line inflation, which they are confident is moving toward its 2% target and that the unemployment rate is already at the level members believe is full employment. In other words, the Fed is ready to go and the only thing stopping it is below-target inflation. That is why the sharp rise in the January Producer Price Index is important. Much of the increase came from another jump in energy costs, but it wasn’t limited to petroleum. Services prices bounced back and the only thing keeping the index from rising faster were flat food costs. There is also some pressure building in the pipeline.

The National Federation of Independent Businesses reported that small business confidence edged up in January, solidifying the gains made since the election. Firms have a large number of job openings and hopefully they will be able to fill them. Owners seem willing to invest, even though the index eased a touch in January, it remains at a high level.

MARKETS AND FED POLICY IMPLICATIONS: There are great expectations that the president and Congress will come through with tax cuts and regulatory changes that will “unleash the beast” in the corporate sector. But that has to happen and lines are being drawn in the sand – and not just by Democrats. A Republican member of the House Ways and Means Committee said that there would be no tax reform without a border adjustment tax, which subsidizes exports and penalizes those that import. He is basically arguing it is time to move to a consumption tax structure. That would create a large number of winners and losers and consumers could see higher prices. Indeed, a border tax, previously known as a tariff, might be necessary as well to offset the revenue losses of tax reform. So, let the battles begin and one of the groups who may be involved is the Fed. Higher consumer costs and aggressive fiscal policy will be the green light to move rates back up to more normal levels. And the Chair noted that currently, the estimate of a “normal” rate is low because of a number of factors. If those conditions change with stronger growth, the Fed would be chasing an upward moving target. Change isn’t simple and if it is going to happen, the many moving parts have to be considered. But too many in Congress don’t have a clue that there are consequences to making the changes they are proposing. The next year should be lots of fun, with tax reform, regulatory changes, Dodd-Frank, Obamacare and rate hikes all entering into the mix. For an economist, this could be the best of times.

January Import and Export Prices and February Consumer Confidence

KEY DATA: Imports: +0.4%; Nonfuel: -0.2%; Exports: +0.1%; Farm: -0.1%/ Confidence: -2.8 points

IN A NUTSHELL: “The strong dollar is keeping everything but energy costs under control.”

WHAT IT MEANS: Import prices jumped again in January, propelled by energy. Energy prices surged by nearly 6%, after having jumped by even more in December. Over the year, the cost of imported fuel is up a whopping 58%. In January 2016, fuel costs were down nearly 40% from the previous year. So it is no wonder that overall import prices are up nearly 4% from the previous year. In just one year, the headline number has gone from a yearly change of -6.5% to a rise of 3.7%, a greater than ten percentage points swing. As for the details, imported food prices dropped sharply, though my Mexican avocados seemed to cost more. Has a border tax been implemented already? Consumer and capital goods prices eased a touch, while automotive import prices dropped sharply. In other words, there aren’t any broad-based inflationary pressures coming from the import sector. As for exports, the two-month rise in farm product prices was halted in January, but the drop was modest. Consumer export prices fell sharply and capital goods exports costs were off modestly, but vehicle makers did see a sharp rise in their prices.

The surge in consumer confidence since the election faded a touch in early February. The University of Michigan’s Consumer Sentiment Index dropped, led by a solid decline in expectations. Still, the level remains quite high. Both positive and negative reactions to the Trump actions are major factors in respondents’ attitudes and they are split pretty much down the middle between positive and negative. As I have said many times, changes in confidence driven by political factors rarely have sustained impacts on spending, so let’s wait a while before we make any judgment on how the rise – or any subsequent fall if it happens – will play out in the marketplace.

MARKETS AND FED POLICY IMPLICATIONS: Import costs, which had restrained inflation, are now rising. Should the Fed be worried about this? Yes and no. The increases are not widespread, so we cannot assume that we will be seeing consumer inflation surge. But the Fed shifted to headline inflation from core and energy is driving up that rate. Don’t be surprised if inflation tops the Fed’s 2% target in the new few months. That would mean the Fed has met both its inflation and unemployment targets, so there would be little to stop it from raising rates – if it wants to and follows its own guidelines. Still, even if inflation tops 2% before the March 14-15 FOMC meeting, the Committee is not likely to raise rates then. They will want to see what the tax cut plan, which is supposed to be “phenomenal”, looks like. (Someone should take the thesaurus away from the White House.) I have the next increase in April, which is a non-press conference meeting. I think Chair Yellen wants to prove that all meetings are live and raising rates then, especially if it comes after a major tax cut proposal, would be the easiest time to make that point.

January Employment Report and Non-Manufacturing Activity

KEY DATA: Payrolls: +227,000; Unemployment Rate: 4.8% (up 0.1 percentage point); Wages: +0.1%/ ISM (NonMan.): -0.1point; Employment: +2 points

IN A NUTSHELL: “The labor market is still a solid job machine but workers are not seeing wages grow solidly.”

WHAT IT MEANS: The jobs machine keeps on humming along. The nation’s businesses added jobs at a very strong pace in January and the gains were spread across most of the economy. Construction workers were hired like crazy, manufacturers added to their payrolls, retailers kept expanding (or maybe they just haven’t shut the stores yet), finance and real estate companies grew, firms started hiring temps again and the health care and hospitality sectors continued to demand more workers like crazy. Only the government showed restraint. But there are some warnings in the numbers. The acceleration in job gains from December’s moderate 157,000 increase came largely from two places: Construction and temporary employment services. Weather probably played a major role in the construction swing (it was warm in January), while the decline in temp positions was likely an aberration, making for an outsized rise in January. Don’t be surprised if job gains retreat back to the 150,000 to 175,000 going forward.

The unemployment rate inched upward in January as the labor force surged, lifting the participation rate as well. All this angst about the falling participation rate is simply misplaced. The rate has been in a fairly tight range for over three years, as the demographic forces driving it down are being offset by the expected return of frustrated workers. Still, there doesn’t seem to be enough pressure on companies to bid more for workers. Wages rose minimally over the month and are up only 2.5% over the year – before inflation is factored in. That is just not good enough.

The Institute for Supply Management reported that the Non-Manufacturing sector continued to expand solidly in January. The overall index was off minimally and the details were solid. Most importantly, hiring is picking up, as order books are no longer thinning. Order growth is still strong, though a touch less than it had been, largely due to weakening in export demand.

 MARKETS AND FED POLICY IMPLICATIONS: Boy, what a difference eight years make. When Barack Obama became president in January 2009, the economy lost 793,000 jobs. The swing between then and now was over one million positions. The tasks facing the two of them are totally different. Eight years ago, it was stop the bleeding. Today, it is keep things going so wages can rise faster. Tax cuts, regulatory changes and infrastructure spending increases all could help, but they are not likely to significantly affect the economy until well into the second half of the year. That makes the Fed’s calculus more difficult. The unemployment rate is pretty much at its target and the inflation target is within sight. That seems to argue for a near-term rate hike. But Fed Chair Yellen has indicated she would be willing to let the economy run hot for a while and the modest wage gains provide her with some cover to do so. That said, monetary policy works with a lag and if the Trump fiscal policies are implemented, the Fed cannot fall too far behind the curve or it will have to raise rates faster than anyone would like. This increases uncertainty about the course of Fed policy. As for the equity markets, solid job gains and low wage pressures seem to be the recipe for a renewal of the exuberance we have seen since the election. How long that will last is anyone’s guess.

Fourth Quarter Productivity, Weekly Jobless Claims and Yesterday’s FOMC Statement

KEY DATA: Productivity (2016): +0.2%; Labor Costs (2016): +2.6%; Real Earnings (2016): +1.5%/ Claims: -14,000/ FOMC: “Steady as she goes.”

IN A NUTSHELL: “The Fed thinks the economy is okay and the data seems to support the view that the economy is okay, if you think okay is okay.”

WHAT IT MEANS: Tomorrow we get the January jobs report and if the huge increase in private sector jobs that ADP reported for the month is any indicator, it should be a good one. And it looks like firms will have to keep hiring if they want to expand output, as productivity is barely growing. In the second half of last year, firms did manage to squeeze out more output from their workforce, but for the year, the gain was miniscule. Only twice over the past thirty years has productivity growth been weaker. As a consequence, labor costs continued to accelerate, reaching its highest pace since 2007. Workers didn’t see their inflation-adjusted income increase very quickly, which is one reason so many voters were ticked off.

Businesses are going to have to make due with their workforces as the labor market continues to tighten. Jobless claims fell and are once again back to record lows. Challenger, Gray and Christmas reported that layoff notices, while up from December, were down nearly 40% from January 2016. Firms are holding onto their workers because they cannot find replacements. The Conference Board’s Help Wanted On Line measure rose in January. It had been declining for much of last year but starting in early fall, it stabilized and is now rising. And the Institute for Supply Management’s manufacturing employment index jumped in January. It is pointing to strong job gains, which supports the numbers that ADP reported. In other words, all the employment data released over the past few days point to a strengthening labor market.

MARKETS AND FED POLICY IMPLICATIONS: As expected, the Fed did not change the funds rate at the FOMC meeting that ended yesterday afternoon. The statement, though largely unremarkable, did make it clear that the members thought the economy was in decent shape. More importantly, instead of saying that inflation “was expected” to rise to 2% in the medium term, the members now believe that inflation “will” rise to that level. That may seem small but it shows that the Fed is now confident that their inflation target is in sight. If both the inflation and unemployment targets pretty much at hand, there is little reason for the Fed to continue standing pat for much longer. I have them raising rates in May, barring some unforeseen craziness that would upset the growth trend, such as a tariff.

So, where do we stand going into tomorrow’s employment report? The labor market is tight, the economy is solid but productivity is moribund. The productivity weakness is major threat to the hopes that the economy can grow at even a 3% pace let alone the hugely optimistic 4% rate that so many in the administration need to make their numbers work. With the labor force expected to expand at less than 1%, productivity would have to increase by 3% or more to get to that upper level. But this far into an expansion, that rarely happens. While you never can say never, basing economic and tax plans on a number that has a low likelihood of occurrence is not a particularly responsible thing to do. But I guess using the word responsible in reference to anything in Washington doesn’t make much sense either.

December Spending, Income and Pending Home Sales

KEY DATA: Consumption: +0.5%; Income: +0.3%; Prices: +0.3%/ Pending Sales: +1.5%

IN A NUTSHELL: “Consumers spending is holding up generally across the economy.”

WHAT IT MEANS: The final numbers for 2016 are trickling in and for the most part, they indicate the economy is in good shape but not accelerating at any great pace. Consumption rose strongly in December, which was expected. A jump in durable goods demand, mostly from vehicles, as well as a solid gain in services such as utilities helped power the sharp spending increase. Soft-good demand rose somewhat less. Still, this is a clear indication that people are willing to out there and spend. They should be able to keep that up. Income rose moderately, led by a rebound in wages and salaries. Unfortunately, much of those income gains are being eaten up by the rise in the inflation. Prices rose solidly as energy costs keep going up. Top line price increases over the year are up 1.6% and are closing in on the Fed’s target level slowly. The Fed members have some breathing room, but that is fading. Income adjusted for taxes and inflation rose at a slower pace in 2016 than in 2015. That is not a good trend. The recent decline in the savings rate is not a major concern as it is till at a decent level.

The National Association of Realtors reported that pending home sales rebounded in December after having crashed in November. Solid gains in the South and West outweighed more modest declines in the Northeast and Midwest. An interesting division that was highlighted in the report was the huge increase in pending home sales in the $250,000 and above group since December 2015 compared to a decline in the under $100,000 group. A dearth of homes on the market at the lower levels, as well as the recent rise in mortgage rates, is hurting the low-priced segment.

MARKETS AND FED POLICY IMPLICATIONS: Since the income and spending numbers for the final month of any quarter are released after the GDP data for the entire quarter, they usually are non-events. But they do provide some detail for the latest month and in this case, it is clear that consumers are still willing to part with their income, which is rising. The savings rate is being used to maintain spending and prices are pressuring households who are still not receiving significant increases in their wages. That raises some flags about spending going forward. Yes, confidence has been rising, but you still need the money to spend and while the labor market is tight, firms are still willing to go without rather than pay up for new workers. The FOMC starts its two-day meeting tomorrow and the expectation is that no rate hike will be announced. However, I am looking for a warning or suggestion that if fiscal policy starts to become expansionary rather than contractionary, the Fed will have greater ability to normalize rates. That is, rates will rise faster than expected.

4th Quarter GDP, December Durable Goods Orders and January Consumer Sentiment

KEY DATA: GDP: 1.9%; Exports: -4.3%; Inflation: 2.1%/ Orders: -0.4%; Excluding Aircraft: +1%; Private Capital Spending: +0.8%/ Consumer Sentiment: +0.3 point

IN A NUTSHELL: “It was a tough year for the economy, but growth in the fourth quarter was not as soft as the headline indicates.”

WHAT IT MEANS: If ever there were a day when the headline numbers misrepresented what was going on in the economy, today was that day. Take overall economic growth, which posted a modest gain in the final quarter of the year. For all of 2016, GDP expanded at a disappointing 1.6% pace. The increase was 2.4% in 2014 and 2.6% in 2015. So why am I saying things are not that bad? As always, let’s go to the details. Consumers spent at a solid, though slightly slower pace in the fourth quarter. But I will take 2.5% every quarter. Business spending on equipment and intellectual property was up faster than in the third quarter. Companies are now rebuilding their inventories. Firms did cut back on investing in structures, but that is a notoriously volatile component. Also, the government, at least state and local governments, is now starting to spend more normally, even if spending on defense remains weak. The real problem with this report is that the economy suffered a “tofu attack”. Poor soybean crops in South America led to a huge surge in U.S. exports in the summer, but that rise was temporary. The fall in exports coupled with a jump in imports meant that instead of adding 0.85 percentage point, as it did in the third quarter, trade subtracted 1.7 percentage points of growth at the end of the year, a 2.55 percentage point swing. In addition, the key measure of private sector domestic activity, final sales to private domestic purchasers, grew faster. On the inflation front, consumer costs rose at the Fed’s target rate in the fourth quarter and over the year, the rise is now close to the Fed’s 2% goal.

Adding to the belief that the economy is in good shape was the December durable goods report. Yes, it declined, but let’s go to the details. The biggest drop was in defense aircraft. Not even a solid rise in civilian aircraft sales could overcome that decline. Excluding aircraft, order rose strongly. In addition, the best measure of private sector capital spending rose solidly for the third consecutive month. Even the energy sector is investing again. This report was strong and indicates the economy may have some momentum building.

Finally, The University of Michigan’s Consumer Sentiment index rose modestly in January after jumping in December. That the gain in confidence was sustained is good news for future consumer spending.

MARKETS AND FED POLICY IMPLICATIONS: The economy didn’t do particularly well last year, but we did end the year on a positive note. Consumers are spending, businesses are investing and the government is no longer blocking the way. With the energy sector, which had restrained growth significantly in the first half of the year turning around, even without any significant fiscal stimulus, growth should move back above 2% this year. That should be enough to cause the unemployment rate to drop below full employment by the end of the year and continue the upward trend in both wage and price inflation. That implies the Fed will likely have to raise rates multiple times this year and I expect an increase of 100 basis points. How those longer-term trends play with equity investors is unclear, but if they read today’s data as weak, that would be a misinterpretation of the numbers.

December New Home Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: -10.4%; Prices (Over-Year): 7.9%/ Leading Indicators: +0.5%/ Claims: +22,000

IN A NUTSHELL: “It is too early to say that rising rates are causing the housing market to tank, despite the sharp drop in new home sales.”

WHAT IT MEANS: “If you build it they will come.” Well, maybe, maybe not. Home sales dropped sharply in December as the weakness was spread across most of the nation. There was a huge 41% decline in the Midwest, which may have been weather related. But demand faltered significantly in the South as well. Demand was also off, though modestly in the West. The only region posting a gain was the Northeast, which bounces around like a Super Ball. Sales may have been down and the number of new homes for sale may have risen, but that didn’t stop prices from soaring. There still is a dearth of inventory as most of the increase in houses on the market came from listings of homes that were not yet started. Developers are not so sure if they build it the buyers will indeed come. They are getting higher prices for their product but are unwilling to do much speculative construction.

Look down the road, not only should growth remain decent but we might see an upturn. The Conference Board’s Leading Economic Index jumped in December and it has been accelerating for a while. Even without any business-friendly policies from the new administration, it looks like the economy will expand faster this year.

There was a sharp jump in the number of unemployment claims last week but not to worry.   As I noted last week, the data had reached rock bottom and were not likely to be sustained at those historically low levels. We are pretty much back to what I think will be more typical claims numbers and they still point to a further tightening in the labor market.

MARKETS AND FED POLICY IMPLICATIONS: The new president is churning out executive orders like crazy. Still, those don’t create a lot of change by themselves. The details of the enabling legislation matter the most. Are we really going to spend $15 billion or more for a wall when there are so many other pressing needs? Starting the process of repealing Obamacare may make for a good sound bite, but does anyone know what the replacement will be? Anyone seen the tax cut or infrastructure spending plans yet? All these things may be coming, but until they are here, we continue to operate on hopes and prayers. As an economist, I can only say I have no idea to what extent growth may be affected. Yet investors keep pushing prices up. That only puts even greater pressure on the Republicans to deliver. The need to feed the stock market beast is not a good way to run an economy and you can bet when the Fed meets next week, that will be the major topic of conversation.    

Linking the Economic Environment to Your Business Strategy