All posts by joel

December 15-16 ‘15 FOMC Meeting

In a Nutshell: “That’s one small step for the Fed, one giant move toward normal financial markets.”

Rate Decision: Fed funds rate range increased to between 0.25% and 0.50%

Well, they finally did it. After hinting and backing off, The FOMC raised the fed funds target range by one-quarter percent. This is the first move of any type since December 16, 2008, when the 0% lower bound was hit, and the first increase since June 26, 2006, when the 25 basis point increase brought the rate to 5.25%. In between we had the housing bubble bursting, the financial system in near collapse and a recovery that is still scarred by the excesses of the last decade.

Very simply, it is good to get this finally out of the way. History will determine whether this was the right time to make a move, but it had to be made and in my mind, this was as good a time as any. Actually, I think if they had gone in June or September, that would have been fine as well, but I don’t want to be critical – at least not right now.

Most importantly, we can now focus on the next stage of the move back to normal bond and stock markets. There are lots of additional actions that must to be taken: We need a funds rate that reflects normal conditions, the Fed’s balance sheet needs to be shrunk and assets need to be shed, and the markets’ obsession with Fed future actions, or lack thereof, must be reduced.

So, where do we go from here? There is little doubt that “the data” will drive Fed decisions – they just keep telling us that. So let’s project out one year from now. The unemployment rate is likely to be at or even below 4.5% and labor shortages will be common, wages will probably be rising at a solid pace, the restraining impacts of declining energy costs should be behind us and businesses will be needing to make up for lost ground due to all the uncertainties they have faced. In addition, Europe will have another year of quantitative easing and China will be another year into its transition to a more balanced, consumer-driven economy. In other words, the economic environment is setting up for a very solid 2016 that should support moves at roughly every other meeting to begin with but maybe more frequently by the end of next year.

But reading the Fed’s statement, while the members seem to be comfortable with current and future economic conditions, there appears to be some unease about the inflation prospects. The Committee mentioned that some surveys indicate that inflation expectations have “edged down” and there was an added statement that inflation would be monitored closely. Since inflation is still an outlier, the pace of future hikes may be linked more to progress on reaching the Fed’s 2% inflation target than on the strength of economic growth. The problem, of course, is that inflation tends to be a lagging indicator. As economists used to note, “If the Fed waits until it sees the whites of inflation’s eyes, it has waited too long”.   It is not clear what the Fed will use as a leading indicator of inflation.

Looking longer-term, since the Fed has to get to a “neutral” funds rate before inflation heats up, and that rate is assumed to be about 3.5%, the FOMC has a lot of work to do. Unless the economy slows, energy prices keep falling and the dollar keeps rising, it is doubtful it will take three years to get there.

Finally, unless we have a perfect economy and inflation stabilizes close to the Fed’s 2% target, the FOMC will not stop at neutral. It hasn’t in the past and there is little reason to believe it will now. So when you start thinking about the terminal rate, it is prudent to assume that it is above the 3.4% long-term rate the members indicated in their “dot chart”. Don’t be surprised if we get to 4.00%. But for the next nine to twelve months, expect only gradual increases in rates.

(The next FOMC meeting is January 26-27, 2016.)

November Consumer Prices and Real Earnings

KEY DATA: CPI: 0%; Excluding Food and Energy: +0.2%; Excluding Energy: +0.1%/ Real Earnings: +0.1%

IN A NUTSHELL: “The steady rise back to normal inflation continues, adding ammunition to the Fed’s view that it is just a matter of time before its target is reached.”

WHAT IT MEANS: Inflation remains the one issue, or non-issue, when it comes to raising interest rates. But that concern is starting to fade, at least when you take out energy. Consumer prices were flat in November, led by another decline in gasoline costs. That downward pressure on the index by energy is continuing, though it is hardly clear that lower energy costs are a problem. Yes, they hurt the energy sector and all the companies that feed into it, but over time, the economy will be better off with the lower energy costs. Sometimes it just takes some pain to get some real gain. Excluding energy, consumer prices were up minimally. But more importantly, over the year, they are right at the Fed’s 2% target. However, all prices, including volatile food and energy, have risen only modestly since November 2014. While commodity prices keep falling, services, which are 63% of the index, keep accelerating. They rose solidly in November and are up by 2.5% over the year. It is unclear how much further energy prices will fall and if or when they will start to rise again, but the huge declines we saw in 2015 will dissipate as we go through 2016. And when that happens, even the headline number will move back toward and likely above the Fed’s target.

Wage gains seem to have eased once again. Hourly earnings increased moderately in November but when inflation is factored in, the gain was modest. We may still be a few months away from when firms feel so stressed by the lack of available workers that they actually have to start paying for new employees. But unless the law of supply and demand in the labor market has been repealed, the lack of workers and the growing number of job openings will have to lead to rising costs – no matter how hard and long businesses fight it.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC meeting starts today and will likely end with tomorrow’s announcement that for the first time since June 29, 2006, the fed funds rate has been increased. The consumer price data only add to the confidence of those at the Fed who believe it is prudent to start the process of raising rates back toward more normal levels. The Fed has a lot of work to do. We are at least three percentage points below where we should be if the economy was growing solidly and inflation was at a reasonable level. The modest inflation pressures allow the Fed to move back to where they should be at a conservative pace. But with inflation, excluding energy, at the Fed’s target and with the annual declines fading, any price pressure that rising wages may create would move the inflation rate above target. Don’t be surprised if that happens sometime during the first half of next year. The Fed will argue that it will stop, look and listen before crossing the street to the next move, but that is likely to happen in March and every other FOMC meeting until late fall. Regardless, we are just one day away so let’s just sit back and wait.

November Retail Sales and Wholesale Prices

KEY DATA: Retail Sales: +0.2%; Excluding Vehicles: +0.4%; Control: +0.6%/ PPI: +0.3%; Goods: -0.1%; Goods Less Food and Energy: -0.1%; Services: +0.5%

IN A NUTSHELL: “The consumer appears to be in a shopping mood and that is good news for the economy and the Fed.”

WHAT IT MEANS: We may not be shopping ‘till we drop, but we are out there spending money. Retail sales were up modestly in November if all you do is look at the headline number. But as usual, the top line is very misleading. First, declining gasoline prices led to weaker dollar sales numbers, not necessarily weaker unit sales – the average price fell by 5.3% but total sales were off only 0.8%. Once again, vehicle sales were off a little, but it is hard to make the case that people stopped going to dealerships. The November sales pace was exceeded only a handful of times over the past forty years. Meanwhile, households bought electronics and appliances, clothing, sporting goods and most merchandise in general. We shopped online and when we were out, we ate out. And if we stayed in, we ate a lot also. In other words, we spent money. Adjusting the retail sales data so they better match up with GDP personal consumption numbers, the so-called Control Group, demand increased sharply.

On the wholesale inflation front, the divide between goods and services continued in November. Goods producer prices eased a touch, but the drop was the smallest in five months. When you exclude food and energy, the decline was minimal as rising food prices offset falling energy costs. Finished consumer goods prices less energy were up not just in November, but over the year as well. That is a potential sign the downward pressure on consumer goods prices may be fading. But the real pressures remain in the services component, which is roughly two-thirds of consumption. Service producer price increases appear to be accelerating.

MARKETS AND FED POLICY IMPLICATIONS: These reports, as well as an early indication by the University of Michigan that consumer confidence may be improving, buttress the Fed’s stance that it is time to raise rates and the economy can handle it. The one major restraint to growth is lower energy prices, which is causing major adjustments in that sector. In the short-term, those cut backs are overwhelming the slow adjustment to the lower energy expenses by consumers. Households don’t seem to be spending a whole lot of the added cash flow. But really, are there many people who are not linked to the energy sector that really believe that in the long run, the economy is better off with $100/barrel for oil than $40? I suspect that most Fed members realize that the adjustments in the energy-patch may be harsh, but they will fade. Meanwhile, the added money in consumers’ pockets will eventually find its way into the economy in a very broad based manner. There is nothing in the way of a Fed rate hike on Wednesday. I suspect the statement will focus on the FOMC’s expectations that future hikes will be slow, but we already know that. Slow, by the way, seems to be every other meeting. So, the real question is, when will the economy become strong enough and inflation high enough that Fed goes every meeting? If low rates are causing economic dislocations, a slow rise doesn’t help very much. Just ask Alan Greenspan.

November Import and Export Prices and Weekly Jobless Claims

KEY DATA: Imports: -0.4%; Fuel: -2.5%; NonFuel: -0.2%; Exports: -0.6%; Farm: -1.1%/ Claims: Up 13,000

IN A NUTSHELL: “The broad based declines in imported goods prices should keep inflation at bay for a while.”

WHAT IT MEANS: Inflation has been well contained and one of the big reasons is that import prices have cratered. That trend continued in November. Led by another drop in energy costs, the prices of imported products fell sharply. But it wasn’t just oil. Non-energy prices were also down. Indeed, you have to look long and hard to find any category where imported goods costs rose over the month. About the only area was in building materials, especially wood. Cocoa and sugar costs rose, but hopefully that will not cause cookie and cake prices to increase. We shall see. Otherwise, there was basically nothing but red numbers in the report. Over the year, nonfuel prices are down 3.2%, which puts sizeable pressure on domestic firms to keep their prices in line. On the export side, the results were similar as prices fell largely across the board. The farm sector is hurting almost as much as the energy sector. Export prices dropped again in November and are now down by nearly 13% over the year. Ugh!

On the labor market front, unemployment claims jumped last week but that is not a concern. The data bounce around and the 4-week moving average remains quite low. We seem to have hit bottom on claims, but adjusting for the size of the labor force, we remain at record lows.

MARKETS AND FED POLICY IMPLICATIONS: The Fed looks ready to move next Wednesday. The economy is strong enough that a small rise in rates really shouldn’t have any negative impact on growth. And the members will likely to continue to hike rates slowly for a couple of years. But for rates to return to normal levels, inflation has to rise faster and the strong dollar is causing the pathway to 2% to be slow. The latest down draft in oil should keep the headline inflation number well below target. Still, as we move through the first part of next year, the large declines in energy will disappear, so look for inflation to accelerate. Excluding energy, the rise should be much slower, helped by the strong dollar and low import costs. That said, labor remains the biggest part of most businesses costs and the unemployment claims number does nothing to change my thinking that labor shortages are becoming widespread enough that wages will have to rise a lot faster in 2016. Unless firms can figure out how to improve productivity, which has been lagging, there may be no choice but to start increasing prices. The latest Blue Chip consensus forecast, of which I am a part, has the economy expanding again by 2.5% in 2016. I think that is low because of my view on wages. Higher salary increases should generate stronger consumption and the faster growth could provide domestic firms with some pricing power. This is important since it is doubtful that once inflation hits 2% it will stay there. More than likely, we will see it go into the 2.5% to 3% range. And if that is sustained for any length of time, as I suspect, the Fed will not dawdle. But that is a year from now. Let’s just start with one rate hike next Wednesday.

November Employment Report

KEY DATA: Payrolls: +211,000; Revisions: +35,000; Unemployment Rate: 5.0% (Unchanged); Hourly Wages: +0.2%

IN A NUTSHELL: “There ain’t no stopping (them) now.”

WHAT IT MEANS: My apologies to Luther Vandross, but there really is nothing except a major crisis that will stop the Fed from its appointed first round of rate hikes. All it would have taken is a mediocre employment report to provide the necessary cover to raise rates and the November data were more than that. Job gains were solid and there were also upward revisions to both September and October. The three month average now stands at 218,000, which is quite good given that the biggest complaint businesses have is the lack of supply of qualified workers. And the increase came despite further cut backs in energy-related firms, weakness in clothing stores, a weird crash in the motion picture industry and a very strange reduction in the vehicle sector, which continues to set new sales records. And, we actually saw a decline in temporary help services companies! In other words, this report was probably even stronger than the headline number implies. Hourly wages rose but there was a small reduction in hours worked, which also seemed a bit strange.

On the unemployment side of the report, almost every component was solid. While the rate remained at 5%, there were strong increases in the labor force and the number of people employed. This led to a rise in the participation rate. While I don’t think much of it, the infamous U-6 rate, which includes all reasons for not having a job, did raise a tick. However, it is still down 1.5 percentage points over the year. The stronger labor market is curing lots of ills.

In a different report, the trade deficit widened in October, but the three-month average is still declining. In any event, today is all about the employment numbers.

MARKETS AND FED POLICY IMPLICATIONS: This report all but green lights the Fed. And it should. There really is nothing more to say other than reprint the Luther Vandross lyrics from the song, “Ain’t No Stoppin’ Us Now”,

Now, are y’all ready?
Are y’all ready?
Here we go now
Do it with the fever
Yeah, come on

Ain’t no stoppin’ us now
We’re on the move
(Hey-yeah, hey-yeah)
Ain’t no stoppin’ us now
We’ve got the groove

There’ve been so many things that have held us down
But now it looks like things are finally comin’ around, yeah
I know we’ve got a long, long way to go, yeah
And were we’ll end up, I don’t know
But we won’t let nothin’ hold us back
(Writer(s): Gene Mcfadden, John Whitehead, Jerry Allen Cohen, Copyright: Mijac Music, Warner-tamerlane Publishing Corp.)

November Supply Managers’ Non-Manufacturing Survey, Layoff Announcements and Weekly Jobless Claims

KEY DATA: ISM (NonManufacturing): -3.2 points; Orders: -4.5 points; Hiring: -4.2 points/ Layoffs: 30,953/ Claims: +9,000

IN A NUTSHELL: “The services sector continues to expand solidly, though not as robustly as it had been.”

WHAT IT MEANS: With the Fed sending loud and clear messages that a rate hike is just days away, it will take some pretty bad economic numbers for the members to pull back from the brink. Today’s Institute for Supply Management’s survey of non-manufacturing firms was not as good as expected, but it was also nothing terrible. The sector continues to grow at a solid pace. Yes, lots of components were down from where they had been, but they didn’t go negative. Orders continued to increase, though less rapidly. Firms continued to hire, though less aggressively, activity continued to rise, though not as strongly and backlogs continued to build, but not as quickly. Basically, this report hardly points to a downturn in the economy, only a modest deceleration – and only if these results are repeated over the next few months.

Other data were just fine. Challenger, Gray and Christmas reported that layoff announcements dropped sharply in November. The big news was the retrenchment in the oil sector slowed sharply. Energy companies cut workers like crazy this year and that has hyped the layoff data and restrained job growth. To the extent that is no longer happening, we could see better payroll gains going forward. But that takes time, as there is a lag between a layoff announcement and an actually job cut.

Jobless claims rebounded last week, but the level remains extremely low. Firms are hanging on to their workers as tightly as possible, as we saw in the layoff announcement numbers.

MARKETS AND FED POLICY IMPLICATIONS: Chair Yellen is talking again today after having sent clear signs yesterday that the economy was coming around and that the factors restraining inflation would be dissipating next year. In other words, she all but said that the FOMC was ready, willing and able to start raising rates on December 16th. She added the usual caveat that the data between now and then would matter, but as we all know, they have to terrible, not soft. Today’s reports were soft but hardly terrible. Tomorrow’s employment report could end the debate. All the signs point to a decent report, but for once, I am at the lower end of the estimates. The October job gain was outsized and there is likely to be some give back in the November report. Still, my estimate of 175,000 new jobs (consensus is 200,000) and a stable 5% unemployment would be viewed as quite decent. Anything above 125,000 would be just fine. Actually, we would need something close to zero for anyone to get really worried. I never say never, but that doesn’t look very likely. It looks like investors expect a decent report and are more fully pricing in a rate hike.

November ADP Private Sector Jobs, Help Wanted OnLine and Revised 3rd Quarter Productivity

KEY DATA: ADP: +217,000/ HWOL: +232,000/ Productivity: 2.2%; Compensation: 4%

IN A NUTSHELL: “If Friday’s job gains come in anywhere near what ADP thinks they will, then a December rate hike becomes a slam dunk.”

WHAT IT MEANS: With more and more Fed members sending strong signals that a rate increase in December is likely, the only things that could prevent that from happening are either a major crisis or disastrous data. The biggest release left is the November employment report that comes out on Friday and it looks like it could be quite good. ADP estimated that private sector hiring accelerated last month and for the first time in a while, the gains were spread across all industries and firm sizes. Small and midsized companies are no longer shouldering the hiring burden as even large firms added workers at a solid pace. Renewed hiring in the manufacturing sector and strong gains in business and finance indicate that a broader expansion is under way. ADP’s estimates don’t exactly match the government’s private sector numbers, so don’t be surprised if Friday’s employment increase is lower.

Adding to the belief that the labor market is strong and getting stronger was the large rise in online want ads in November. This was the second consecutive strong gain for the Conference Board’s measure and points to a potential break out in hiring. Firms had been cautious for about six months but that has changed. They are once again aggressively looking for workers in all regions and occupations.

Third quarter productivity was revised upward, as expected, given the large upward revision to third quarter GDP growth. But what jumps out in this report is the huge increase in hourly compensation. Instead of a 3% rise, it is not put at a 4% annualized gain. It looks like hourly compensation will rise by over 3% this year, the biggest gain since 2007. When adjusted for inflation, the increase should be over 2%, which would be the fastest rise since 2000. The tight labor market is already causing wages to rise faster and that trend will only accelerate next year when the unemployment rate dips below full employment.

MARKETS AND FED POLICY IMPLICATIONS: All signs are pointing to a Fed rate hike two weeks from today. Any payroll increase above 150,000 should seal the deal and a number above 200,000 might even get them hiking early – just kidding. This is a Fed that has been dragged kicking and screaming to the conclusion that the economy can absorb not just one rate hike but a series of increases. The discussion should finally turn to what constitutes a slow series of increases? I have argued that every other meeting is cautious enough. Once the huge energy price declines come out of the inflation indices, and that will start happening early next year, the top line number should go back above 2% and start approaching 2.5%. The unemployment rate will fall below 5%, if not in November then most likely in December. By June, it could be closing in on 4.5% – a rate that only the nattering nabobs of negativity will argue is not below full employment. At that point, labor compensation costs could be rising fast, not just faster, and that should lead to accelerating inflation excluding or including food and energy. By next fall, the markets could be calling for an increase at each meeting. That has been my forecast for a while and I am sticking to it – at least until next fall.

November Manufacturing Activity and October Construction

KEY DATA: ISM (Manufacturing): -1.5 points; Orders: -4 points; Hiring: +3.7 points/ Construction: +1%

IN A NUTSHELL: “The lull in manufacturing continues even as other segments of the economy heat up.”

WHAT IT MEANS: This is the fall of manufacturing’s discontent. The Institute for Supply Management reported that in November, the industrial sector declined for the first time in three years. New orders and production turned negative after having also grown about three years. I guess all good things must end, though it is not nice to see this trend turn downward. Both export and import orders continued to slow, though the import cut backs are moderating. On the other hand, the employment index, which did dip into the red earlier in the year and again in October, rebounded. Manufacturing has been restraining the job numbers so maybe we will see an uptick in Friday’s employment report.

While manufacturing may be having issues, the construction sector is doing just fine. Construction spending jumped in October and the rise was spread almost evenly between public and private, residential and nonresidential. For the first ten months of the year, private construction is up 11.2% compared to the same period in 2014. The October level of total private construction was nearly 16% higher than last year’s pace. Once again, the increases were spread evenly between residential and nonresidential activity. That is interesting since some of the housing reports have been less than stellar. For example, yesterday’s National Association of Realtors’ Pending Home Sales numbers were up less than expected. The problem facing the housing market seems to be supply, but despite the solid construction numbers, there are still not a lot of homes, new or existing, that are on the market. It looks like 2015 will be a great year for builders and the good times seem to be getting better.

MARKETS AND FED POLICY IMPLICATIONS: While everyone likes to focus their attention on manufacturing, it is the services component that generates most of the jobs. Manufacturers employed less than 9% of all employees and just a little over 10% of private sector workers. The manufacturing job slowdown probably reduced the total average monthly job gains by less than 10,000 per month. That is a concern, but not so great that it changes the perception that the job market is strong. The real problem, as we all know, is in the mining/oil production sector. Despite the free fall in oil patch activity, total construction in the rest of the economy is doing quite well. That is what should be the take away and what the Fed members will likely consider as they barrel toward the first rate hike in two weeks (most likely). With the November jobs report being released on Friday, investors will probably assume today’s numbers changed no minds at the Fed and react accordingly.

October Income and Spending, Durable Goods Orders, New Home Sales and Jobless Claims

KEY DATA: Consumption: 0%; Income: +0.4%/ Durables: +3%; Excluding Aircraft: 0%; Capital Spending: +1.3%; New Homes: +10.7%/ Jobless Claims: -12,000

IN A NUTSHELL: “The economy is hardly a turkey so the Fed, which is fed up with low rates, will likely tighten the economy’s belt a little next month.”

WHAT IT MEANS: The day before Thanksgiving is when everyone dumps their data so they can get out early and today was no exception. Most of the reports were decent. Let’s start with the consumer. Households’ balance sheets are better as income is rising solidly. Most encouraging was a sharp increase in wages and salaries. The tight labor market, which got even tighter in October as claims were about as low as they get, is finally causing firms to raise compensation more rapidly. However, people aren’t out shopping until they drop or even until they are tired. They are spending money, but not at a great pace. The weakest segment of was durable goods demand, which is really nothing to worry about. October vehicle sales were one of the highest on record so we know consumers are more than willing to buy big-ticket items. Indeed, the added burden of monthly vehicle loan payments may be a reason that retail sales have not taken off despite the rise in incomes. But households are not stretched as the savings rate continues to edge up. We are approaching the 1990s savings rate. On the inflation side, prices rose modestly and when food and energy were excluded, they were flat.

Manufacturing has been a soft spot in the economy, but that may be changing at least a little. Durable goods orders rose sharply, but most of that was for civilian and defense aircraft. Still, orders for computers, communications equipment and machinery were up. Again, there was one very positive component of the report: Business capital goods orders rose strongly and it looks like the cut backs in investment may have ended.

New home sales surged in October – not really. There was a sharp rise in signed contracts but that was only because the September number was revised down. The October level was okay but not particularly great. This report, though, was weird. Demand in the Northeast jumped by 135% but fell slightly in the West. But the strangest number was medium prices: They fell, yes fell, by 6% from the October 2014 level. That makes no sense at all.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data did nothing but provide the Fed with more cover to raise rates in December. The only potential speed left is the November jobs report, which will be released on Friday, December 4th.   But that number would have to be almost catastrophic – i.e., negative – for the Fed to get worried. The markets are expecting a rate hike so a move shouldn’t cause that great a reaction. With growth exceeding potential, with wages rising more solidly and with businesses starting to invest again, there is lot for the economy to be thankful for. So, on that note let me say:

Have a wonderful Thanksgiving!

Revised 3rd Quarter GDP, Housing Prices, Consumer Confidence and Philadelphia Fed NonManufacturing Index

KEY DATA: GDP: 2.1% (up from 1.5%)/ S&P Home Prices (Year-over-Year): 4.9%/ Confidence: -8.7 points/ Philadelphia Fed: up 8.8 points

IN A NUTSHELL: “The economy is growing at its potential and home prices are accelerating, so why all the long faces?”

WHAT IT MEANS: With terror being on everyone’s minds, it is hard to focus strictly on the economic data, but we must do that so we know where things are given the risks the world is facing. And the data look fine. It turns out that the economy grew at a solid pace in the summer. I use the term “solid” because we have to base out evaluation of growth on what the economy can do, not what we would like it to do. Trend or potential economic growth is running between 2% and 2.25%, so the upwardly revised GDP number comes in right at that pace. It is strong enough to keep the labor market tightening and to maintain modest upward pressure on prices. The revision was mostly due to more inventory building than initially thought. Equipment and residential spending were also revised upward, while consumption came in a touch lower. It looks like growth this year growth will come in at about 2.5%, above trend but not strong enough to create major bubbles. That said, wage pressures are building.

On the housing front, prices continue to rise. Both the S&P/Case Shiller and CoreLogic indices rose faster over-the-year in September than they did in August. S&P/Case Shiller had prices rise by 4.9% for its national index while CoreLogic came in at 6.4%.

The Conference Board’s Consumer Confidence Index fell sharply in November. There is growing concern about the labor market as more people thought jobs were hard to get and fewer found it easier to get a job. How much the terror news affected the results is unclear.

The Philadelphia Fed reported that the regional economy picked up some steam in November. But the same time, nonmanufacturing firms reported that their business grew a little less rapidly. There were some very interesting results in this report. Compensation rose faster and firms seem to be reacting by slowing hiring. Looking toward 2016, firms expect prices and compensation to increase by about 3% over-the-year, which is above what most people have been predicting. Rising labor costs and pricing power may be returning to the economy.    

MARKETS AND FED POLICY IMPLICATIONS: There are growing calls for the Fed to once again put on hold its first rate hike because of the uncertainty created by the Paris terror attacks. But while that is a logical reaction, history tells us that major negative events don’t usually cause the economy to falter. Despite the horrors of September 11th, fourth quarter 2001 growth was positive and the recession ended in November. That is not to say there will not be any short-term or even longer-term dislocations. Because of the need for heightened spending on security, the economies of just about every nation look different today than they would have had there been no terror attacks. The current attacks will only add to increased security spending. And while consumers tend to become more conservative initially, they usually bounce back fairly quickly. We may have to mark down fourth quarter growth a little, but that could mean a somewhat stronger first quarter 2016 expansion. Barring a domestic terror attack, I still expect the Fed to raise rates in December.