KEY DATA: Home Sales: +2.4%/ Leading Indicators: up 0.9%; Claims: 298,000 (down 14,000)
IN A NUTSHELL: “It looks like the economy is approaching escape velocity.”
WHAT IT MEANS: There were a lot of numbers released today and they all were really good. First, there was existing home sales, which rose solidly in July. The pace of demand is back to October after having posted four consecutive increases. While the level is not spectacular, it is probably within ten percent of a solid market. The huge levels posted during the mid-2000s should be viewed as aberrations not targets. Increases were in all regions except the Northeast, which was flat. As for prices, they continue to moderate. After peaking last August at a 13.4% rise over the year, the gain is now under 5%.
Looking forward, the Conference Board’s Index of Leading Indicators popped in July. This measure is accelerating as there were 0.6% increases in both May and June. Gains in both the coincident (current conditions) and lagging indicators support the view that the economy is in really good shape. And then there were the weekly jobless claims number, which got back to “normal”, that is, below 300,000. Last week’s pop was a surprise and assumed to be due to a non-seasonally adjustable pattern of vehicle production shutdowns. That we moved back to such a low rate is an indication that the labor market is really in good shape.
There were two other reports released that also point to a strengthening economy. The Philadelphia Fed’s Business index surged in August, as did expectations. Supporting the view that manufacturing is really cooking was the Markit flash August number which jumped to its highest level in 4.5 years. The report noted that “robust manufacturing growth momentum has been sustained through the third quarter”.
MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen speaks tomorrow morning and that is the focus of attention. Her talk takes on even more importance given the growing indications that the economy is beginning to break out of its sluggish growth mode. While waiting for wage gains is not exactly the equivalent of sitting on a bench waiting for Godot, it is not really the best way to run monetary policy. Wages is a lagging, lagging indicator and monetary policy needs to look forward. The economic data are pointing to stronger growth than the Fed has been forecasting, which is hardly a surprise. I always use the Fed’s numbers as a lower bound for growth. Of course, I have been aggressively optimistic this year and seeing the possibility that my forecast could actually turn out to be correct makes me a bit giddy, so I will limit my criticism of the Fed. That said, I have argued that wage gains are coming sooner than later and that the Fed will be compelled to raise rates earlier than many have expected. Today’s data reinforces that view. These data should make investors happy, but only when they realize that it’s the economy not the Fed that should be driving prices.