All posts by joel

January Spending and Income, February Consumer Confidence and Revised Fourth Quarter GDP

KEY DATA: Spending: +0.5%; Income: +0.5%: Prices: +0.1%/ Confidence: -0.3%/ GDP: +1% (Up from 0.7%)

IN A NUTSHELL: “With consumers spending, incomes growing and confidence stable, it is hard to understand why we are seeing all those stories about a recession on the horizon.”

WHAT IT MEANS: “The recession is coming, the recession is coming” – Really? While I may look a little like Alfred E. Neuman (not really), I don’t go around saying: “What me worry?” I do worry when there are good reasons to worry. That is not right now. It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust. Wages and salaries are on the rise, which is what we would expect from the tight labor markets. Consumers may be spending, but the rise in incomes has been enough to keep the savings rate constant. On the inflation front, while the overall increase was not significant, a lot of that was from commodities. The cost of services, which is nearly two-thirds of consumption, continues to accelerate. The year-over-year increase in the Fed’s favorite inflation measure, the Personal Consumption Expenditure price index, was the highest in over a year. Excluding food and energy, the index was up the fastest in three years. We may still be below the Fed’s inflation target, but the target can now be seen by the eye, not just on radar.

Another reason to be optimistic is that consumer confidence is not crashing, despite the mayhem in the markets. The University of Michigan’s February reading of Consumer Sentiment did tick down, but the decline was not nearly as much as might be expected given the stock market declines. The concerns did show up in expectations, which fell sharply.

The government revised fourth quarter GDP growth up a bit. A small decline was expected, so the modestly faster growth pace was a nice surprise. The revisions were minor in most categories and don’t alter the perception that the economy eased at the end of last year.

MARKETS AND FED POLICY IMPLICATIONS: The long awaited rise in wages and salaries is starting to show up. Now, we shouldn’t expect the sharp January increase to be repeated as some of the gain came from first of the year raises. But with jobless claims low and job openings high, it is likely that the wage acceleration that has been occurring for the past three years should continue this year. With incomes rising and financial conditions improving, there is every reason to believe households will continue opening their wallets. This report provides more ammunition for those at the Fed who say that market volatility should be watched but should not be the determinate of policy. It’s the economy and inflation that matter. Growth is rebounding, inflation is picking up and stocks have recovered about half the loss posted this year. In other words, conditions are moving back toward supporting a rate hike.    

January Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Durables: +4.9%; Excluding Aircraft: 1.7%; Capital Spending: 3.9%/ Claims: +10,000

IN A NUTSHELL: “The broadly based rise in demand for big-ticket items is a sign that manufacturing sector is starting to stabilize.”

WHAT IT MEANS: The weakest link may still be the weakest link, but it may not be that weak anymore. The manufacturing sector, battered by the rising dollar and the collapse in oil prices, has faltered recently. However, given the surge in durable goods orders in January, the problems are starting to disappear. Yes, the wildly volatile aircraft sector accounted for about two-thirds of the gain, but demand for private and defense airplanes was not the only source of strength. Machinery, electrical equipment, computers, communications equipment, motor vehicles and metals were all up solidly. As for business capital spending, there was a strong rebound there as well. One month doesn’t constitute a trend, but maybe the oil complex cut backs are easing and demand in the rest of the economy will start showing through. Though orders were strong, so were shipments, which led to a modest rise in backlogs. Order books need to fill faster if production is to accelerate.

On the labor market front, jobless claims rose solidly last week, but that is hardly a concern. The previous week’s level was extremely low, so we just got back to very low levels of claims. The data are consistent with a solid rise in payrolls in February.

MARKETS AND FED POLICY IMPLICATIONS: So, what should we make of the economy? If the weak is no longer that weak, and the strong, which is the labor market, remains strong, then I think it is fair to say the economy is in good shape. But investors don’t seem to care that much about the economic data. If oil prices fall, so do stock prices. If oil prices rise, so do stock prices. So, maybe we should just forget the economy. Not. Ultimately, the umbilical cord binding stock and oil prices together will be cut and economic fundamentals will once again matter. Will the markets rebound at that point? It really depends upon which stocks you are looking at. Domestic firms should do just fine. However, international firms have to worry about the dollar and growth in the countries where they do business. The dollar has stabilized, at least when you look at the indices, so executives will have to come up with other excuses if their earnings don’t do as well as investors thought they should. Regardless, the Fed will not place huge importance on foreign earnings, and therefore the stock prices of international companies, unless the markets crash and burn. It is still the U.S. economy that is job one. Friday we get January incomes, spending and the all-important Personal Consumption Expenditure index. Other inflation measures have been moving up and if the PCE follows, that would be another reason to think the Fed members will start talking about future rate increases.

January New Home Sales

KEY DATA: Sales: -9.2%; West: -32.1%; Median Prices: -4.5%

IN A NUTSHELL: “Every once in a while you get a really weird number and the huge decline in new home sales in the West perfectly fits that description.”

WHAT IT MEANS: Yesterday, we saw that existing home sales eked out a small increase in January. Of course, many were expecting a decline, so the rise was a pleasant surprise. The only part of the country where sales were off was the West and the drop was fairly modest. Today, the new home sales numbers were released and once again, demand was off in the West. However, the decline was eight times as great for new home sales than existing home sales. So what happened? I don’t know, so if you do, please fill me in! Huge ups and downs in the numbers happen periodically and what you have to do is simply grin and bear it. Meanwhile, sales were pretty much flat in the rest of the country, with the Northeast and South showing gains while the Midwest was off. As for home prices, the median value was down over the year for the second consecutive month and third out of the last four. That is opposite of what is happening in the existing home market, where prices remain quite firm. There appears to be a shift to somewhat lower-priced new homes. The percentage of sales in the less than $200,000 range rose from 19% in January 2015 to 23% this year.

MARKETS AND FED POLICY IMPLICATIONS: So, what is the condition of the housing market? Given the inexplicably large drop in the West, I would have to guess that conditions remain solid. The number of homes under construction is rising and it is doubtful that builders would spend the money moving dirt and putting up structures if traffic and expected sales were not holding up. I am assuming housing has not faltered, which is important given that consumer confidence is easing, probably in reaction to the problems in the stock markets. With investors marching to the beat of oil prices, rather than economic fundamentals, the volatility is likely to continue. But while some may believe the markets are the be-all, end-all of economic indicators, Fed members don’t necessarily think that way. Yesterday, Fed Vice Chair Stanley Fischer said: “If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years–including in the second half of 2011–that have left little visible imprint on the economy, and it is still early to judge the ramifications of the increased market volatility of the first seven weeks of 2016.” In other words, the markets forecast upcoming recessions almost as well as economists. Actually, we do a little better, but that is not the point. Focusing on the equity markets may not provide a lot of knowledge about the economy. As I’ve pointed out before, a decline in one sector, such as oil, that has long-term positive offsets, or a rise in the dollar that simply reduces earnings translation should not matter greatly when talking about the domestic economy. The FOMC meets in three weeks and the members have been quiet enough about the next move to take the March meeting off the table. But if it is the economy, not the markets, that is driving Fed decisions, we need to watch the economic data, not the S&P 500. Before the April 26-27 meeting, two employment and inflation reports will be released. We also should have a good idea about first quarter GDP, which comes out on April 28th. Don’t count out a move in April just yet.

January Consumer Prices and Real Earnings

KEY DATA: CPI: 0%; Year-over-Year: +1.4%; Excluding Energy: +0.3%; Year-over-Year: +2%/ Real Hourly Earnings: +0.4%; Real Weekly Earnings: 0.7%

IN A NUTSHELL: “Inflation may not be high, but it is clearly rising, and that is something the Fed will be watching closely.”

WHAT IT MEANS: Energy has dominated the discussion as the large declines brought smiles to consumers’ faces but frowns to investors. But energy comprises less than 7% of the consumer costs. What happens to the prices of the rest of the goods we buy is more important, unless you think oil prices can keep falling 40%. Eventually, we approach zero, as in zero U.S. fracking companies. I don’t think we get there, so I will focus on the non-energy consumer costs. Here, we are seeing price increases starting to accelerate. The January headline Consumer Price Index number, which was flat, totally misrepresents the report – as usual. For the first time in a very long time, every component except energy was either flat or up. Food costs were the one flat number, largely because the egg price surge is being unwound. Otherwise, food costs are also starting to increase, especially cakes, cupcakes and cookies. And if you eat out, well you are paying more as well. Prices of medical care, clothing, vehicles, transportation and shelter were all up solidly. Services, which are nearly two-thirds of consumer spending, continue to rise at a strong pace. Even commodities, when you exclude energy, are up. In other words, inflation pressures are starting to build across the economy.

Low inflation has saved workers, whose incomes have risen modestly. Bgs and weekly earnings rose solidly in January, even when adjusted for inflation. The tight labor market, which the declining unemployment claims show is tightening further, is finally translating into better wage gains. That bodes well for future consumer spending but should put additional pressures on prices.  

MARKETS AND FED POLICY IMPLICATIONS: While investors watch oil and react in a lock-step manner, following energy costs up and down, inflation continues to move back toward normal. At the end of last year, I warned that inflation could break the Fed’s target rate by spring. That forecast assumed energy prices would be largely stable, which it turns out was a pretty poor assumption. That said, headline inflation is accelerating and excluding energy (my preferred measure) or excluding food and energy, price gains are at or above the Fed’s target. Yesterday, we saw that producer prices are beginning to rise and while the pathway from wholesale to retail is hardly direct, the messages being sent is that the inflation is not something that will keep the Fed from tightening. However, the Fed needs to delink itself from the quarter-to-quarter insanity in the equity markets. A strong dollar that lowers earnings is irrelevant unless there is a major impact on exports. What about oil? There is nothing the Fed can or should do about the price of oil. It is being driven by supply and we all know, supply-side economics should be left to run its own course. As for the manufacturing recession, the sharp January production increase hints it may be modest or even over. Meanwhile, wage pressures are building, inflation is slowly accelerating and growth should be quite solid this quarter.  Maybe the nattering know-nothings of negativity who fret about falling stock prices and claim that the Fed’s quarter point increase killed growth think the world revolves around stocks, but the Fed shouldn’t. The economy is evolving as the Fed members thought it would when they raised rates in December and there is little reason to believe that rate hikes will stop with that one move.

January Industrial Production, Housing Starts and Producer Prices

KEY DATA: IP: +0.9%; Manufacturing: +0.5%/ Starts: -3.8%; Permits: -0.2%/ PPI: +0.1%; Energy: -5%; Services: +0.5%

IN A NUTSHELL: “The economy moved forward in fits and starts in January as industrial production surged but home construction eased.”

WHAT IT MEANS: The battle between those who think the Fed should save the stock markets and those who think interest rate policy is all about the economy not equity prices continues unabated. Today’s data, though, do tend to come down on the side of those who believe the economy is in reasonably good shape. The biggest news was the sharp rebound in manufacturing output. So much for the manufacturing sector being in recession. Firms ramped up production of consumer goods, business equipment and business supplies. The output of both durable and nondurable goods was up solidly, with vehicle assembly rates jumping. Nothing helps like strong sales. The cold weather led to a sharp rise in utility output. The falling energy prices did lead to a cut back in oil and gas drilling.

While manufacturing seems to shrugging off its lethargy, bad weather battered the housing sector during January. Housing starts fell as declines were posted across the nation. Rain, snow and El Nino all showed up during the month. That weather played a major roll in the construction decline can be seen by the minimal decline in permit requests. If the issue was demand, permit demand would have followed downward more closely. Instead, permit requests have been running about 8% above starts for the past three months and that means construction should jump in the months to come. There are an awful lot of homes permitted but not yet started.

On the inflation front, wholesale prices rose modestly despite another sharp drop in energy costs. Finished consumer goods prices, excluding food and energy, rose solidly again and are up 2.4% over the year. That hardly points to low inflation. And on the services side, which is 64% of the index, prices rose sharply there as well. It had been that I had to scour this report for any sign that prices were rising. Now, increases are much more common than price declines.

MARKETS AND FED POLICY IMPLICATIONS: If we step back and view the economy from afar, we see that consumers are spending, manufacturing is beginning to rebound and housing, though not great, is hardly weak. That is, the domestic economy is fine. While the stock market is probably once again sending out a false signal that a recession is coming, it hardly looks that way from the real economic data. So, what will the Fed do? The members will give lip service to concerns about China, the dollar and some may even think the equity markets matter, but I suspect they will be watching the labor market and non-energy capital spending numbers more closely. And if the last few days signal that the wackiness in the markets is coming to an end, then that will be a major public relations burden off their backs. The uncertainties about the world economy might be enough to put off the next rate hike past March, but I still do not rule April. Chair Yellen would like to prove the Fed doesn’t need a press conference to raise rates and one or two solid jobs reports would make it easy for the FOMC to do just that. As for investors, the trend is their friend and right now that is up. Let’s hope it stays that way.

January Retail Sales and Import and Export Prices

KEY DATA: Sales: +0.2%; Control: +0.6%/ Imports: -1.1%; Nonfuel: -0.2%; Exports: -0.8%; -1.1%

IN A NUTSHELL: “Atlas had nothing on the U.S. consumer, who continues to shoulder all the burden of growth in the country.”

WHAT IT MEANS: The markets are continuing on their merry wild mouse ride and investors continue to worry about oil and assorted international concerns. Meanwhile, back at the ranch, consumers are spending money as if nothing is wrong at all. On the surface, the January retail sales numbers don’t look particularly strong, but as usual, the details tell the real story. First, these data are not adjusted for price changes, so the declines in things such as gasoline enter as a negative. But gasoline prices fell more than sales, so its clear demand rose. The snow and cold weather led to strong demand for winter products and we ate in a lot as a result. Households started buying electronics again as well as general merchandise, so the rise in demand was fairly widespread. But maybe the best number was the so-called “control” group, which closely mirrors the consumption number in GDP and excludes gasoline, vehicles, building materials and food services, which rose strongly. We have started of the year with solid consumption of goods and with the weather turning cold, services demand could surge (utilities are part of the services number). And with consumer sentiment not getting crushed by the fall in stock prices, don’t be surprised if the solid household spending continues.

As for inflation, it still is being restrained by declines in import prices. Yes, energy costs are going down and where they go from here is anyone’s guess. The real issue is nonfuel costs. The January numbers were much less clear about the path of those goods. Imported food prices products jumped. While nonelectric capital goods costs were off, electrical equipment and non-vehicle transportation prices rose. Motor vehicles were up as were durable consumer goods. The details don’t say that all consumer imported goods prices are falling. As for exports, the farm sector continues to be hit by huge price declines.

MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen testified in front of Congress this week and refused to bail out the stock markets. That, of course, set off a whole slew of market guru and big-investor invectives. They want the Fed to continue feeding the beast, as it did for years with quantitative easing. But the Fed wasn’t created to focus strictly on the markets: It’s U.S. economic growth that is job 1A. Today’s retail sales numbers don’t point to a recession coming any time soon. And the modest decline in the University of Michigan’s sentiment index also says that the average household has largely divorced itself from the markets. Why that surprises anyone is anyone’s guess. People have learned their lessons and appear to be looking long term. I cannot understand all the attacks on the Fed for raising rates only 25 basis points. Indeed, what kind of company would be crushed if the funds rate rose just one percentage point? Yes, there are growing risks, but their path is unclear. Anyone know where oil will be at the end of the year? If you do, tell me because I would like to by a beachfront home and retire. Basically, today’s retail sales numbers and the less than feared import price declines give the Fed some breathing room. Whether investors are buoyed by those reports, though, is anyone’s guess.

December Job Openings and January Small Business Optimism

KEY DATA: Openings: +261,000; Quits: +196,000/ Small Business Optimism: -1.3 points

IN A NUTSHELL: “If the labor market is tightening, can the economy really be faltering?”

WHAT IT MEANS: The stock market continues to gyrate wildly, but we can still take hope from the simple fact that we haven’t seen the real economy mirror the financial economy. The latest reports provide further indications that the labor market is still in good shape. The December Job Openings and Labor Turnover survey (JOLTS) shows just how Wall Street and Main Street are diverging. Unfilled positions surged in December to the second highest level on record. While hiring and separations were relatively balanced, the eye-opener was a jump in the number of people quitting their jobs. We are back to levels not seen since 2006, well before the recession began. That positions are hard to fill was reinforced by two other surveys. Yesterday, the Conference Board’s Employment Trends Index posted a nice gain, pointing further job growth going forward. Also, while the National Federation of Independent Business’s January survey showed that small business optimism is declining, the index measuring difficulty in filling positions rose to its highest level since the end of the recession. The NFIB members are concerned that business conditions and sales will not hold up going forward.  

MARKETS AND FED POLICY IMPLICATIONS: I have argued many times before, the key to the labor market is the willingness of people to leave positions, something they simply have not been doing since the onset of the Great Recession. That appears to have changed. Firms are going to have to start recognizing that they need to spend some money retaining their workers, especially since there are not that many people out there who need a new job. There are many who want a new position, and they can be lured away, but that means raising salaries. As firms raise salaries either to retain their workers or attract their workers, the pressure on margins and prices will only rise. Inflation is hardly an issue right now and with oil prices continuing to fall, the headline number will remain well below the Fed’s target for a while. But the members watch the JOLTS report closely as an indicator of future wage inflation, and given the quit rate level, it is flashing red. Nearly 2.9 million new positions were created last year and the unemployment rate dropped below 5% in January. Say what you want about discouraged workers, but when people are once again quitting, after having gone through the labor markets of the last seven years, that tells me those numbers accurately reflect what is going on. Fed Chair Yellen testifies in front of Congress on Wednesday and Thursday, so we will get some insights into her thinking about the economy. The latest labor market reports provide her with the ammunition needed to make a balanced presentation and keep her options open. Of course, investors are still following oil, so it is doubtful reports about the actual economy will make much of a difference.

January Employment Report and December Trade Deficit

KEY DATA: Payrolls: +151,000; Manufacturing: +29,000; Unemployment Rate: 4.9% (down 0.1 percentage point); Hourly Wages: +0.5%/ Trade Deficit: $1.1 billion wider

IN A NUTSHELL: “No, the sky is not falling and the labor market is not weakening as the details of the employment report were just fine.”

WHAT IT MEANS: Right after the January employment report was released, a certain business network’s website trumpeted: “Ugh, job growth is slowing now, too.” Please, give me a break. Is the headline number all that matters? No! It’s the details and they don’t tell me that labor market conditions have weakened at all. Let’s start with the disappointing employment gain. The largest decline, 38,500 workers, was in educational services, of all places. Really, is that anything other than a strange number? The second largest drop, 25,200, was in temporary help workers. If that is an indication that firms are trying to lock up their workers by moving temps to full time status, I have not problems with it. And finally, 14,400 messengers and couriers lost their jobs. Hey people, the delivery companies ramped up wildly to meet the growing holiday delivery demands, so a cut back was hardly surprising or likely repeatable. And are we really worried the government cut payrolls? Meanwhile, the job gains were spread across the economy and even in places where we didn’t think were strong. For example, there was a sharp rise in manufacturing, you know, the sector that is supposed to be in recession. Nearly 64% of the manufacturing industries posted job gains, so something good must be happening there. Hiring was strong in construction, health care, professional services, finance, retail trade and restaurants. Both high paying and low paying jobs are being created like crazy. There was a huge rise in the hourly wage. Major firms said they were raising wages on January 1st and some states increased the minimum wage. But wage gains are accelerating. Hours worked rose and weekly earnings increased sharply, hardly signs of a softening labor market. Let me make one other point. In March of last year, only 84,000 new jobs were added and the nattering nabobs of negativity, as I called them then, announced that the sky had fallen. Well, the total number of jobs added in 2015 was the largest since 1999. Enough said.

And then there was the unemployment rate, which fell to its lowest level since February 2008. The labor force participation rate continues to rise after bottoming last September. While the annual statistical changes make the 2015 and 2016 not strictly comparable, it appears that the labor force rose in January as well. These are all signs of a healthy labor market.

Another number was released today, the December trade deficit, though I doubt many people paid much attention to it. With the dollar rising, exports were expected to decline, and they did. Imports rose, another sign of a solid economy as well as cheaper foreign products.

MARKETS AND FED POLICY IMPLICATIONS: The Fed members are not business website headline writers. They take their time and digest the data and what they tasted was a pretty good meal. The job weakness came in places that were either odd or not surprising. The lower unemployment rate and rising wages further support the view that the labor market is doing nothing but tightening. Clearly, there are more uncertainties today than when they raised rates in December and hinted that there could be four increases this year. But the labor market is absolutely not one of them. Thus, investors will once again have to decide if a decent economy and higher interest rates is better than a weak economy and lower rates. I will take better growth and a Fed that is slowly raising rates anytime.

January NonManufacturing Activity, Private Sector Jobs and Help Wanted Online

KEY DATA: ISM (NonManufacturing): -2.3 points; Orders: -2.4 points; Hiring: -4.2 points/ ADP Jobs: +205,000/ Online Ads: +13,500

IN A NUTSHELL: “The new year hasn’t started off with a bang, but more like a whimper.”

WHAT IT MEANS: The first data for 2016 are trickling in and while the economy continues to expand, there are no signs it is accelerating. The Institute for Supply Management’s January reading on the nonmanufacturing portion of the economy was disappointing. Business activity decelerated sharply as orders grew at a slower pace than in December. As a consequence, hiring activity moderated as well. With order books filling slowly, it doesn’t look like we are in for any major acceleration in growth in this, the largest portion of the economy, anytime soon. The only unknown in this report is how much the blizzard hurt activity. As a consequence, we need to be careful in getting too down about the weakness. That said, on Monday, the January Supply Managers’ manufacturing index was released and while it was a little better than in December, it too pointed to sluggish growth.

This being the first week of the month, it means that Friday is Employment Friday. ADP released its estimate of January private sector job growth and it was better than expected. Payroll gains were solid and spread across companies of all sizes and in almost every industry. The only weak link appears to be manufacturing, which we also saw in the Supply Managers’ report. Still, after huge gains at the end of last year, expectations are that the January numbers would be a lot lower. This report suggest hiring should be less but decent nevertheless.

Speaking of the labor market, The Conference Board’s Help Wanted OnLine measure rose minimally in December. Labor demand picked up strongly in the Midwest and West, more moderately in the South, but declined in the Northeast. Again, it is not clear if weather played a role in the drop.

January motor vehicle sales were released this week and they were up despite the blizzard. The economy may be slowing, but people are once again in love with new vehicles.

MARKETS AND FED POLICY IMPLICATIONS: The latest economic news hasn’t been great and investors are getting whipsawed. We are seeing more questions about Chinese and even Japanese growth. So, where are we? As long as jobs are being created and incomes are rising, households will keep spending. And that is likely to be the case. Businesses may be turning cautious, but if they are linked into the domestic economy, they should continue to hire and invest, at least if they are not part of the energy complex. Basically, there are more uncertainties out there and that is likely to cause the Fed to be cautious in their drive to normalize. Both the January and February jobs report will be released before the next FOMC meeting, so let’s wait a while before we conclude a rate hike in March is off the table. However, the probability of it occurring at that meeting has slipped.

Fourth Quarter 2015 GDP and Employment Costs

KEY DATA: GDP: +0.7%; 2015: +2.4%; Private Domestic Spending: +1.8%; Consumption: +2.2%; Consumer Prices: +0.1%/ ECI (Year-over-Year): +2.0%; Wages and Salaries: +2.1%; Benefits: +1.7%

IN A NUTSHELL: “The warm winter and low energy prices hurt growth at the end of last year and that helped keep inflation and worker compensation costs down.”

WHAT IT MEANS: Boy did the economy decelerate at the end of 2015. But the modest fourth quarter expansion hides some decent details. For example, consumer spending was pretty decent. Given that the warm December meant a lot lower heating bills and very little reason to buy winter-related products such as sweaters or shovels, it was actually quite good. The recent blizzard probably caused some change in spending habits, at least here in the East. For all of 2015, consumption grew at the fastest pace in a decade. A drop in business investment in structures was another place where growth was restrained. But that was likely due to the massive cut back in energy activity. Where we go from here is anyone’s guess, but the cut backs were due to supply side factors, not a decline in demand. Firms also reduced inventories. That too was expected, as there had been some artificially high increases earlier in the year. We are close to more sustainable levels now. One place where there should be continued issues is the trade deficit, which expanded and reduced growth by about 0.5 percentage point. The strong dollar and weak world growth, coupled with a decent U.S. economy, point to a further deterioration in the trade situation. Final Sales to Private Domestic Purchases, a closely watched measure that removes inventory swings, the government and trade, increased decently, another sign that conditions are hardly dour. Growth for all of last year was the same as in 2014 – good but not great. On the inflation front, there wasn’t any. Consumer prices barely budged and the only component where prices rose even moderately, was housing.

A second report released today was the Employment Cost Index, which measures total compensation cost trends. Surprisingly, it was fairly tame at the end of last year. Wages and salaries, despite all that we heard, didn’t rise very much and benefits remain well under control. Of course, any measure that says wages are declining, yes going down, in the aircraft industry has to be taken with a bit of salt.

MARKETS AND FED POLICY IMPLICATIONS: Much will be made of the tepid growth coming into this year, but as usual, the looking just at the headline number as an indicator of the state of the economy would miss the more complex underlying trend. Consumers are spending and that should hold up given the 3.2% rise in disposable income in the fourth quarter. Business investment in equipment fell, but in only one major category, transportation equipment. But that came after huge increases the previous two quarters, so some giveback was not unlikely. And the rig issue is largely unrelated to U.S. economic activity, so we cannot determine where that will go this year. Putting it all together, growth was disappointing, but we clearly shouldn’t fear a recession is imminent, or even in the cards. Instead, a return of winter and some moderation in the energy sector cut backs should allow first quarter growth to be pretty solid. What needs to change if growth is to accelerate is labor compensation. If wages keep growing modestly, it is hard to see how the economy can grow rapidly. And that would make the Fed’s job even more difficult given the below-target inflation rate.