KEY DATA: IP: -0.2%; Manufacturing: -0.2%/ NAHB: 59 (up 5 points)
IN A NUTSHELL: “Housing is up, manufacturing is down and the data remain all over the town.”
WHAT IT MEANS: The FOMC starts its two-day meeting tomorrow and the latest numbers on the economy remain mixed. The Fed’s own industrial production index showed that activity contracted in May. While the energy sector is having issues that we all are aware of, what was unexpected was the decline in manufacturing output. It was assumed that the rampaging vehicle sector would pull up with it other sectors. While assembly rates did jump, not a whole lot of other areas posted gains. There was a solid increase in technology, but oil and gas drilling cratered once again. Food production also fell sharply. Whether that was due to the bird flu was not made clear. Basically, vehicles and technology-related products, such as computers and communications equipment, were up, but much of the remainder of the manufacturing sector was down.
Reinforcing the view that manufacturing has hit a soft spot was a decline in the New York Fed’s June Empire State Manufacturing index. While just about every component of the index was off, hiring and the workweek increased. You tell me what that says and we both will know.
While manufacturing seems to be wandering around, housing is off and running. The National Association of Home Builders/Wells Fargo Housing Market Index gapped upward in June. Current sales, sales expectations and traffic all rose significantly. It was noted that the indices of current and future activity were at “their highest levels since the last quarter of 2005”. We are talking about the peak in the housing bubble here. While there is no way that we will see anything close to the level of activity we had a decade ago, the measures point to strong dales and construction in the months ahead.
MARKETS AND FED POLICY IMPLICATIONS: So, what shape is the economy in? That is bond market’s $64 trillion question. It was great to see that the vehicle sector, technology and housing are all in very good shape. Normally, that would create real optimism about the future. But the drag from energy continues to keep a lid on growth. Consumers seem content to bank the savings from the lower energy costs, but they may also be feeling a lot better about their financial situations. That seems to be reflected in the improved housing and vehicle sector and strong credit demand. If households are borrowing, either long-term or through revolving credit, that should mean solid gains in consumption. We don’t get May consumption data until a week from Thursday, but they should be really strong. So, what will the Fed say on Wednesday? I am guessing there will be some positive views about the economy and an indication that a tightening is coming, but also a need for continued good data to support the first rate hike. In other words, Janet Yellen, whether in the statement or at her press conference, will likely only hint, not confirm, that a move to increase interest rates is likely to happen “soon”.