Category Archives: Economic Indicators

February Consumer Prices, Real Earnings and Small Business Optimism

KEY DATA: CPI: +0.2%; Over-Year: +2.2%; Less Food and Energy: +0.2%; Over-Year: +1.8%/ Hourly Earnings (Monthly): 0%; Over-Year: +0.4%/ NFIB: +0.7 point

IN A NUTSHELL: “Even with strong job gains and exuberant small business owners, inflation remains at reasonable levels.”

WHAT IT MEANS: The labor market is booming, so is that translating into higher wages and prices? It doesn’t look like that is the case. Consumer prices rose moderately in February, led by another surge in apparel costs. Despite two consecutive months of large increases, clothing prices are up only minimally over the year, so don’t make too much of the gain. Housing expenses continue to rise and it cost more to eat out, insure you vehicle and buy medical products. But food, fuel, vehicle and hospital services prices were either down or flat, so the price pressures were not that widespread. Unfortunately, feeding my passion for cakes, cupcakes and cookies continued to cost me a lot more. Excluding the more volatile food and energy components, consumer prices rose moderately as well.

Rising inflation continues to take its toll on household spending power. Hourly earnings and prices both rose at about the same pace, so inflation-adjusted or real earnings were flat in February. That is, consumer spending-power went nowhere. Over the year, household earnings gains were also nearly wiped out by inflation. Workers did make more on a weekly basis, but that was largely due to working longer hours. As I say all the time, it is hard for the economy to boom if households don’t have the money to spend, and most don’t.

Small business owners are about as happy as they have ever been. The National Federation of Independent Business’ Index of Small Business Optimism rose in February and now sits at the second highest level in its 45-year history.   Taxes are no longer a major concern. Finding qualified labor is the number one issue. Firms expect to invest and pay higher wages. Indeed, the capital spending index was the highest since 2004. In a warning to the Fed, firms are raising prices already and a growing number are planning to increase prices going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting next week and will have to decide whether or not to continue its interest rate normalization policy. The members will be looking at a variety of factors, but they can be summarized simply: Is growth strong and is inflation moving back toward its target? The answer on both accounts seems to be yes. Clearly, the February jobs report indicates that the economy is in very good shape. Today’s consumer price data tell us that inflation is nearing the magical 2% rate, but is not accelerating sharply. The NFIB survey is the report that should catch the FOMC members’ attention. Actual and planned price increases are back into historically normal levels after being depressed for the past decade. Firms seem to feel this is a good time to expand and they expect to get higher prices as they do so. There is little reason for the FOMC to hold back on increasing interest rates at the March 20-21 meeting and I expect it to do so. As for investors, the rise in the Consumer Price Index was not so great that inflation fears were stirred up. In addition, bond rates have stabilized, though at significantly higher levels than we had at the end of last year. Until there is a reason to panic, it looks as if equity investors will stay the course. Whether that is just economy-based exuberance or irrational exuberance is something that will be determined in the months to come.

February Jobs Report

KEY DATA: Payrolls: +313,000; Private: +287,000; Revisions: +54,000; Construction: +61,000; Unemployment Rate: 4.1% (unchanged); Wages: +0.1%

IN A NUTSHELL: “Wow! That is the only way to describe the number of jobs added in February.”

WHAT IT MEANS: There is a saying that you should “watch what I do, not what I say”, and that is oh, so true when it comes to business hiring. You know all those complaints about firms not being able to find “qualified” workers, an issue I often discuss? Well, never mind. They seem to be able to get all the workers they need, at least if you believe the U.S. Bureau of Labor Statistics. Payrolls increased in February by the largest amount since July 2016 and the gain was way above expectations. Given that the December and January increases were revised upward sharply, the February hiring was even more impressive. Yes, there were some oddities in the data. A huge rise in construction was likely due to the warm February weather. For some reason unknown to anyone, retailers added workers as if the malls were being swamped. And teacher hiring was off the charts, which for February makes little sense. Still, even adjusting for those anomalies, the gains were so widespread that you have to consider this to be a strong report that makes clear firms are ready, willing and able to add lots of new workers.

Despite the outsized hiring, the unemployment remained at 4.1%. The reason was simple: People are flocking into the workforce like crazy. Earlier this week, I mocked the idea that the qualified couch potatoes were suddenly emailing resumes and getting hired. Well, maybe they are (though I still think firms are finally lowering their standards). The increase in the labor force was the largest in fifteen years! The labor force participation rate jumped. However, it is pretty much at the same level it has been for the past four years.

The only weak element of the report was wages, which rose minimally. I am just not certain why the wage increase was so modest. There were strong increases in high-paying jobs, with thirty percent of the total job gain in manufacturing and construction. Meanwhile, restaurants, which typically have low pay, added few new workers. Employees did work longer, so we should see a solid rise in personal income.

MARKETS AND FED POLICY IMPLICATIONS: This was a big report. No, it was a HUGE report. While investors may be comforted by the limited wage increase, that may not be the driving force for the FOMC. The Fed members are likely to read this as saying the economy is accelerating. That should be good enough to trigger a rate hike at the March 20,21 meeting, especially if trade war fears ease. And the pace of hiring is enough for the statement to reflect stronger growth and the likelihood that the Fed will continue normalizing rates. The risks right now are that wage and price inflation will accelerate as we go through the year to a pace well above the Fed’s 2% target. We have yet to see the tax cuts, either business or personal, really kick in. That should happen over the next six months. If we are getting this level of hiring now, what will the demand for workers be in the summer or fall? There just are not enough workers around to meet the demand. Indeed, It looks as if part of the corporate tax cuts are being used to fund desperately needed worker retention and attraction strategies. Larger firms now have the wherewithal to offer higher wages, bonuses, 401K subsidies and/or better benefits, and they are starting to do that. It is just that most small and mid-sized companies cannot match those increases, which is likely the reason the wage increases remain limited.

February Private Sector Jobs, Help Wanted OnLine and January Trade Deficit

KEY DATA: ADP: +235,000/ HWOL: -185,7000/ Deficit: $2.7 billion wider

A NUTSHELL: “The labor market is strong, maybe too strong.”

WHAT IT MEANS: One of the risks of the tax cuts and added government spending is that a stronger economy could put great pressure on wages. Well, it looks like that may already be happening. Friday we get the February employment report. Today, ADP released its estimate of private sector job gains for February and it looks like businesses hired like crazy. The gains were across the board, with robust payroll increases in every size of business and in just about every sector. The only decline was in information services, which has been soft for quite some time now. Meanwhile, construction was up big-time. The mild February may have played a major role in the strong hiring.

The strong payroll gains may be cutting into the backlog of open positions as the Conference Board’s Help Wanted OnLine measure was down sharply in February. Maybe. It is hardly clear why the number of want ads dropped, but they did, and the declines were widespread. Seven of the ten major occupational groupings followed showed fewer ad postings while declines were seen in every region, most states and three-quarters of the major metropolitan areas. There is still strong need for computer and math specialists, which is not a surprise given there are few people with those skills who are actually unemployed.

With tariffs and trade wars in the news, the focus is likely to shift to the trade data and today’s deficit is not likely to make the White House happy. The trade deficit widened sharply in January as exports fell while imports were largely flat. Oil was the prime driver of the deficit as rising prices led to a significant increase in the value of oil imports. Excluding oil, imports would have been down, as the major components, such as consumer goods and food, were lower. Interestingly, our purchases of foreign aluminum and most steel products declined. On the export side, we sold more vehicles and consumer goods, but less of most other goods. As for the country issue, the deficit with China surged, narrowed with the EU and Mexico but widened with Canada. That is just a one-month snapshot, but it’s today’s number, which is likely to matter to some.  

MARKETS AND FED POLICY IMPLICATIONS: The ADP estimate of private sector payroll changes is a good guide, but it can differ quite widely from the month’s government numbers. The trends are similar, though, and ADP is indicating that job gains are still quite strong. That is happening despite the fact that companies have been complaining for years that they cannot find “qualified” workers. Either tons of “qualified” workers are suddenly deciding to get off their couches, stop eating cereal and enter the workforce or the definition of “qualified” just may be changing. I opt for the second explanation. Businesses had failed to adjust to the fact that there just wasn’t the massive oversupply of labor they benefitted from in the first years after the end of the Great Recession. Reality may have finally settled in. But there are implications of hiring less qualified workers; the biggest is that productivity is likely to remain weak. The revised 2017 productivity numbers were released today and an increase of 1.2% is hardly something to celebrate. And since growth can only come from either productivity or added labor, the modest productivity increase implies that strengthening growth could put pressure not just on wages but prices as well. As for the markets, trade wars are bad and anyone who thinks otherwise has been smoking too much medical marijuana. There is reason to be concerned and until we actually see what tariff plan is implemented – and the reaction – uncertainty and wild equity price swings are likely to continue. In addition, a trade war would likely cause the Fed to rethink its interest rate normalization strategy. I still expect a rate hike at the March 20-21 FOMC meeting, but going forward, the pathway of rates will depend upon the actual, not tweeted, trade proposals.

January New Home Sales

KEY DATA: Sales: -7.8%; Over-year: -1.0%; Median Prices (Over-Year): +2.4%

IN A NUTSHELL: “Builders may be exuberant, but sales don’t seem to be supporting that attitude.”

WHAT IT MEANS: If you believe the National Association of Homebuilders, happy days are here again. The NAHB index is at a level that was exceeded only during the peak of the dot.com era. It was not even this high during the best times of the housing bubble. Housing starts were fifty percent higher than they are now. Yet in January, sales of new homes declined for the second consecutive month. There were sharp drops in sales in both the Northeast and the South. I can almost understand the 33% fall off in the Northeast. There was exceptionally cold weather, at least early in the month. However, I am not sure why demand fell by double-digits in the South. On the other hand, sales soared by over 15% in the Midwest, but rose minimally in the West. In other words, this is a report that shows no real pattern. Meanwhile, prices rose only modestly over the year. Builders are bringing more homes on to the market. Indeed, the number of homes for sale is the largest in nearly nine years. However, when adjusted for the sales pace, inventory is still not high, even with the recent backing off of contract signings.

MARKETS AND FED POLICY IMPLICATIONS: There are always strange housing numbers that pop up because extreme weather conditions occur randomly. A blizzard that hits in January could have easily happened in February. Bitter cold weather or massive rain, as we have had this year, changes the ability to get shovels in the ground or for buyers to visit sites. So don’t take the two consecutive months of declines in purchases as a clear signal the housing market is faltering. That said, both new and existing home sales did decline in both December and January and now we are facing rising mortgage rates. Yes, they are still relatively low, but they are the highest in four years. An upward trend in rates should be forcing some buyers to jump off the fence. I guess the increase has not been enough to cause any great stampede. I suspect that we will see a very strong rebound when the February numbers come out, especially since the weather, at least in the Northeast, has been incredibly mild. Even though that report will not be released before the next FOMC meeting, I don’t expect this report to deter any Fed member from voting in favor of a rate hike. As for investors, it appears it will take a push to above 3% in the 10-year Treasury note to create any real anxiety – if it actually does do anything to the exuberance currently in the equity markets. Right now, we have fifteen basis points to go to get there. If 2.85% is the new normal, it shows that an acceptable long-term rate is a moveable target. Don’t be surprised if 3% comes and goes in a similar manner. And we could get there fairly soon.

January Import and Export Prices and Housing Starts and Permits

KEY DATA: Imports: +1%; Nonfuel: +0.4%; Exports: +0.8%; Farm: -0.1%/ Starts: +9.7%; 1-Family: +3.7%; Permits: +7.4%; 1-Family: -1.7%

IN A NUTSHELL: “Inflation pressures are building not just because domestic firms are raising prices but also because import costs increases are accelerating.”

WHAT IT MEANS: Another day of numbers, another sign that inflation is on the rise. This time it is from imports. The cost of foreign goods surged in January. Yes, energy prices jumped, but that was not the only reason the index was up so much. Excluding fuel, prices still rose rapidly. There was a surge in food, vehicles and a variety of industrial materials. On the positive side, consumer goods import prices were flat and capital goods costs went up modestly. Excluding fuel and even excluding food and fuel, import prices are up nearly 2%, the highest in nearly six years. On the export side, the only major sector that didn’t post a solid increase was agriculture. This sector has been struggling to find some pricing power and it just isn’t there.

Meanwhile, the December slowdown in home construction was probably due to weather issues. It is tough to seasonally adjust the data during the winter as deep-freezes and blizzards tend to come at random times. The rebound, though, in housing starts and permits in January was good to see. Both permit requests and housing starts were the highest in over nine years. Much of the gain, though, came from big jumps in the multi-family segment, which is always volatile. Regionally, construction fell in the Midwest but surged in the Northeast, South and West. While the number of homes under construction did increase, the level of activity was not a whole lot above what was going on in January 2017. It doesn’t look as if the shortage of inventory will be eased anytime soon.

One other key number came out today. The University of Michigan’s mid-month reading of consumer sentiment rebounded sharply in the early part of February. Consumers were more optimistic about the future and thought the economy was improving.

MARKETS AND FED POLICY IMPLICATIONS: Do interest rates matter? And if so, to whom do they matter? Despite rising inflation and an increase in the 10-year note of about 50 basis points and a 30 basis point jump in the 2-year note, investors don’t appear to be that concerned. The one-week retreat seems to have been shrugged off. But the inflation pressures are real and we haven’t seen any major economic acceleration from the tax cuts yet that could push up wage costs. Of course, businesses are probably looking forward to stronger, possibly excess demand, as that would give them the pricing power they have lacked for over a decade. And the ability to raise prices holds out hopes that earnings growth can be sustained at a decent level even after the post-tax cut base is put in place. But there is a downside to this thinking as the Fed will be free to raise interest rates back to more normal rates at just about any pace deemed necessary. Unfortunately, the discussion about what are “normal” rates hasn’t really begun. It needs to and soon. In two weeks the next PCE price index comes out and it could be hot. And three weeks later the FOMC meets. If the inflation data are as worrisome as I think is possible, look for the Fed to indicate it is putting inflation on the closely watched list.

January Retail Sales, Consumer Prices and Real Earnings

KEY DATA: Sales: -0.3%; Excluding Vehicles: 0%/ CPI: +0.5%; Less Food and Energy: +0.3%/ Real Earnings (Monthly): -0.2%; Over-Year: +0.8%

IN A NUTSHELL: “In January, consumption cooled but prices heated up, which is not a good combination.”

WHAT IT MEANS: Did the consumer go on vacation? Are households waiting for their paychecks to increase as a result of the tax cuts before they start spending? I don’t know, but the decline in retail sales in January was the largest drop in nearly a year. We knew the number was not going to be great because vehicles sales were off, but this was well below expectations. And the decline in sales is actually worse than the headline number would have you believe. Gasoline purchases soared, but that was driven by a sharp rise in gasoline prices. Shoppers did buy more clothing, but that was about it.

In the “no good economy goes unpunished” category, the Consumer Prices Index jumped in January, led by the surge in energy costs. But even excluding energy, prices still rose solidly. The higher fuel prices drove up transportation expenses. Food and shelter prices rose moderately, but eating out cost a lot more. There was also an outsized surge in apparel prices, which happens periodically. Clothing costs are still down solidly over the year. As for health care, the spotlight on medical goods price increases may be working at they fell but medical services costs rose sharply. But maybe most importantly, consumer prices are up by 2.1% since January 2017, a touch over the Fed’s 2% target. Excluding food and energy, the so-called “core” index has risen 1.8%. The Fed prefers a different inflation measure, the Personal Consumption Expenditure (PCE) deflator, and that index could be close to the magic 2% pace when the data are release in a couple of weeks.

Consumer spending power continues to go nowhere as real, or inflation-adjusted wages dropped again in January. For the entire year, workers compensation rose modestly. Actually, the data are even more disappointing when you remove supervisory employees from the numbers. Real hourly wages were essentially flat over the year and even with hours worked up a touch, the weekly income increase was limited.

MARKETS AND FED POLICY IMPLICATIONS: The initial thought is that is that consumers must have been all tapped out from their holiday shopping, which explains the weak spending to start to the year. That would be nice if it were true. Retail sales were flat in December, which means there were two consecutive months of soft demand. The reason may be simple: Labor compensation continues to go nowhere. Once again, let me repeat that it is difficult to get strong overall economic growth without strong consumer spending. To maintain solid demand, households need the income to spend. They just don’t have it. As a result, as I keep harping on, the savings rate is near record lows. That might force families to use some of the tax cuts to rebuild household balance sheets rather than purchasing new goods. And then there is inflation. Reality seems to be setting in that the days of low inflation and therefore low interest rates are likely over. It appears we are moving back toward more normal levels of inflation and that is driving the increases in rates, also toward more normal levels. We will get the February CPI and the January PCE reports before the next FOMC meeting, which will be held on March 20-21. If the inflation pressures don’t turn around, it is likely that Chair Powell will raise rates.

January Employment Report

KEY DATA: Payrolls: +200,000; Private: +196,000; Revisions: -24,000; Unemployment Rate: 4.1% (Unchanged)

IN A NUTSHELL: “If the labor market is this strong and the tax cuts have yet to kick in, what will it look like when households and businesses actually start spending the money?”

WHAT IT MEANS: I know it was called the Tax Cuts and Jobs Act, but why we needed more jobs is a mystery to me. Payroll gains were strong in January and the increases were pretty much spread across the entire economy. Construction hiring was robust and manufacturers continued to add workers at a solid pace. Retail employment rebounded after a down month in December and the warehousing industry just keeps expanding to meet the needs of the delivery economy. The improving real estate sector is also hiring heavily, as did health care and restaurants. Even federal and local governments padded their payrolls, and it wasn’t even in education. In other words, this was a really broad based employment increase. Over the past three months, an average of 192,000 new positions were added. That exceeds the 181,000 monthly average posted in 2017. Keep in mind, that lower pace of job gains was still robust enough to drop the rate from 4.7% in December 2016 to 4.1% in December 2017.

On the unemployment front, the rate held steady for the fourth consecutive month. The annual revisions to the data makes it not possible to directly compare December 2017 with January 2018 on some of the figures, but suffice it to say that there really wasn’t a softening in the unemployment and labor force numbers. Indeed, there may be a tightening in labor markets. Wage gains accelerated and the increase over the year hit 2.9%, the highest since the end of the Great Recession.

MARKETS AND FED POLICY IMPLICATIONS: The tax cuts should slowly start kicking in as we move through the first half of the year. We really have no idea how much of a boost to growth will occur. On the business side, it isn’t clear how much of the surge in after-tax profits will go toward new capital spending and higher wages rather being used to increase dividends, buy-back stock and/or increase management compensation. On the household side, with the savings rate low, it is also uncertain how much of the tax cuts and bonuses/wage increases will go to new spending rather than repairing deteriorating balance sheets. All that said, there will be growing household demand for goods and services and additional investment on the part of businesses. That faster growth will require more workers. So far, and despite their claims that they cannot find qualified workers, firms seem to be doing just that: They are hiring robustly. Is that pace sustainable? If the unemployment rate declined by 0.6 percentage point last year, what will it fall to this year? Even if you don’t like the unemployment measure, it is hard to see that the current hiring pace can be sustained. Massive fiscal policy piled on top of an economy that was growing solidly and has limited labor availability has not been tried before. How this “Grand Fiscal Experiment” affects wage and price inflation is something Fed has to be worried about. The rise in the 10-year Treasury note to its highest level in four years indicates the markets are getting worried about it as well. As I like to say, “no good economy goes unpunished” and the punishment may already be starting to be meted out.

Fourth Quarter ’17 GDP and December Durable Goods Orders

KEY DATA: GDP: +2.6%; Consumption: +3.8%; Imports: 13.9%; Consumer Prices: +2.8%/ Orders: +2.9%; Excluding Aircraft: +1.4%; Capital Spending: -0.3%

IN A NUTSHELL: “The economy expanded at a solid pace last year and with orders rising and tax cuts kicking in, we should see better growth this year.”

WHAT IT MEANS: So, how did the economy do in 2017? Pretty well. Fourth quarter GDP growth came in a little less than expected, but the headline number hides the true strength. Consumers, businesses and even the government spent money like crazy. Demand for durable consumer goods surged by double-digits as did residential construction. Businesses poured tons of cash into capital goods and technology. So, why did the economy not break the 3% pace as it had in the previous two quarters? Well, you have to get the goods from somewhere and it looks like we got a lot of it from two sources: foreign companies and warehouses. Imports surged and inventories shrunk. Together, those two components reduced growth by 1.8 percentage points. A measure of internal demand, sales to domestic purchasers, was up significantly. As for prices, they rose sharply, especially for consumer products. That is something the Fed is going to have to watch carefully.

Orders for big-ticket items accelerated in December. Durable goods orders jumped, led by sharply rising aircraft demand. Excluding aircraft, the increases were not spread widely across the economy. Demand for metals, machinery and vehicles rose, but orders for electrical equipment, communications equipment computers were off. And the measure that most closely mirrors business capital spending also declined. So, this was a decent, but not great report.

MARKETS AND FED POLICY IMPLICATIONS: The GDP numbers point to an economy that is in very good shape. But they also show how hard it will be to expand by 3% or more for any extended period. The 2.25% pace posted in 2017 was the same as was averaged the previous seven years. There was no acceleration. Yes, it was faster than the 1.5% in 2016, but also less than the 2.9% in 2015. Looking forward, there are some concerns. A lot of the additional purchases came from foreign companies and that is not going to change much in the next few years. The capacity to meet sharply rising demand is just not there. Yes, industrial production should strengthen, but we will also have to get a lot of the rising demand from the rest of the world. So, expect imports to grow rapidly and the trade deficit to widen. There is doubt about the ability of households to continue spending like crazy. Yes, tax cuts will help. However, the minimal savings on the part of low and moderate-income households raises questions about the use of their fatter paychecks. Will they use the money to buy more goods and services or pay down debt and rebuild balance sheets? Given that most of the tax cuts will go to upper income households, who tend to invest, the prospects of a rise in consumer demand anywhere near what we saw in the last quarter are not great. It will take an awful lot of business capital spending to offset those factors and right now, we haven’t heard that companies are making plans to spend a large amount of their windfall profits on building new plants, warehouses or investing in technology. There will be an increase, but how much is just not certain. Then there is the rising rate of consumer inflation. It is not at a threatening level yet, but the falling dollar, increasing energy costs and surging imports imply inflation will accelerate further this year. And that is before we get into the need to pay more for workers. The economy is moving ahead solidly and this year growth should be a lot better, probably around 3%. But unless there is a massive increase in productive capacity and/or a sudden surge in labor supply, much of the new growth will not be met domestically. That means overall economic activity could have an upper bound, which when approached, could translate into higher prices rather than stronger growth. And if that happens, Jerome Powell will have to make some really tough decisions about interest rates.

December Existing Home Sales and November Home Prices

KEY DATA: Sales: -3.6%; Annual: +1.1%; Median Prices (Over-Year): +5.8%; FHFA Prices (Over-Year): +6.5%

IN A NUTSHELL: “Sales of existing homes continue to lag, but that may be due to the incredibly low level of supply.”

WHAT IT MEANS: The housing market is in good shape, especially if you are a seller. Yes, according to the National Association of Realtors, existing home sales fell in December and for all of 2017, the gain was modest. But the sales number is misleading, at least to an extent. The inventory of homes for sale is extraordinarily low. Also, the months supply, which is the number of months at the given sales place needed to clear the market, dropped to its lowest level since 1999, when the number was created. If you cannot find the home you want, you don’t buy a home and with few houses on the market, that is the case for many buyers. With demand outstripping supply, prices rose solidly over the year. Regionally, every part of the nation posted a decline in December. For all of 2017, compared to 2016, sales were flat in the Northeast and Midwest and were up modestly in the South and West.

The Federal Housing Finance Agency’s index of home prices rose again in November, though the gain was limited. Home prices in the West continue to surge but are not rising very quickly on the East Coast. Over the year, housing costs are up significantly. Indeed, nationally, home prices have increased at an average pace of 6.2% for the past six years.

MARKETS AND FED POLICY IMPLICATIONS: With baby-boomers retiring and Millennials entering the home buying years, you would think that housing sales would be growing more rapidly. But demand is going unmet because households are just not moving and putting their houses up for sale. Equity values in many parts of the nation have climbed above their housing-bubble peaks, so it is hard to blame under-water properties for the lack of inventory. What will induce people to sell is unclear and that raises some concerns. To the extent that housing costs are reflected in consumer inflation, the rapidly rising home prices will continue to drive the consumer price indices up faster. Indeed, shelter is one of the fastest growing segments of the Consumer Price Index. That gets piled on top of the rise in energy costs, which is likely to continue given that growth should be strong this year. And if Treasury Secretary Mnuchin’s hopes come true and the dollar weakens, we could see import prices rise faster. Jerome Powell has been confirmed as the next Fed Chair and while he doesn’t face the difficult issues his last two predecessors confronted, it doesn’t mean he comes in with no potential problems on the horizon. Expansionary fiscal policy in a time of solid growth and low unemployment has not been tried. Add that to building underlying inflationary pressures and the new Fed Chair’s job might turn out to be a lot more daunting than people currently think. I am sure Mr. Powell hoped to be Chair. Well, he got it. I wish him luck. He will need it.

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

KEY DATA: Starts: -8.2%; 1-Family: -11.8%; Permits: -0.1%; 1-Family: +1.8%/ Phila. Fed (Manufacturing): -5.7 points/ Claims: -41,000

IN A NUTSHELL: “It has been a tough winter and the weather may have been a major factor in the construction slowdown.”

WHAT IT MEANS: I am already tired of winter and it is still the middle of January. Ugh! But there are only 27 days until the Phillies start spring training, so there is something to look forward to – my annual father/son trip to Clearwater. Builders across the nation had trouble coping with the weather in December. Housing starts plummeted, led by a double-digit drop in single-family construction. Every region posted a fall off in building activity. But the decline is likely to be temporary, as permits were largely flat and they increased for the key single-family segment. Over the last three months of 2017, permit requests ran over 4% higher than starts, so there is a lot of potential activity in the pipeline. If we ever get some good weather, those permits will be used.

While the economy seems to be accelerating, manufacturing activity is not gaining a lot of traction. Yesterday we saw that manufacturing production rose minimally in December. Today, the Philadelphia Fed’s survey of manufacturers indicated that there was not pick up in the first half of January. Activity was still decent, but the trend has been down, not up in the Middle Atlantic region. The details also supported the headline number. New orders expanded much less quickly, inventories built and order books thinned. Optimism about the future was also down. The only good elements of the report were the labor market numbers. Hiring held up and the workweek expanded. Employment expectations also remained solid.

Last week I said the jobless claims data were surprisingly soft and we needed to watch them. Well, never mind. New claims for unemployment insurance fell to one of their lowest levels ever. These data are seasonally adjusted on a weekly basis and that is really impossible to do. What we are probably just seeing is volatility due to weather and other factors that the adjustment factors are not built to account for. The labor market is tight and that is all that needs to be said.  

MARKETS AND FED POLICY IMPLICATIONS: In 2005, I was in Phoenix for a presentation to a venture capital company on the real estate market. I read in the Phoenix newspaper that housing prices in the region had risen over 20% over the year and that realtors believed that prices could increase that much or more over the next year. It was at that point that I started writing about housing bubbles. I admit, I had no idea how bad things would get, but that experience was something I have not forgotten. Consider the current environment. Stock indices were up 20% to 25% last year and have surged to start off this year. The Dow is up over 30% in a little over a year and has already jumped about 5.5% in just the first two weeks of this year. The S&P 500 has surged nearly 5% so far this year. And what are people saying? There is no reason to think that we cannot get another 20% plus increase this year. Sound familiar? Are there bubbles in the equity markets? In the immortal words of Alan Greenspan, “… it was very difficult to definitively identify a bubble until after the fact — that is, when it’s bursting confirmed its existence.” Apparently, we will have to wait until this bubble bursts, if it does, to confirm we are in an equity bubble. And along those lines, it is worthwhile to repeat a quote attributed to George Santayana: “Those who cannot remember the past are condemned to repeat it”. Just something to think about.