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January Import and Export Prices and February Consumer Confidence

KEY DATA: Imports: +0.4%; Nonfuel: -0.2%; Exports: +0.1%; Farm: -0.1%/ Confidence: -2.8 points

IN A NUTSHELL: “The strong dollar is keeping everything but energy costs under control.”

WHAT IT MEANS: Import prices jumped again in January, propelled by energy. Energy prices surged by nearly 6%, after having jumped by even more in December. Over the year, the cost of imported fuel is up a whopping 58%. In January 2016, fuel costs were down nearly 40% from the previous year. So it is no wonder that overall import prices are up nearly 4% from the previous year. In just one year, the headline number has gone from a yearly change of -6.5% to a rise of 3.7%, a greater than ten percentage points swing. As for the details, imported food prices dropped sharply, though my Mexican avocados seemed to cost more. Has a border tax been implemented already? Consumer and capital goods prices eased a touch, while automotive import prices dropped sharply. In other words, there aren’t any broad-based inflationary pressures coming from the import sector. As for exports, the two-month rise in farm product prices was halted in January, but the drop was modest. Consumer export prices fell sharply and capital goods exports costs were off modestly, but vehicle makers did see a sharp rise in their prices.

The surge in consumer confidence since the election faded a touch in early February. The University of Michigan’s Consumer Sentiment Index dropped, led by a solid decline in expectations. Still, the level remains quite high. Both positive and negative reactions to the Trump actions are major factors in respondents’ attitudes and they are split pretty much down the middle between positive and negative. As I have said many times, changes in confidence driven by political factors rarely have sustained impacts on spending, so let’s wait a while before we make any judgment on how the rise – or any subsequent fall if it happens – will play out in the marketplace.

MARKETS AND FED POLICY IMPLICATIONS: Import costs, which had restrained inflation, are now rising. Should the Fed be worried about this? Yes and no. The increases are not widespread, so we cannot assume that we will be seeing consumer inflation surge. But the Fed shifted to headline inflation from core and energy is driving up that rate. Don’t be surprised if inflation tops the Fed’s 2% target in the new few months. That would mean the Fed has met both its inflation and unemployment targets, so there would be little to stop it from raising rates – if it wants to and follows its own guidelines. Still, even if inflation tops 2% before the March 14-15 FOMC meeting, the Committee is not likely to raise rates then. They will want to see what the tax cut plan, which is supposed to be “phenomenal”, looks like. (Someone should take the thesaurus away from the White House.) I have the next increase in April, which is a non-press conference meeting. I think Chair Yellen wants to prove that all meetings are live and raising rates then, especially if it comes after a major tax cut proposal, would be the easiest time to make that point.

January Employment Report and Non-Manufacturing Activity

KEY DATA: Payrolls: +227,000; Unemployment Rate: 4.8% (up 0.1 percentage point); Wages: +0.1%/ ISM (NonMan.): -0.1point; Employment: +2 points

IN A NUTSHELL: “The labor market is still a solid job machine but workers are not seeing wages grow solidly.”

WHAT IT MEANS: The jobs machine keeps on humming along. The nation’s businesses added jobs at a very strong pace in January and the gains were spread across most of the economy. Construction workers were hired like crazy, manufacturers added to their payrolls, retailers kept expanding (or maybe they just haven’t shut the stores yet), finance and real estate companies grew, firms started hiring temps again and the health care and hospitality sectors continued to demand more workers like crazy. Only the government showed restraint. But there are some warnings in the numbers. The acceleration in job gains from December’s moderate 157,000 increase came largely from two places: Construction and temporary employment services. Weather probably played a major role in the construction swing (it was warm in January), while the decline in temp positions was likely an aberration, making for an outsized rise in January. Don’t be surprised if job gains retreat back to the 150,000 to 175,000 going forward.

The unemployment rate inched upward in January as the labor force surged, lifting the participation rate as well. All this angst about the falling participation rate is simply misplaced. The rate has been in a fairly tight range for over three years, as the demographic forces driving it down are being offset by the expected return of frustrated workers. Still, there doesn’t seem to be enough pressure on companies to bid more for workers. Wages rose minimally over the month and are up only 2.5% over the year – before inflation is factored in. That is just not good enough.

The Institute for Supply Management reported that the Non-Manufacturing sector continued to expand solidly in January. The overall index was off minimally and the details were solid. Most importantly, hiring is picking up, as order books are no longer thinning. Order growth is still strong, though a touch less than it had been, largely due to weakening in export demand.

 MARKETS AND FED POLICY IMPLICATIONS: Boy, what a difference eight years make. When Barack Obama became president in January 2009, the economy lost 793,000 jobs. The swing between then and now was over one million positions. The tasks facing the two of them are totally different. Eight years ago, it was stop the bleeding. Today, it is keep things going so wages can rise faster. Tax cuts, regulatory changes and infrastructure spending increases all could help, but they are not likely to significantly affect the economy until well into the second half of the year. That makes the Fed’s calculus more difficult. The unemployment rate is pretty much at its target and the inflation target is within sight. That seems to argue for a near-term rate hike. But Fed Chair Yellen has indicated she would be willing to let the economy run hot for a while and the modest wage gains provide her with some cover to do so. That said, monetary policy works with a lag and if the Trump fiscal policies are implemented, the Fed cannot fall too far behind the curve or it will have to raise rates faster than anyone would like. This increases uncertainty about the course of Fed policy. As for the equity markets, solid job gains and low wage pressures seem to be the recipe for a renewal of the exuberance we have seen since the election. How long that will last is anyone’s guess.

Fourth Quarter Productivity, Weekly Jobless Claims and Yesterday’s FOMC Statement

KEY DATA: Productivity (2016): +0.2%; Labor Costs (2016): +2.6%; Real Earnings (2016): +1.5%/ Claims: -14,000/ FOMC: “Steady as she goes.”

IN A NUTSHELL: “The Fed thinks the economy is okay and the data seems to support the view that the economy is okay, if you think okay is okay.”

WHAT IT MEANS: Tomorrow we get the January jobs report and if the huge increase in private sector jobs that ADP reported for the month is any indicator, it should be a good one. And it looks like firms will have to keep hiring if they want to expand output, as productivity is barely growing. In the second half of last year, firms did manage to squeeze out more output from their workforce, but for the year, the gain was miniscule. Only twice over the past thirty years has productivity growth been weaker. As a consequence, labor costs continued to accelerate, reaching its highest pace since 2007. Workers didn’t see their inflation-adjusted income increase very quickly, which is one reason so many voters were ticked off.

Businesses are going to have to make due with their workforces as the labor market continues to tighten. Jobless claims fell and are once again back to record lows. Challenger, Gray and Christmas reported that layoff notices, while up from December, were down nearly 40% from January 2016. Firms are holding onto their workers because they cannot find replacements. The Conference Board’s Help Wanted On Line measure rose in January. It had been declining for much of last year but starting in early fall, it stabilized and is now rising. And the Institute for Supply Management’s manufacturing employment index jumped in January. It is pointing to strong job gains, which supports the numbers that ADP reported. In other words, all the employment data released over the past few days point to a strengthening labor market.

MARKETS AND FED POLICY IMPLICATIONS: As expected, the Fed did not change the funds rate at the FOMC meeting that ended yesterday afternoon. The statement, though largely unremarkable, did make it clear that the members thought the economy was in decent shape. More importantly, instead of saying that inflation “was expected” to rise to 2% in the medium term, the members now believe that inflation “will” rise to that level. That may seem small but it shows that the Fed is now confident that their inflation target is in sight. If both the inflation and unemployment targets pretty much at hand, there is little reason for the Fed to continue standing pat for much longer. I have them raising rates in May, barring some unforeseen craziness that would upset the growth trend, such as a tariff.

So, where do we stand going into tomorrow’s employment report? The labor market is tight, the economy is solid but productivity is moribund. The productivity weakness is major threat to the hopes that the economy can grow at even a 3% pace let alone the hugely optimistic 4% rate that so many in the administration need to make their numbers work. With the labor force expected to expand at less than 1%, productivity would have to increase by 3% or more to get to that upper level. But this far into an expansion, that rarely happens. While you never can say never, basing economic and tax plans on a number that has a low likelihood of occurrence is not a particularly responsible thing to do. But I guess using the word responsible in reference to anything in Washington doesn’t make much sense either.

December Spending, Income and Pending Home Sales

KEY DATA: Consumption: +0.5%; Income: +0.3%; Prices: +0.3%/ Pending Sales: +1.5%

IN A NUTSHELL: “Consumers spending is holding up generally across the economy.”

WHAT IT MEANS: The final numbers for 2016 are trickling in and for the most part, they indicate the economy is in good shape but not accelerating at any great pace. Consumption rose strongly in December, which was expected. A jump in durable goods demand, mostly from vehicles, as well as a solid gain in services such as utilities helped power the sharp spending increase. Soft-good demand rose somewhat less. Still, this is a clear indication that people are willing to out there and spend. They should be able to keep that up. Income rose moderately, led by a rebound in wages and salaries. Unfortunately, much of those income gains are being eaten up by the rise in the inflation. Prices rose solidly as energy costs keep going up. Top line price increases over the year are up 1.6% and are closing in on the Fed’s target level slowly. The Fed members have some breathing room, but that is fading. Income adjusted for taxes and inflation rose at a slower pace in 2016 than in 2015. That is not a good trend. The recent decline in the savings rate is not a major concern as it is till at a decent level.

The National Association of Realtors reported that pending home sales rebounded in December after having crashed in November. Solid gains in the South and West outweighed more modest declines in the Northeast and Midwest. An interesting division that was highlighted in the report was the huge increase in pending home sales in the $250,000 and above group since December 2015 compared to a decline in the under $100,000 group. A dearth of homes on the market at the lower levels, as well as the recent rise in mortgage rates, is hurting the low-priced segment.

MARKETS AND FED POLICY IMPLICATIONS: Since the income and spending numbers for the final month of any quarter are released after the GDP data for the entire quarter, they usually are non-events. But they do provide some detail for the latest month and in this case, it is clear that consumers are still willing to part with their income, which is rising. The savings rate is being used to maintain spending and prices are pressuring households who are still not receiving significant increases in their wages. That raises some flags about spending going forward. Yes, confidence has been rising, but you still need the money to spend and while the labor market is tight, firms are still willing to go without rather than pay up for new workers. The FOMC starts its two-day meeting tomorrow and the expectation is that no rate hike will be announced. However, I am looking for a warning or suggestion that if fiscal policy starts to become expansionary rather than contractionary, the Fed will have greater ability to normalize rates. That is, rates will rise faster than expected.

December New Home Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: -10.4%; Prices (Over-Year): 7.9%/ Leading Indicators: +0.5%/ Claims: +22,000

IN A NUTSHELL: “It is too early to say that rising rates are causing the housing market to tank, despite the sharp drop in new home sales.”

WHAT IT MEANS: “If you build it they will come.” Well, maybe, maybe not. Home sales dropped sharply in December as the weakness was spread across most of the nation. There was a huge 41% decline in the Midwest, which may have been weather related. But demand faltered significantly in the South as well. Demand was also off, though modestly in the West. The only region posting a gain was the Northeast, which bounces around like a Super Ball. Sales may have been down and the number of new homes for sale may have risen, but that didn’t stop prices from soaring. There still is a dearth of inventory as most of the increase in houses on the market came from listings of homes that were not yet started. Developers are not so sure if they build it the buyers will indeed come. They are getting higher prices for their product but are unwilling to do much speculative construction.

Look down the road, not only should growth remain decent but we might see an upturn. The Conference Board’s Leading Economic Index jumped in December and it has been accelerating for a while. Even without any business-friendly policies from the new administration, it looks like the economy will expand faster this year.

There was a sharp jump in the number of unemployment claims last week but not to worry.   As I noted last week, the data had reached rock bottom and were not likely to be sustained at those historically low levels. We are pretty much back to what I think will be more typical claims numbers and they still point to a further tightening in the labor market.

MARKETS AND FED POLICY IMPLICATIONS: The new president is churning out executive orders like crazy. Still, those don’t create a lot of change by themselves. The details of the enabling legislation matter the most. Are we really going to spend $15 billion or more for a wall when there are so many other pressing needs? Starting the process of repealing Obamacare may make for a good sound bite, but does anyone know what the replacement will be? Anyone seen the tax cut or infrastructure spending plans yet? All these things may be coming, but until they are here, we continue to operate on hopes and prayers. As an economist, I can only say I have no idea to what extent growth may be affected. Yet investors keep pushing prices up. That only puts even greater pressure on the Republicans to deliver. The need to feed the stock market beast is not a good way to run an economy and you can bet when the Fed meets next week, that will be the major topic of conversation.    

December Industrial Production, Consumer Prices and Real Earnings and January Home Builders Index

KEY DATA: IP: +0.8%; Manufacturing: +0.2%/ CPI: +0.3%; Less Energy: +0.2%/ Real Earnings: +0.1%/ NAHB: down 2 points

IN A NUTSHELL: “Inflation is at the Fed’s target and with manufacturing and home construction solid, there is every expectation that multiple rate hikes will occur this year.”

WHAT IT MEANS: Today’s data dump provides a clear picture of an economy moving forward and inflation that is steadily accelerating. Industrial production surged in December, but most of that was due to a bitter December that followed unseasonably warm October and November weather. But more importantly, manufacturing activity rose decently. This had been the economy’s weakest link but output was up for the third time in four months. The fourth quarter rise in manufacturing production points to a GDP growth rate that may not be greatly different from the solid third quarter number. The petroleum sector is starting to recover, which is good news for many firms that supply goods and services into that portion of the economy.

As for inflation, it continues to edge up. The Consumer Price Index rose solidly in December. Even excluding energy, which jumped once again, costs are starting to accelerate. While eating in is costing less (I’m paying less for my baked goods), eating out is more expensive – and we do eat out a lot. Health care, used cars, rent and transportation services costs are all rising more sharply. At least we are paying less for apparel. But the jump in consumer prices largely offset a strong increase in wages, so household spending power increased modestly. Workers keep spinning their wheels and as the election showed, they don’t like that and they vote.

Despite a decline in the National Association of Home Builders/Wells Fargo Housing Market Index in January, the level of confidence is the second highest in over eleven years. One year ago, the Index was at 61 compared to the 67 this January. The NAHB indicated that builders expect single-family home construction to rise 10% this year. I’ll take that.

MARKETS AND FED POLICY IMPLICATIONS: Unless the Republicans self-destruct and don’t pass any tax cuts and spending increases, expansionary fiscal policy should hype economic growth this year. The extent and timing of those changes and their impacts on the economy are unclear, as reality is beginning to set in. That is true both for the politicians and the monetary authorities. Inflation is pretty much at the Fed’s target and it is likely to accelerate. Indeed, a report today by ADP indicated that wage gains continued to accelerate during the fourth quarter of 2016. With the unemployment pretty much at full employment, the Fed’s dual mandate is being met. Now, they have to decide what to do about the looming fiscal stimulus. The next FOMC meeting is in two weeks and the March meeting is in the middle of the month. It is doubtful we will have clarity on tax changes and spending by either meeting. But there is an early May meeting and I am betting that the next move comes then. First, even Congress can get its act together in three months, especially since there is one party rule. The second reason is that the Fed has been looking to prove that all meetings, not just those with a press conference, are live. The timing of the May 2-3 meeting is perfect to make that point. As for investors, euphoria is great but reality ultimately rules. It is time to decide what is likely and what is a dream. The fiscal stimulus program remains unclear and I suspect investors are finally beginning to factor that into their decision-making.

November Income and Spending, Durable Goods Orders, Leading Indicators, Revised 3rd Quarter GDP and Weekly Jobless Claims

KEY DATA: Consumption: +0.2%; Income: 0%; Inflation: 0%/ Orders: -4.6%; Excluding Aircraft: +0.5%; Capital Goods: +0.9%/ LEI: 0%/ GDP: 3.5% (up from 3.2%)/ Claims: +21,000

IN A NUTSHELL: “It doesn’t look like the pick up in activity during the summer was built upon during the fall.”

WHAT IT MEANS: The economy is growing, consumers and business are spending, but happy days are not here again. That is, if you define happy days as strong economic growth. Lots of data were dumped today and they tell largely the same story. Consumer spending was up in November, but if you adjust for inflation, it wasn’t anything special. The key factor was a major slowdown in durable goods consumption, driven by a softening in vehicle sales. But it should be kept in mind that the sales pace was still robust, just not as huge as in October. It looks like consumption will be up only moderately in the final quarter of the year and that will likely keep overall growth from getting anywhere near what we had in the third quarter. Looking forward, household incomes went nowhere. Workers may be hoping that wage and salary gains will accelerate, but they actually went backward in November. Why that happened in anyone’s guess and it will be interesting to see what the December numbers look like. At least inflation remains well contained, though the Fed may not be overjoyed by that.

On the business side, demand for big-ticket items, excluding the volatile aircraft sector, was up solidly in November. Critically, business capital expenditures rose sharply. This has been a major weak link in the economy and the failure of companies to upgrade their capital stock does not bode well for future growth. If rising investment becomes a real trend, growth should accelerate. That, though, is not what we see from the Conference Board’s Leading Economic Index, which was flat in November. That came after only a modest rise in October. The modest rise in the leading indicators suggests we will not see a major surge in growth in the first part of 2017.

The third, and at least for a while, last reading of third quarter GDP showed that the economy grew at a strong pace. The revisions were not great in any major category but were largely across the board. And corporate profits were also stronger than initially thought, so firms do have the cash to invest in machinery, equipment, software and structures.

On the labor front, the surge in jobless claims is not worrisome. Trying to seasonally adjust weekly data is a thankless and pretty much impossible task, so even a few weeks of increases really mean little. Smoothing out the weekly numbers by using the four-week moving average indicates that the level of claims remains quite low.

MARKETS AND FED POLICY IMPLICATIONS: The first two months of job gains, income and spending data for the fourth quarter point to growth only in the 2% to 2.5% range. I am somewhat surprised by the consumption numbers as other reports seemed to indicate households were spending this holiday season. Maybe we will get a late surge in demand. We shall see. But the real issue is wage growth. You cannot get consumers to spend more if they don’t have the money to spend, and they just don’t have that much more money to spend. I may sound like a broken record, but that is simple math. We can talk all we want about unleashing the corporate beast by cutting taxes and revising regulations, but firms are not going to invest massively unless they see a reason to do that. With consumers not having the money to allow stronger consumption and world growth remaining modest, the proposals coming out of Washington may not add to growth as much as many are expecting. Still, the economy is moving forward at a decent pace and that is something to be happy about. On that note let me say:

Happy Holidays!

December 13-14 2016 FOMC Meeting

In a Nutshell: “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent.”

Rate Decision: Fed funds rate range increased to 0.50% to 0.75%

The Fed is starting to work like a Swiss watch: Every twelve months it raises rates whether it needs to or not, whether the economic data demand it or not. If it’s December, then the Fed is raising rates. Okay, I am being sarcastic. But the FOMC did increase the fed funds rate today, which hardly surprised anyone.

Did the Fed provide any insight into what it might do next year? Yes, but let’s not forget, last December it expected to raise rates several times this year, so believe the Fed’s forecast at your own risk. That said, the Committee’s forecast indicates the funds rate will likely be increased about three times in each of the next three years. By the end of 2019, the funds rate is expected to be about 3%, give or take 25 basis points. In other words, the expectation that rates would be increased gradually was reinforced.

As for the economy, there was some indication that the members believe inflation pressures are building a little faster than previously thought. That was signaled by the comment: “Market-based measures of inflation compensation have moved up considerably”. The word “considerably” was added. Since the choice of words is what we look for, that was really the only notable change in the statement. The description of the economy was largely the same, if a little muted.

So, what should we expect? First of all, nothing was said about the election or how the Fed may react if the proposed fiscal stimulus is implemented. At her press conference, Chair Yellen indicated that the members recognize there is great uncertainty about the extent of any fiscal stimulus. Thus, while the Fed cannot react now to something they don’t know about, they will respond once the stimulus package is passed.

In summary, the Fed raised rates today, indicated that rates will likely go up three times next year and left the door open for further increases, depending upon the stimulus package that Congress passes. As I said before, if the Trump stimulus plan is passed in any form, by the second half of next year, we could be seeing inflation nearing 3%. If that is the case, three to four increases in 2017 looks likely and if there is a major stimulus package, we could see upwards of six increases (or 150 basis points) in 2018.

(The next FOMC meeting is January 31- February 1, 2017.)

November Retail Sales, Producer Prices and Industrial Production

KEY DATA: Sales: +0.1%; Excluding Vehicles: +0.2%/ PPI: +0.4%; Excluding Energy: +0.5%/ IP: -0.4%; Manufacturing: -0.1%

IN A NUTSHELL: “Higher inflation but modest consumer spending and production gains is not the recipe for an economic acceleration.”

WHAT IT MEANS: Just as I was getting all bulled up on the economy, the November data start showing up. To say the least, today’s reports were disappointing. Start with the retail sales numbers, which barely budged. All the stories coming out of Black Friday weekend and Cyber Monday were that people were shopping like crazy. Yet department store demand fell and Internet sales were up modestly. Another example of false news stories, I guess. And I thought everything I read on the Internet was accurate. Oh, well. The November vehicle sales numbers were off just a touch, but they were still at a very high pace, so the decline was nothing to be concerned about. While people may not have been shopping ‘till they dropped, they did eat until they were stuffed, which is good news for the restaurant industry.

On the inflation front, wholesale costs jumped in November. This occurred despite a decline in energy prices and we know that has reversed quite dramatically in December. Services prices are surging once again and that is only because transportation services costs are relatively tame. If energy costs keep increasing, that too could change. On the goods side, though, prices are rising more moderately. Neither consumer nor capital goods costs are going up at any great pace.

The manufacturing sector has been in a funk for about two years now and there were no signs that changed in November. Output fell again and over the year, manufacturing production is up minimally. The biggest loser was the vehicle sector, as assembly rates tumbled. Given the solid demand, that will likely turn around. But it wasn’t all motor vehicles. Sharp drops in output occurred in the machinery and electrical equipment sectors as well. In contrast, the ramping up of production in oil and gas industry continued. If prices keep rising, we could see this sector in full recovery mode.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data dump probably did little to change the thinking at the FOMC meeting. But the data do raise some questions about the speed at which the Fed will raise rates next year. While the economy is not booming, it is still growing strongly enough to keep the unemployment rate going down. That can only raise wage gains, which are already accelerating. The Atlanta Fed’s wage tracker is the highest it has been in eight years. Inflation is the key for the FOMC. Oil prices are now about 30% above where they were a year ago and in January that could go to 50%. Energy will be adding to not subtracting from inflation and the top line index will be above 2% very soon. If the Trump stimulus plan is passed in any form, by the second half of next year, we could be seeing inflation nearing 3%. If that is the case, and that is my forecast, the Fed will not raise rates just once or twice in 2017. Three to four times looks likely and if there is a major stimulus package, we could see upwards of six increases (or 150 basis points) in 2018. As I like to say, no good economy goes unpunished and real fiscal stimulus will get us a good (or at least better) economy.

Revised Third Quarter Productivity and October Trade Deficit and Home Prices

KEY DATA: Deficit: $42.6 billion ($6.4 billion wider); Exports: -1.8%; Imports: +1.4%/ Productivity: +3.1%; Labor Costs: +0.7%/ Home Prices (Over-Year): +6.7%

IN A NUTSHELL: “Continuing the improvement in productivity will be key if growth is to accelerate.”

WHAT IT MEANS: Despite the economy expanding a little faster than initially estimated, productivity growth didn’t increase as well, though it was still solid. The rise in output per hour was the strongest in two years. However, we need to see more gains like this to have any confidence that the long period of weak productivity increases is behind us. Indeed, even with the solid increase in the summer, productivity was still flat over the year. It looks like that may be the gain for the year as well. Rising wage costs were largely offset by the gains in output and production adjusted labor costs rose modestly, though more than had been previously estimated. Labor compensation is accelerating, which does not bode well for inflation.

The trade deficit widened in October, which was not a major surprise. The surprise had been declining deficits posted during the first half of the year. Exports fell, but largely because the surge in soybean sales that powered the second quarter trade narrowing eased. There were also large declines in nonmonetary gold and artwork, neither of which point to a weakening economy. On the import side, increases in purchases of computer accessories, telecommunications equipment and consumer goods offset a drop in vehicle demand. Even adjusting for inflation, it looks like trade will restrain growth modestly in the fourth quarter.

Home prices just keep rising and rising and rising. CoreLogic’s Home Price Index jumped in October and is up sharply over the year. Texas, Florida and California powered the increase. However, the gains are not widespread as only nine states had gains at or above the national average.

MARKETS AND FED POLICY IMPLICATIONS: Business can expand by either working more efficiently or by using more workers. It is hard to get strong growth when hiring is constrained by labor availability and productivity gains are largely nonexistent. That is the growth trap that we have been in and unless something changes, don’t expect those rosy predictions of years of 3.5% to 4% growth to come true. And if companies don’t start investing more, they will be faced with increases in labor costs that are likely to require prices higher than we have seen in quite a while. The Fed worries quite a lot about productivity and while this report will be well received, the data do bounce around a lot. With compensation accelerating faster than output per worker, either earnings or prices have to give, raising questions about equity prices. The markets have been euphoric lately, but extensive fiscal stimulus in an economy nearing full employment is not a recipe for the Fed standing pat and that reality has yet to set in.