July Employment Situation and NonManufacturing Activity and June Trade Deficit

KEY DATA: Payrolls: +157,000, Private: 170,000; Revisions: +59,000; Unemployment Rate: 3.9% (down from 4.0%; wages: +0.3%/ ISM (NonMan.): -3.4 points; Orders: -6.2 points/ Trade Deficit: $46.3 billion (7.3% wider)

IN A NUTSHELL: “Despite a disappointing jobs number, the labor market remains strong.”

WHAT IT MEANS: It was a big day for data and the numbers were mixed. The July jobs gain was well below expectations but as I always say, don’t assume one employment report is a good indicator of anything. First, the previous two months job increases were revised upward sharply. Taken together, job growth was actually strong. Indeed, the three-month average, which is a better way of looking at the situation, was a robust 224,000. In addition, Toys-R-Us’ closing reduced retail jobs sharply. So, don’t even look at the headline number, especially since the details were really good. Manufacturers and restaurants keep adding workers like crazy and construction and health care are hiring strongly. Government was down, but that was in education, which the government just cannot figure out how to seasonally adjust. On the unemployment side, the rate fell and is likely to continue declining. The labor force grew and the participation rate was stable. The one disturbing number was the wage increase. It was decent, but over the year, the 2.7% gain means that real wages are up less than 1% over the year. That is pathetic.  

NonManufacturing activity slipped pretty sharply in July. The Institute for Supply Management’s index dropped led by major decline in new orders. Backlogs grew a lot less rapidly, which is a concern. Business activity was off significantly and that is something the needs to be watched as it may be the first sign that the bloom is coming off the economy.

The trade deficit widened sharply in June as exports declined while imports rose. The drop in foreign sales was not surprising, given the trade war issues, but not in the categories we saw. Agricultural exports rose but there were sharp declines in capital goods, vehicles and consumer products. That does not bode well for future exports. We also exported more petroleum products. On the import side, we bought a lot more consumer goods, petroleum products and vehicles, but a lot less capital goods.

MARKETS AND FED POLICY IMPLICATIONS: The economy is in very good shape and the labor market is mirroring the gains. The July payroll increase is likely to be revised upward, if the previous months upward revisions are any indicator, and Toys-R-Us is not shutting down again. But wages are just not rising fast enough to improve spending power. The soft July vehicle sales number may be a trend as consumers are becoming tapped out. That does not bode well for future spending. In addition, we may be starting to see that trade wars can create significant negatives for economies. The decline in exports must be watched carefully. And while the Supply Managers’ index drop was just one number, if it is the start of a trend, it could be worrisome. The Fed will not be swayed by the headline jobs number but instead will look at the details. The lack of significant wage pressure is helpful, at least on the inflation front, but the trend in job growth is still above labor force growth and that implies a further tightening in the labor markets. The weak consumer spending power growth and the first crack in the economy that could be indicated by the slowdown in the nonmanufacturing segment may not change policy in the short run. But they are now likely on the Fed members’ radar.

July Private Sector Jobs, Help Wanted OnLine, Manufacturing Activity and June Construction Spending

KEY DATA: ISM (Manufacturing): -2.1 points, Orders: -3.3 points/ ADP Jobs: +219,000/ HWOL: +170,800/ Construction: -1.1%

IN A NUTSHELL: “The job market continues to be on fire even as manufacturing and construction start settling down into more sustainable levels.”

WHAT IT MEANS: Friday we get the government’s take on the number of jobs created in July and it looks like that could be a pretty good one. The ADP estimate of July private sector payroll increase came in well above expectations. While this measure does have periodic large misses, lately it has done a pretty good job of signaling whether the report would beat expectations. Driving the large gain was a surge in employment in mid-sized companies. The increases in small and large companies were somewhat disappointing. There also continues to be large numbers of workers being hired in manufacturing as well as a rebound in health care employment.

Regardless of the size of the July job increase, whether payroll gains will remain strong is a bit of a question mark. The Conference Board’s Help Wanted OnLine measure rose solidly in July. However, the number of ads peaked in November 2015, has been generally falling since then. It is down nearly 20% from the high and is at the level seen in mid-2012. Firms did ramp up their search for new workers and the increases were pretty much across the board, ranging from healthcare practitioners and management to sales and food preparation.

Manufacturing has been leading the way in this economy and it should continue to do so. The Institute for Supply Management’s Index did ease in July, but the level is still pretty high. New orders continued to grow but at a little less robust a pace. Production also expanded at a somewhat more moderate pace and as a result, backlogs built more slowly. Still, all of those components were at levels that indicate a very solid sector. Indeed, hiring actually picked up, which bodes well for Friday’s employment report.

The one weak report today was construction spending, which fell sharply in June. This was the largest decline in over a year and was driven but cut backs in public and private activity. There was weakness in the residential and nonresidential components. Manufacturers are starting to expand, another sign of strength in that sector.

MARKETS AND FED POLICY IMPLICATIONS: Friday we get the jobs report and today a statement from the Fed. Today’s reports generally paint a picture of a strong, expanding economy, though one that may be easing back to levels that can be sustained. Continued growth in excess of 4% is not likely and actually not desirable. It would create the likelihood of bubbles forming and recessions tend to follow the bursting of bubbles. But first, inflation would accelerate, though why it hasn’t yet is anyone’s guess. So consider a strong employment a double-edged sword: It would mean we have a great economy but it would also raise the risk of much higher inflation and interest rates. That is what the Fed and the markets have to balance as they look toward the future.

Second Quarter GDP and July Consumer Sentiment

KEY DATA: GDP: 4.1%; Consumption: 4%; Business Investment: 5.4%; Consumer Prices (Quarterly): 1.8%; Over-Year: +2.8%/ Sentiment: down 0.3 point

IN A NUTSHELL: “The economy surged in the spring, led by business and consumer spending.”

WHAT IT MEANS: As expected, we got a big number for second quarter growth. The pace was the fastest since mid 2014, when second quarter growth was 5.1% and the third quarter expanded at a 4.9% rate. Most importantly, the gains were broad based. Consumers spent like crazy, especially on durable goods. Businesses also invested, especially on new buildings. A surprisingly large reduction in inventories restrained growth and that may have to be rebuilt going forward. Final sales to private domestic purchasers, a proxy for non-government, non-foreign demand, were up robustly as well. Export growth surged, likely in order to get ahead of the trade war and federal government spending ballooned. While the federal government tended to subtract from growth during the first half of the decade, it is now helping lead the way forward. On the inflation front, consumer price gains eased over the quarter, though it did accelerate when looking at the year-over-year numbers. The Fed considers both numbers when it evaluates what is happening to inflation.

One more sign that consumers will keep spending came from the University of Michigan’s July Consumer Sentiment Index release. The index fell minimally, which was surprising given all the trade war news. Indeed, it was reported that the share of respondents indicating that tariffs would have a negative impact surged in July and it was across all political groups, not just Democrats. It is hardly clear, though, that those fears will actually translate into changes in spending habits. I doubt it.

MARKETS AND FED POLICY IMPLICATIONS: This was a strong number that probably disappointed those who were looking for a number well above 4.5% – and many were. For those, I suggest chilling. The data will be revised, though I would not be surprised if the next number isn’t a little less robust. The huge increase in exports, which added greatly to growth, may not have been sustained in June and the June numbers were largely unavailable when this report was created. We get the June trade report at the end of next week. Looking forward, consumer spending will likely be good but not nearly as strong as in the second quarter. If the reports from the vehicle makers are to be believed, sales may be softening. (The July numbers come out next week.) With confidence high, the slowdown is not likely to be great. However, there is room for business spending to increase faster, especially on machinery, intellectual property and inventory rebuilding. On the trade front, it is all about the farmers and whether they can sustain their exports. Soybean exports exploded in the spring, as sellers tried to get things out to beat the trade war, and that could turn down sharply this quarter, slowing growth significantly. Other agricultural product sales may also have been curtailed. Putting it all together, the spring quarter could be the high water mark for growth. That said, there is every reason to expect that growth in the second half of the year will still be in the 3% range, a very solid pace. Investors should be happy but not exuberant over this report. It contains good news and some cautionary data. As for the Fed, inflation is not accelerating sharply and growth is strong but maybe not sustainable. I expect the Fed to raise rates again in September and if third quarter growth is in the 3% range, as I have, it is likely to hike again in December, especially if the strong growth causes inflation to continue to slowly accelerate.

June Existing Home Sales

KEY DATA: Home Sales: -0.6%; Over-Year: -2.2%; Median Prices (Over-Year): +5.2%

IN A NUTSHELL: “With supply limited and prices and mortgage rates rising, it is not surprising that housing sales are softening.”

WHAT IT MEANS: The key housing market is suffering from a major case of agita. Existing home demand, which makes up nearly ninety percent of all home purchases, declined again in June. That was the third consecutive monthly drop. Over the year, sales were off for the fifth month in the last six. In other words, demand has largely flatlined. In June, the decline was limited by a sharp rise in the Northeast that nearly offset drops in the South and West. Demand rose modestly in Midwest. Worse, there are some warning signs that indicate the market is not balanced and could be facing problems going forward. Sales of the units costing $250,000 or less are down quite sharply over the year, those in the middle, between $250,000 and $750,000 are up modestly while the highest priced homes are selling strongly. Entry-level buyers are having issues finding and affording homes, especially since prices continue to rise sharply – they hit an all-time high in June. About the only good news in the report was the continued increase in homes on the market. They have risen for the last six months. That said, the inventory level is still way too low.

In a separate report, the Chicago Federal Reserve’s National Activity Index rebounded in June and is now showing that that strong growth should continue. Not surprisingly, it was led by a jump in the production components of the index. Manufacturing is doing well and should support the economy for months to come.

MARKETS AND FED POLICY IMPLICATIONS: The overall economy is in great shape, but there are a few cracks in the armor. Those “weaknesses”, though, are being created, in part, by the strong growth. Rising interest rates and the surging cost of construction that are the direct result of the solid economy, are forcing up home prices and reducing affordability for the key entry level home buyers. The percent of all homes sold to first-time buyers is down from June 2017 and that segment makes up nearly a third of all sales. As I always say, no good economy goes unpunished and right now, it is the housing market that is suffering. As for investors, it is all about growth and earnings, which so far are generally really good. It would take an awfully bad situation for a company’s after-tax earnings to falter given the huge tax cuts. And the strong demand should be creating some decent top-line numbers. As for the president’s tweets and their impacts on the markets, they wilder they get, the less investors seem to take them seriously. Another favorite saying of mine is that the markets may be efficient but that doesn’t mean they are rational. When it comes to the tweets, they may just be doing the right thing – at least for now.

June Industrial Production and July Housing Market

KEY DATA: IP: +0.6%; Manufacturing: +0.8%; Vehicles: +7.8%; Excluding Vehicles: +0.3%/ NAHB: 68 (Unchanged)

IN A NUTSHELL: “Manufacturing rebounded in June, but it was largely due to a surge in motor vehicle assemblies.”

WHAT IT MEANS: It is hard to focus on the fundamentals of the economy when there is chaos in Washington, but that has to be done. While we are highly confident that second quarter growth was strong, the issue of sustainability remains. Today’s data only muddy the waters further. Industrial production jumped in June, led by a strong showing in manufacturing and mining. But the manufacturing upturn came after an even larger decline in May. In both cases, the changes were due to a vehicle assembly whiplash: Sharply down then up. For the first six months of the year, vehicle production has run just slightly above last year’s average, which indicates we really shouldn’t expect this sector to lead the way. Excluding vehicles, manufacturing output increased moderately, which is the way we should look at the monthly numbers unless we start seeing a sustained rise in vehicle sales. Otherwise, the details were decent but not spectacular. Energy drilling continues to soar and aerospace, machinery, computers and electronics increased solidly. Capital spending is increasing and supporting those gains. We are also starting to see a ramping up of defense product production, a result of the massive rise in the Defense Department’s budget.

With mortgage rates up, is the housing market getting hurt? Not so far. The National Association of Home Builders/Wells Fargo Housing Market Index was flat in July but it is at a fairly high level. Still, the index has largely gone nowhere this spring and is down from the winter. The sector no longer looks like it is accelerating.

MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Powell testified in front of Congress today and in his prepared remarks, he made it clear that it’s steady as it goes. As he stated: “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that–for now–the best way forward is to keep gradually raising the federal funds rate.” So look for rates to increase in September and December. The Fed is also continuing QT – quantitative tightening – and its balance sheet is slowly shrinking. That process will pick up some steam, though not a huge amount. That will also pressure rates. Rates across the yield curve should rise, though the trade tensions make forecasting the changes more difficult since it affects international capital flows. Today’s numbers point to a strong economy but not one that is accelerating. So, if second quarter GDP does come in at or above 4%, don’t expect that to be repeated in the quarters ahead. Indeed, that is my forecast and most other economists’ forecasts: Growth should be very good but not spectacular in the second half of the year. What all that means for investors is unclear. There seems to be a willingness to look through the trade war statements and dismiss any issues regarding inflation and weak wage growth. But we are in the second half of 2018 and that means investors should be thinking about next year, which is why I keep harping on the idea that “the future ain’t what it used to be” (thanks, Yogi). Six months ago, we were forecasting strong growth six months out and that is likely to be the case. That same forecast for the first half of 2019 is less clear.

June Retail Sales

June Retail Sales

KEY DATA: Sales: +0.5%; Ex-Vehicles: +0.4%; Ex-Vehicles and Gasoline: +0.3%

IN A NUTSHELL: “The consumer spent heavily in the spring and that implies second quarter growth should be quite strong.”

WHAT IT MEANS: Wages might not be rising very quickly but that is not stopping households from spending money. Retail sales rose solidly in June after surging in May. The May level was revised upward sharply, so the two months together point to really good demand. Looking at the June report, vehicle demand led the way, which we pretty much knew from the sales data. But there was another strong month of sales at building materials and garden stores, as homeowners seem to be improving their properties. And while they are doing that, they are going out to eat like crazy once again. Restaurants had been seeing modest sales gains for quite a while by that seems to be changing. People shopped online and bought lots of furniture and health care products, indicating that sales were spread between big-ticket and smaller purchases. Rising gasoline sales also helped. Declines in purchases at supermarkets, sporting goods stores and department stores restrained the gains. It should be kept in mind that these data are not price adjusted, so some of the ups and downs may be due to price changes.

In a different report, the New York Fed’s Empire State Index, which measures local manufacturing activity, declined slightly in early July, but it remained at a very high level. Almost every component of the current conditions and futures indices was down, but not significantly. Essentially, manufacturing in the New York region remains solid. Of course, this area is not a huge industrial area, so not much should be made of the changes, on way or another.

MARKETS AND FED POLICY IMPLICATIONS: The first reading of second quarter GDP growth will be released on July 27th and right now it looks to be a really good one. It would not be surprising if it had a 4-handle, which would mean that the economy expanded by about 3% during the first half of the year. That is pretty much in line with expectations. The robust growth is also not a surprise given the massive tax cut and the beginnings of additional government spending. When you implement one of the largest fiscal stimulus’s on record, you better get strong growth at least for a while. Which means we should see solid growth, at a minimum, for the rest of the year. But, as I keep asking, what happens when the sugar high wears off? Will businesses keep investing at higher rates or settle back into previous capital spending levels? Right now, they are not shopping for new equipment ‘till they drop by any means. And once the tax cuts increase consumer spending to a higher level, how can households increase their spending levels without any significant change in purchasing power? It is great that 2018 should be a great year, but what about going forward? That is always the worry when you hype things and it is no different right now. For example, after the Obama stimulus package hit, growth accelerated. In the second quarter of 2010, it hit 3.9%, but faded afterward. With inflation heating up and wages not following, with businesses spending lots of money on mergers and acquisitions, stock buy backs and dividends but little on new capital, and with trade becoming a major uncertainty, it is not a lock that strong growth will be sustained.

June Producer Prices

KEY DATA: PPI: +0.3% Over-Year: +3.4%; Goods: +0.1%; Services: +0.4%

IN A NUTSHELL: “Wholesale cost increases are accelerating and with more tariffs being announced, it is hard to see how consumer inflation will not accelerate as well.”

WHAT IT MEANS: Is inflation a problem? Maybe not yet, but it is hard to see that it will not be a real issue very soon. Wholesale prices rose solidly in June even with a sharp decline in food costs. Excluding foods, it was up at a concerning rate. I point out foods because a large part of the trade war is being fought over agricultural products and a loss of foreign markets would create surpluses in the U.S. and price declines. To the extent the price increases were due to bumper crops, those declines would likely be temporary. So, we should focus on the goods excluding foods and those were up pretty much across the board. Energy prices are rising as well and that is not good news for consumers, especially since they are helping drive a sharp rise in transportation costs.

Over the year, producer prices are up the fastest since December 2011. That is a warning and if we look into the pipeline to see if cost pressures will accelerate of slow, it is clear that they are likely to worsen. At the intermediate level, non-food and energy goods costs are soaring. Processed materials less food and energy were up by nearly five percent over the year and much of that will likely be passed through to finished goods. And the sharp rise in energy costs we saw in June is likely to be as great this month.

MARKETS AND FED POLICY IMPLICATIONS: Wholesale costs are accelerating and now we have threats of further tariffs on China that can only ramp up inflation fears. Of course, they are only wholesale costs. By that I mean the pathway from producer to consumer price increases is hardly straight. But we are getting to wholesale inflation levels that will be hard to absorb without materially reducing earnings. That is a warning for investors that the sugar high from the tax cuts may start wearing off, as businesses have to show increases that are not simply tax related. Higher producer costs, regardless of the source of the cost pressures, are not good news for the markets. If earnings come under pressure, it is likely that at least some of those cost increases will start showing up in the consumer price measures. That cannot make the Fed happy. So, today’s report is not good news as it provides warnings that inflation is likely to rise further and corporate earnings could weaken as we go through the second half of the year.

June Non-Manufacturing Activity, Private Sector Jobs, Layoffs and Weekly Jobless Claims

KEY DATA: ISM (NonManufacturing): +0.5 point; Activity: +2.6 points/ ADP Jobs: 177,000/ Layoffs: +37,202/ Claims: +3,000

IN A NUTSHELL: “With the economy booming, it is becoming harder and harder to find workers to hire.”

WHAT IT MEANS: Boy, are businesses in good shape. Earlier this week we saw that manufacturing activity rose again in June and today the Institute for Supply Management indicated that the nonmanufacturing portion of the economy might be in even better shape. Business activity surged and it was already strong. New orders were robust. But hiring eased a touch, though it is still quite strong. Despite soaring production, orders books are still filling at a pretty rapid pace. It is getting harder to meet the strong demand and that has led to deliveries slowing further. Will firms start allocating demand by raising prices? That might be coming.

Tomorrow is Employment Friday and it looks like job gains will be solid. ADP’s measure of private sector employment increases pointed to a very good but not great increase. There was limited hiring in the small business segment, which usually leads the way. If there is going to be problems hiring, it is likely to show up here as larger businesses can pay more and provide better benefits. That may be the case already.

Job layoffs remain low, even if they did pick up in June. Challenger, Gray and Christmas reported a jump in layoff notices and we are starting to see a rise from last year. The report noted that “in the wake of announced tariffs, we may be entering a period of increased cuts going forward”. Interestingly, retail is stabilizing and it was also pointed out the firms are already looking into creating a suitable workforce for the holiday shopping season. On the other hand, other sources indicate that firms have been scrambling to find any worker possible to fill positions and many are just not working out. That could be leading to more turnover.

Jobless claims increased last week and are running a touch higher than they had been. Still, the level remains pretty low.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow’s payroll number could be a head scratcher. Clearly, firms are looking for workers and have become somewhat desperate. But if they cannot find them, then job growth could be lower than the consensus of roughly 200,000. I would not be surprised if it is closer to 150,000, even if the labor force participation rate rises. A disappointing number would not be a sign of weakness, other than in labor supply. As I have argued all year, the key number is the hourly wage change. If we get the expected pop in wages, it will be taken as a warning that the labor market tightness is finally creating higher wages. This is a terrible measure, but it is closely watched nonetheless. I don’t like it because it is a weighted average, so it is possible that the average wage rate can fall even if all wages rise. In addition, it doesn’t include benefits and firms are upping their use of non-wage compensation packages in order to attract workers while not locking in higher salaries. Investors, though, seem to be willing to shrug off just about any and every hurdle placed in their way so a weak employment number may – or may not – affect the markets. Rationality is not the same thing as efficiency.

June Supply Managers’ Manufacturing Index and May Construction Spending

KEY DATA: ISM (Manufacturing): +1.5 points; Orders: -0.2 point/ Construction: +0.4%; Residential: +0.8%/ Ads: -51,000

IN A NUTSHELL: “Robust industrial activity should keep the economy strong for quite a while.”

WHAT IT MEANS: With trade issues starting to slowly, but steadily spiral out of hand, we need to know if the key sectors can withstand the potential problems that a trade war could bring.  Last week we saw that household income, especially wages and salaries, was not growing significantly. Today, though, it became clear that the industrial sector is in very good shape. The Institute for Supply Management reported that its manufacturing index rose in June. Orders continue to increase sharply, though not quite as quickly as they had been. Still, the expanding demand was large enough to force production to rise and order books to continue to fill (though also less rapidly). Both producer and customer inventories are low and that bodes well for future production. Finally, hiring continues at a very solid pace as well. All in all, it looks like the manufacturing sector should be able to lead the way for the rest of the year.

It is also looking like construction is starting to accelerate. Activity jumped in May, led by a surge in residential building, both private and residential. Office construction was also up sharply. However, excluding office, nonresidential construction was weak, which is something that needs to be watched. The economy needs a broad based strong construction to help offset any weakness that the trade battles may create.

MARKETS AND FED POLICY IMPLICATIONS: Can the U.S. economy withstand the counter-tariffs being put on by Europe, Canada, Mexico and China as well as the higher costs created by our tariffs? Right now, given that the level of the tariffs is not huge, it looks that way. That is not to say some industries will not be hurt badly or that growth will not slow, but unless things deteriorate further, a recession will not likely follow just from the current trade skirmishes. However, the longer the tariff mini-war continues, the greater the damage and the slower the economy will grow. That is causing investors to lose some of their exuberance and maybe even creating some caution in the market. But this week contains Employment Friday and some of the concerns about the future course of the economy could be either dispelled or heightened, depending upon the size of the report. The consensus is for strong gain in the 200,000 range. I don’t think that is likely. However, I do think the wage number could be hotter than expected. That would create worries. Regardless:

Have a wonderful and safe July 4th!

May Consumer Spending, Income and Prices and June Consumer Sentiment

KEY DATA: Consumption: +0.2%; Disposable Income: +0.4%; Prices (Over-Year): +2.3%; Excluding Food and Energy (Over-Year): +2.0%/ Sentiment: 98.2 (up 0.2 point)

IN A NUTSHELL: “Inflation to Fed: We have a liftoff.”

WHAT IT MEANS: There is a famous saying from the Apollo 11 mission, when we put the first people on the moon: “We have a liftoff!” Well, it looks like that is the case when it comes to inflation.   Consumer prices rose moderately in May, whether or not you include the more volatile food and energy components. But the real issue is that over the past year, both the headline number and so-called core numbers rose by at least 2%. The Fed’s target has been reached.

But we are just starting to see the impacts of the tax cuts hit. Indeed, consumer spending increased fairly modestly in May and when you adjust for inflation, it was flat. That is likely to change, hopefully, during the second half of the year. Moderate May weather kept utility spending down and that helped restrain consumption. Energy costs were up sharply, though. Meanwhile, household income expanded at a somewhat better pace. But even here, there are some warning signs. Wage and salary gains were fairly limited. What created the solid increase was a sharp rise in dividends. For the average household, if they hold stocks at all, their dividends wind up mostly in retirement accounts, so it is not going to be spent. That raises questions about how strong consumption will be going forward. So far this quarter, consumption is growing at a 2.3% pace, up quite nicely from the 0.9% rate posted in the first quarter. A likely decent gain in June could push the increase to the 3% range. That would point to much better second quarter growth.

The University of Michigan’s Index of Consumer Sentiment edged up in June, though it receded from its mid-month reading. Importantly, households are becoming more concerned about future economic activity. Respondents think the economy is in very good shape, but the trade issue is weighing on optimism. A growing share of people believe more trade is better than less.

MARKETS AND FED POLICY IMPLICATIONS: Right now, the extended period of strong growth that so many are predicting is just a wish and a hope. The numbers on wages continue to disappoint. In addition, households seem to taking their tax cuts and saving them, as the savings rate has risen recently. And while business capital spending is strong, it hardly matches the massive spending on dividends, stock buy-backs and mergers and acquisitions. I am not saying that the tax cuts are having no impact on growth, they are. But as of now, I think the added spending has been disappointing. That may or may not worry investors, but in a perverse way, should provide some comfort to the Fed. The members’ worse fear is a surge in growth that triggers even faster inflation. How long the Fed would be willing to allow the economy to “run hot” is not clear, but with backlogs building and labor shortages of critical workers, such as truckers, at crisis levels, the ability and need to raise prices is also increasing. Inflation may not be high yet, but the Fed has to be concerned that it will exceed its target by more and for longer than expected. It hard to think that we will not see another two rates hikes this year and the possibility we will get four more next year cannot be dismissed.

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