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December Consumer Prices, Real Earnings and Help Wanted OnLine

Real Earnings: +0.1%; Over-Year: -2.4%; Hourly Earnings: +0.6%; Over-Year: +4.7%; HWOL: +6.3%

IN A NUTSHELL: “Could the fastest increase in consumer prices in forty-years lead to the Fed raising rates by 50 basis points in March?”

WHAT IT MEANS: Businesses are worrying about rising input and wage costs, while households are distressed at the surging consumer prices, and they both have cause for concern.  Inflation jumped again in December, though the pace was down from what we saw in October and November. Since December 2020, prices were up 7%, an increase not seen since the wage/price inflation spiral days in the early 1980s.  Excluding food and energy, the rise over-the-year was the greatest in thirty years.  In other words, the “bad old days” are back.  Not really, conditions are different, but inflation is showing few signs of decelerating.  In December, there were strong increases in just about every major component except energy goods and services.  Commodity costs, excluding food and energy, have risen nearly three times as fast as services, as medical and shelter costs were up more moderately than most other components.  Used vehicle prices continue to skyrocket as new vehicle supplies remain tight. 

Wages may be surging, but consumer prices are going up just as fast, if not faster.  Hourly earnings jumped in December, but when adjusted for inflation, they were up minimally.  Worse, over-the-year, real wages declined sharply.  Households are seeing their purchasing power disappear and that is not good news for the economy. 

The Conference Board’s Help Wanted OnLine index rebounded sharply in December, after having cratered in November.  This measure doesn’t usually bounce around this wildly, but the trend is up and the level of want ads is at a record high.  To the extent that firms can find available workers, it looks like they will be hiring just about every one of them.      

FED POLICY IMPLICATIONS: Prices are rising at levels not seen since former Fed Chair Paul Volcker decided it was time to use the nuclear option – massive interest rate increases that would crush the economy and squeeze inflation pressures out of the system.  The time to face the inflation threat, even if it is currently not close to what it was forty years ago, has arrived.  Fed Chair, Jay Powell is not likely to go the Volcker route, but he made it clear that the days of feeding the economic and market beasts with massive liquidity are coming to an end.  Today’s report backs for the Fed’s view that it not only has to stop adding support to the system, but it needs to begin withdrawing it, both in terms of raising rates and reducing its balance sheet. Don’t be surprised to see the asset purchases end by March and the rate hike process begun at the March 15-16 FOMC meeting.  How fast will interest rates be increased and liquidity be withdrawn from the economy?  The consensus is for the Fed to raise rates at its usual pace, 25 basis points every other FOMC meeting, or one percentage point a year.  However, that may not be the strategy.  We get two more inflation reports before the March meeting and if they continue to show inflation accelerating, I do not rule out a 50-basis point increase.  That would have to be signaled beforehand, but it would show that the Fed means business.  Its biggest concern is that higher inflation will become embedded in expectations, which would require even stronger action (no, not the nuclear approach). Mr. Powell commented at his reappointment hearing that he still felt that the supply chain-related issues would fade, though he has pushed that timing out toward later in the year.  A sooner-than-expected deceleration in inflation would provide the Fed some breathing room, but that doesn’t seem to be the likely case.  Regardless, the funds rate is going up and barring an economic collapse, look for it to rise at least two percentage points over the next two years.   

December Services Sector Activity, November Trade Deficit and Weekly Jobless Claims

KEY DATA:  ISM (NonManufacturing): -7.1 points; Orders: -8.2 points; -1.6 points/ Trade Deficit: $13 billion wider (19.4%); Exports: +0.2%; Imports: +4.6%/ Claims: +7,000

IN A NUTSHELL: “Growth is moderating, though it still looks as if the fourth quarter increase will be quite strong.”

WHAT IT MEANS:  The Fed is signaling that rate hikes are coming and there is good reason for that to be the case: The economy continues to grow solidly, even if the pace is moderating.  The Institute for Supply Management’s non-manufacturing index dropped sharply in December.  That followed a less dramatic decline in its manufacturing measure.  Yet neither dip points to major economic issues.  Why?  The level of activity remains quite high.  It’s just that we are coming off of huge increases that were not sustainable, especially with government stimulus funds slowing or running out. New orders remain solid, though not booming.  More workers are being hired and while backlogs are building less rapidly, they are still growing.  Essentially, growth is trending back toward a more sustainable pace, which is what was expected.  The major disappointing component in the report was costs of goods.  Prices paid for supplies and services grew at an even faster pace.  That is different than we saw in the manufacturing report, where input expense gains eased sharply.

The trade deficit, as expected, widened significantly in November, as exports increased minimally, but imports surged.  It would have been worse, but there was a huge increase in service exports due to the borders being opened to foreign travelers.  The goods deficit skyrocketed.  Price increases also hyped the size of the changes. On the export side, only the sale of food products rose over the month.  The remaining categories posted good-sized declines.  As for imports, we bought more of everything from the rest of the world.  The trade deficit for the first two months ran at the same pace as the third quarter.  But with some progress being made at the ports, I expect the widening of the deficit to continue in December, so for the quarter, trade will likely restrain growth.

Jobless claims rose last week, but the level is ridiculously low, especially when you adjust for the size of the labor force.  Firms are just not cutting workers loose out of fear they will be unable to replace them.  Indeed, Challenger, Gray and Christmas reported that layoff announcements in 2021 were the lowest since they started collecting data in 1993.

IMPLICATIONS:The equity markets never stop amazing me.  Yesterday, the Fed released the minutes from its December meeting and not surprisingly, it was indicated that the members were growing quite worried about inflation and that a rate hike could come as soon as the March meeting.  The markets tanked on that news.  Duh, has anyone been listening?  Central banker after central banker has been speaking about how inflation was now a concern and that rates would be going up.  The Fed’s forecast, released after the December meeting, pointed to as many as three increases.  Yet when the Fed put into print that it would be doing what it has been signaling it would be doing, investors suddenly got worried.  Does the Fed have to hit people over the head with a sledgehammer to get them to listen?  Barring a major shock, rates are going to be hiked at the March, May, or at worst June meeting.  Does a couple of months really matter?  No.  But I guess for the Rip Van Winkles it does.  The point is, even with the economy decelerating, inflation is not going to come down rapidly.  Growth is strong enough to support rates hikes.  Unfortunately, the Fed has trained households and businesses to believe that the once-called “emergency” low rates are normal rates.  When you keep rates near the bottom for a decade, that’s what should be expected.  Thus, any talk of rate increases worries people, even though it will take quite a few increases (and probably several years) before the level even approaches long-term normal.  The Fed needs to clean up the mess it created by keeping rates so low for so long and it is good that it will be starting to do that – the sooner the better.   

December Manufacturing Activity and November Job Openings and Quits

KEY DATA:  ISM (Manufacturing): -2.4 points; Orders: -1.1 points; Prices: -14.2 points/ Openings: -529,000; Quits: +370,000

IN A NUTSHELL: “Growth may be moderating, but workers still see this as a great time to find other jobs or even other things to do.”

WHAT IT MEANS:  Yes, the economy is no longer growing at an unsustainable pace, which is good news.  So, don’t worry too much about the moderate decline in December manufacturing activity reported by the Institute for Supply Management.  Indeed, there was some good news in the details.  First, the level of overall growth is still strong, and orders continue to expand at a very solid pace.  As a result, hiring accelerated and order books fattened.  Those point to continued improvement in the economy during the early part of this year.  But the eye-opening number was the prices paid component, which dropped sharply.  We could be starting to see some moderation in the rise in production costs. The index is not pointing to low inflation, just lower inflation. 

Job openings dropped sharply in November, though it is hard to argue that the labor market is faltering.  The level is not that much below the record high reached in July, and nearly matched in October.  To put things in perspective, the pre-pandemic high, which was set in November 2018, was 7.5 million.  The November level was nearly 10.6 million – almost forty percent above the pre-pandemic peak.  There are a ton of jobs openings, and workers are taking advantage of it.  The number of people quitting reached a new high and is about twenty-five percent above the pre-pandemic peak.  It is likely the number of workers quitting will rise a lot further during the first half of this year.     

IMPLICATIONS:  Delta took its toll on the economy in the late summer/fall, and it is looking as if Omicron is doing the same now.  But that doesn’t mean the economy is falling apart, it is not.  All that is happening is growth is decelerating from the unsustainable rate we saw when economy was reopening and the government was shoveling money out to businesses and households at an incredible pace.  Remember, when something is unsustainable it usually means there are excesses being created that lead to issues in the future. And we have seen that, especially when it comes to inflation.  So, more reasonable growth is good.  The first positive sign of that is the moderation in manufacturing cost increases.  Expenses are still rising rapidly, so don’t look for a major easing in inflation, but at least the increase is decelerating.  As for the labor market, employers are not getting any relief.  The level of unfilled positions is extraordinarily high, and workers are getting very comfortable with changing jobs or just plain quitting.  Hiring is robust and layoffs are extremely low, so the excess demand is not going away.  Friday, we get the December employment report, and it should be solid.  What I will be watching is the wage component.  The supply managers may be seeing a moderation in raw material costs, but if wage gains are still accelerating, inflation is not likely to slow significantly anytime soon.  If the November Paychex Small Business Wage Index is at all on target, hourly wage gains should be strong again. 

FOMC Decision Commentary

Commentary: FOMC Decision

Yesterday, the Federal Reserve’s rate setting group, the Federal Open Market Committee, decided that it was time to face reality.  Having been lampooned mercilessly for its consistent message that the high and rising rate of inflation was “transitory”, it decided to abandon the “don’t worry, be happy” message and changed course dramatically.  Rate hikes are coming sooner and faster than expected, but they are needed and therefore welcomed.

Here are some of the key takeaways from the Fed’s statement, forecast and fed funds dot plot.

No more transitory: First, and most importantly, the term “transitory” was dropped.  That was hardly a surprise, but it did set the stage for everything that came afterward.  Instead, the Fed simply noted that “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”  In other words, there was no attempt to forecast the length of time the economy could face elevated inflation, except to say that it will not come down until the pandemic eases and the supply chain problems dissipate. 

Forget “tapering”; it’s now “vanishing”:  The open-ended outlook for elevated inflation provides the Fed with the foundation needed to accelerate the ending of its asset purchase program.  The “tapering” was accelerated and will now finish by March.  That is important as it does two things: First, it sets the stage for an earlier increase in rates.  You have to stop easing before you can start tightening.  Second, it makes it clear that there is an urgency to the process.  That is, inflation really is a concern.

Full employment is the trigger for rate hikes: Once the tapering is done, the Fed signaled it will start raising rates soon afterward.  It set a target for when that would happen when it noted that “the Committee expects it will be appropriate to maintain this target range (0%-0.25%) until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.”

With the unemployment rate currently at 4.2%, the FOMC may not have to wait long for the target of full employment to be met.  Looking at the forecast, the Fed’s median longer-run forecast for unemployment (i.e., full employment) is 4.0%.  That could be met sometime in the spring – and maybe sooner. 

The tapering ends by March and full employment could be hit not long afterward.  Consequently, the March 15-16, 2022 FOMC meeting looks like the earliest date the Fed might start tightening, with the May 3-4 meeting being the likely one, at least right now.

“Don’t go slow, just get it done”: Maybe the most startling part of the message sent was that the Fed may not raise rates as slowly as expected.  The Economic Projections Table indicated that as many as three rates hike could occur in 2022.  That is really nothing excessive.  Indeed, the forecast now suggests there would be another 100 basis points in both 2023 and 2024.  Three years to get back to long-term rate levels is hardly breakneck speed.

Summary:  The economy is growing solidly, job and wage gains are strong, the unemployment rate is nearing full employment, but inflation is high and showing minimal signs of decelerating rapidly.  This environment calls not just for the ending of monetary stimulus, but a tightening of policy so it gets back to something closer to neutral.  That is what the Fed said yesterday, and it should be good news for the markets and the longer-run health of the economy. 

(Next FOMC meeting: January 25-26, 2022)

November Producer Prices and Small Business Optimism

KEY DATA:  PPI: +0.8%; Over-Year: +9.6%; Goods Ex-Food and Energy: +0.8%; Services: +0.7%; Over-Year: +7.1%/ NFIB Optimism: +0.2 Points

IN A NUTSHELL: “Inflation comes, inflation goes, but maybe not as quickly as anyone, especially the Fed, would like.”

WHAT IT MEANS:  Inflation will subside, and it is likely to be transitory over the medium term, but so far, it is not showing signs of moderating. In November, producer prices spiked again and the year-over-year gain for the top-line measure is nearing double-digits.  Each month we keep saying it will come down, but it just doesn’t seem to be doing that.  And the increases are everywhere, in both goods and services, even when you remove volatile food and energy.  About the only segment where we saw any easing of costs was government related products.  Basically, the ability and willingness to raise prices has spread across the entire economy and while it may not become permanently embedded, it is getting harder to tamp down the inflationary pressures.

Small businesses are not a happy bunch.  Yes, the National Federation of Independent Businesses’ Overall Index rose a touch in November, but the details were not very good.  Expectations of the future are about as low as they get, as firms cannot find workers and are raising wages to try to retain or attract them.  The compensation index hit a forty-eight year record high.  This is not a sector that normally has much pricing power, so the added costs are raising real worries.     

IMPLICATIONS:  The Fed is meeting today and tomorrow, and today’s numbers are stoking the fire under the members.  How they handle the final transition from transitory to worrisome will be interesting, but expect Chair Powell to defend the Fed’s stand tomorrow at his press conference, while also making it clear the monetary authorities actually know the data and understand what is happening.  That is, they really are not clueless.  And the fact is, the Fed members do understand the situation, but they trapped themselves when they used the term “transitory”, thinking it was bland enough to survive the period of time it would take to ease the supply chain problems – however long that would be.  Unfortunately, like most economists, they didn’t expect this high a level of inflation for this long.  To show that they central bank is not going to fall further behind the curve, look for the FOMC to announce that the tapering process will be accelerated.  At least that is what 99.44% of all economists think will happen.  I am one of them.  Unfortunately, the supply chain will not get untangled because the Fed reduces its purchases of assets more quickly.  And inflation will not slow much with one or two rate hikes.  The Fed is not particularly well suited to deal with supply-related economic issues and that is what we have.  But it can show that it intends to do something, even if that something may not materially change conditions, unless the economy slows dramatically.  The next few months should be very interesting.  Without a clear deceleration in inflation, the Fed could be faced with a major dilemma: It needs to slow demand, but if it does so, the political impacts could be massive come next November.  Politics should never enter into the Fed’s thinking or actions, but in this world, nothing is apolitical anymore.  And Jerome Powell wants to be Fed Chair for another four years. What is he thinking?

November Consumer Prices and Real Earnings, and Mid-December Consumer Sentiment

KEY DATA:  CPI: +0.8%; Over-Year: +6.8%; Ex-Food and Energy: +0.5%; Over-Year: +4.9%; Energy: +3.5%/ Real Hourly Earnings: -0.4%; Over-Year: -1.9%/ Sentiment: +3 points

IN A NUTSHELL: “When you can say that inflation is the highest in nearly forty years, you know things have gone haywire.”

WHAT IT MEANS: Another inflation report, another set of distressing numbers.  The Consumer Price Index surged in November, led by another jump in energy costs.  It looks like energy may have peaked, which is good.  But even excluding energy, consumer costs rose sharply, both over-the-month (0.5%) and over-the-year (5.1%).  So yes, we should see some deceleration in price increases, but it will not come quickly or sharply given the broad-based nature of inflation.  The one thing saving consumers is that service costs, while rising solidly, are not soaring at the same pace as commodity prices.  Since services comprise over sixty percent of consumption, that relative restraint is keeping things from getting totally out of hand 

The high rate of inflation is devastating workers’ incomes.  Despite solid gains in wages, real/inflation adjusted hourly wages fell in November and over-the-year are down sharply.  Declining purchasing power doesn’t bode well for economic growth.

Normally, when inflation rises as much as it has, households get depressed.  Well, they are unhappy, but they seem to be hanging in there.  The University of Michigan’s Mid-December reading on consumer sentiment increased nicely. That said, the level is low and has varied around the current number for almost six months.  Thus, it cannot be said the people are learning to live with inflation.  Indeed, as the report noted “When directly asked whether inflation or unemployment was the more serious problem facing the nation, 76% selected inflation…” Fed Chair Powell, the people are speaking.  Are you listening? 

IMPLICATIONS:I really hope that transitory comes soon and lasts quite a while, as inflation is starting to become worrisome.  I say “starting to become worrisome” because like most economists, I have assumed it would begin to decelerate and over the next year, get back to somewhere in the 2.5% to 3% range.  The delayed deceleration is reinforcing my previously stated belief that the Fed’s 2% average target is likely going to go the way of the Fed’s view that the high rate of inflation was only “transitory”.The elevated monthly gains, even excluding energy, are hanging in longer than expected and that creates the risk that rising inflation expectations may not be easy to excise from the economy.  Jerome Powell is not Paul Volcker, and the nuclear option (massive rate hikes) is not on the table, in the room, the building, the nation, the planet or the solar system.  Indeed, given this is a largely supply driven inflationary period, barring a major slowdown in growth, which I don’t think the Fed wants to engineer, elevated inflation could be with us for an extended period.  The Fed meets next Tuesday and Wednesday.  Expect the statement to reflect growing concern about inflation, the willingness to accelerate the taper, and the likelihood that the Fed will begin raising rates soon afterward.

November Employment Report and Non-Manufacturing Activity

KEY DATA:  Payrolls: +210,000; Private: +235,000; Retail: -20,000; Revisions: +82,000/ Unemployment Rate: 4.2% (down from 4.6%); Wages: +0.3%; Over-Year: +4.8%/ ISM (NonMan.): +2.4 points; New Orders: 0%

IN A NUTSHELL: “In this labor shortage environment, it is unrealistic to expect hiring in the half-million range every month, so don’t look at this report as being disappointing.”

WHAT IT MEANS:  Is the job market losing steam?  Absolutely not.  Yes, the number of people added to the payrolls in November was less than expected.  But it really should not have been a major surprise that hiring underperformed because there are labor shortages across the economy.  Look at the weakest sectors.  Retail cut employment.  Who wants to work in retail these days?  Health care hiring was soft.  Anyone know of an unemployed nurse?  Education is having a tough time finding workers, so why should we expect hiring to be strong?  And let’s not forget that these data are volatile.  They bounce around like crazy.  Yet the private sector added an average of 429,000 workers over the past three months.  That is awesome.  Revisions to the September and October added an additional 82,000 workers.  That usually means small and mid-sized firm are adding more workers than the models project, as their data come in later.  In other words, on the hiring front, conditions are still really good.

As for the unemployment situation, the sharp decline in the rate came despite a solid rise in the labor force and an increase in the participation rate.  That shows that demand is robust.  And workers are benefitting, as wages rose, though somewhat less than they had been. 

The Institute for Supply Management released its report on the nonmanufacturing sector and activity and hiring improved solidly in November.  Orders didn’t accelerate, though they remained at a strong pace.  The cost of inputs continued to weigh on firms, as no industry reported a decline in prices paid and fewer than one percent of the respondents said their costs fell.  Overall, the nation’s supply managers are saying both the manufacturing and nonmanufacturing portions of the economy are in very good shape. 

IMPLICATIONS:While worker demand is strong, labor supply is tight, a combination that economists seem to forget when they make up their monthly guesses of job growth.  This month was no different.  Forecasts were for 600,000 or more jobs to be added, which would have been nice.  But it would likely have been unrealistic.  Indeed, I believe the three-month average of over 400,000 is unsustainable.  Job gains in the 200,000 to 300,000 look more likely, and that pace should slow further as we move through 2022.  That doesn’t mean the economy will be weakening.  It’s just that there are not a lot of workers sitting around waiting for the perfect job offer.  Yes, the participation rate is below where it was before the pandemic hit, but that was almost two years ago.  The rate had peaked in March 2000 and trended steadily downward for nearly twenty years.  The sustained expansion after the Great Recession scraped the barrel clean and there was a rise in the rate for a few years.  But most labor market experts had predicted that the participation rate would stabilize or fall further, as boomer retirement rates accelerated.  So, we really are not that below where we might have been if the pandemic didn’t hit.  In other words, there is not a reserve army of the unemployed waiting for the right time to surge into the market.  That is the constraining factor, and the strong job increases we have seen are the result of technology being such that the job market friction has been reduced both in terms of information as well as location.  What is left is the skill mismatch, which cannot easily be resolved and that will keep job growth limited, as we are likely at full employment already.  The implication is that we should start setting our targets to more realistic levels and while we will get some really good job numbers over the next six to twelve months, we will likely trend back to a sustainable, full employment level of somewhere between 175,000 and 225,000 per month.

November Consumer Confidence, Small Business Employment and September Housing Prices

KEY DATA:  Confidence: -2.1 points/ Small Business Hiring (+0.3%); Over-Year: +6.8%/ Home Prices: +1%; Over-Year +19.5%

IN A NUTSHELL: “Consumers are getting rattled by rising prices and the Omicron variant is not going to help going forward.”

WHAT IT MEANS:  We know people have money – income gains have been robust – but at what pace will they spend it?  Consumer spending may hinge on consumer sentiment, and right now that is a little shaky.  The Conference Board reported that its Consumer Confidence Index fell in November.  After rebounding sharpy with the reopening of the economy, the reality of price increases and the continued presence of Covid have sapped confidence.  Views of current and future conditions faded, as job and income prospects declined.  The level of all the indices remains well below where they were pre-pandemic.  Hopefully, the Omicron variant will not turn out to be a major game-changer, as people already have enough to worry about.

Small businesses continue to hire.  The Paychex/HIS Markit Small Business increased again in November, though at a slower pace than October.  Still, the gain over the year is robust, and the 4.1% wage increase over the is strong, though not excessively so given the labor shortages.

Home prices remain out of control.  Yes, the Case-Shiller National Index rose more “moderately” in September, if you can call 1% moderate.  But the year-over-year increase did decelerate.  Of course, 19.5% is not much of a deceleration from the 19.8% rise posted in August.  I guess we can be happy about little things.

IMPLICATIONS:Consumers have been spending, but it doesn’t appear if they are particularly exuberant about things. Initial reports indicate that Black Friday cyber sales may have dropped over the year for the first time, though in-store sales look like they picked up.  That said, the availability of vaccines means there is little sense in comparing the last two years.  It also looks like the idea that Black Friday is the key day is also anachronistic.  Sales start early in the month, if not sooner, and accelerate.  Consumers have also recognized that you can sometimes save money by purchasing items before or after the Thanksgiving extended weekend.  So, while it is fun to make all these comparisons, it is not very enlightening.  We need to look at the entire shopping season and that looks like it will be up massively.  In addition, once vehicle makers can become vehicle builders again, vehicle sales should pick up.  Fourth quarter consumption should be really good.  But given the job and income growth, as well as the federal government’s continued largesse, it should be great.  Confidence will determine if that turns out to be the case.  I suspect we will not get the massive surge we should be seeing.  With firms announcing they will be raising prices next year and with Omicron a potential issue for at least for a few more weeks, we need to be a little cautious about the economic outlook. 

October Housing Starts and Permits

KEY DATA:  Starts: -0.7%; 1-Family: -3.9%; Multi-Family: +7.1%/ Permits: +4%; 1-Fmaily: +2.7%; Multi-Family: +6.6%

IN A NUTSHELL: “Despite some recent disappointing construction numbers, the rise in permit requests points to better home building days ahead.”

WHAT IT MEANS: The housing market remains strong, but we are not seeing that in the construction data.  Housing starts disappointed in October, declining for the second consecutive month.  Single-family activity accounted for the entire decline as construction of multi-family units increased solidly.  The fall-off in building activity was across most of the country with only the Midwest posting a gain.  But there wasn’t only bad news in this report.  Building permit requests for both single and multi-family dwellings rose in October.   The number of permits has been running ahead of construction significantly this year and that is showing up in a sharp rise in the number of homes permitted but not started.  Since builders don’t like to shell out money for permits they might not use, it looks like the growing backlog of permits will lead to a sharp increase in construction sometime over the next few months.    

IMPLICATIONS: Builders are complaining about the availability and cost of construction supplies and that is likely the major hold up when it comes to home construction.  Yesterday we saw a large pop in the National Home Builders Index, with traffic and current sales rising sharply.  That is a sign that the market remains quite firm.  The big issue is not buyers, but the ability to meet the demand.  Whether it is materials or labor, it is hard for developers to ramp up construction activity.  When that bottleneck will break, though, is unclear, but with the supply of existing homes largely nonexistent, builders have a chance to fill in the gaps and I am sure they would love to do that.  Indeed, once all the goods that are in floating warehouses start being distributed more efficiently, look for growth to accelerate.  The supply chain issues are creating a demand bubble that could support solid, but not necessarily robust economic growth for an extended period.  That is the silver lining in the bottleneck/high inflation dark cloud. 

October Retail Sales, Industrial Production and Import and Export Prices

KEY DATA:  Retail Sales: +1.7%; Ex-Gasoline: +1.5%/ IP: +1.6%; Manufacturing: +1.2/ Import Prices: +1.2%; NonFuel: +0.4%; Exports: +1.5%; Farm: +1%

IN A NUTSHELL: “It appears that the summer moderation in growth may have been the pause that refreshes as consumers and businesses are spending and producing like crazy.”

WHAT IT MEANS:  Shop ‘till you drop, or maybe run out of money.  That seems to be the mind set of consumers these days.  Retail sales soared and while rising prices likely will take a major bite out of the real/inflation-adjusted gain in spending, the increase will still be quite solid.  The biggest increase was not even in gasoline – Internet spending edged that out.  But purchases of electronics and appliances, as well as building materials soared as well.  People went back into department stores and despite the lack of inventory, picked up a lot of new vehicles.  Purchases of clothing dropped, but I suspect that was due to price declines.  As for restaurants, sales were flat.  The reopening process is largely over and now the restraint is a lack of workers.

Meanwhile, factories are doing their best to keep up with the strong demand.  Manufacturing output rose sharply in October, led by a surge in the production of consumer goods and materials.  Despite the chip shortage, vehicle assemblies picked up sharply.  They are still low, but at least more new vehicles are coming off the assembly lines.  Even excluding the added vehicle production, output accelerated.  After four consecutive months of production cutbacks, the petroleum and coal sector finally woke up and increased output. I guess prices are high enough for them.   

As for inflation, it was another bad month for the Fed’s “inflation is transitory” story.  Import prices jumped again, though the increase was more restrained when the energy factor was removed.  But the details were not pleasant.  The costs of imported food, industrial supplies and vehicles all increased significantly.  There was some good news, though.  Imported consumer goods prices, excluding vehicles, rose modestly.  Capital goods import costs were flat.  We are hearing that the rising cost of goods is driving the surge in inflation, but when it comes to imported consumer products, that is just not the case.  Over the year, the increase was below 2%

IMPLICATIONS – INFLATION: The economy has thrown off whatever lethargy it might have had in the summer, and it is growing quite strongly.  The truth is, growth didn’t really soften, it just eased back.  That is a very normal pattern.  As for inflation, the argument that it is transitory cannot be dismissed, as long as you define the length of time of a transitory process.  Chair Powell and his band of clueless inflation fighters assumed earlier this year that the bottlenecks at the ports and transshipment points would dissipate steadily and largely be gone by the end of this year.  It appears that they were off by at least one year.  As of now, there are indications that it could take all of 2022 to clear up the backlogs and some residual problems could remain into 2023.  So, if transitory is a couple of years, then Mr. Powell may ultimately get it right.  Sarcasm aside, it wasn’t clear how long the bottlenecks would last.  But now that we have some indication of the length of time inflation could remain well above the target, the Fed will have to deal with impacts of an extended period of elevated inflation.Short-term inflation pressures become problems when they get imbedded in expectations.  I have raised this issue before, and I will keep doing so. That seems to be happening and the longer that transitory lasts, the greater the likelihood that inflation expectations will have increased to the point where rates will reflect the rise for an extended period.  That is the real, longer-term issue the Fed could be facing.  Unfortunately, there is little that can be done to quickly resolve the inflation pressures.  The Fed could try pulling a Volcker and nuking the economy so demand falls sharply and matches the bottleneck-constrained demand.  I doubt that is in the cards.As for government action, the problem is the supply chain. Unless we want the military to start unloading ships, transporting goods to warehouses, unloading the trucks at the warehouses, stocking the goods, reloading the goods on trucks, and finally delivering them to stores or consumers, we are stuck with the private sector trying to solve the problem.  Inflation will diminish, but it might be a slow process and during the process, damage to the economy could be done.