KEY DATA:  CPI: +0.3%; Over-Year: +8.3%; Ex-Food and Energy: +0.6%; Over-Year: 6.2%/ Real Earnings (Monthly): -0.1%; Over-Year: -2.6%/ HWOL: +2.5%

IN A NUTSHELL: “Inflation may have peaked, but it is not coming down quickly.”

WHAT IT MEANS:  Hoorah, consumer prices did not surge in April.  That said, the details don’t tell me that inflation is going to decelerate sharply anytime soon.  So, let’s go to the numbers.  The major factor holding back the index was a big drop in energy costs, led by a six percent decline in gasoline prices.  Unfortunately, we already know that has been reversed in May, so we can skip the celebration on gasoline.  Apparel costs also tanked, and that may be more permanent.  As the supply chain slowly untangles, more shipments reach our shores and that increases supplies.  Of course, if China keeps shutting down parts of its country, we could see prices go back up, so hold the celebration here as well.  Finally, used vehicle prices dropped.  As new vehicle supply rises, so should used vehicle availability, so we could see continued easing in those costs.  On the other hand, food prices jumped again.  The war in Ukraine, coupled with bird flu should keep food costs from falling sharply anytime soon.  With the prices of fresh cakes, cupcakes and cookies still rising at a near double-digit pace, I don’t feel there is any hope for inflation (but there is for my diet). 

The more muted rise in consumer prices was good news for wage earners, but not good enough.  The growth in hourly wages is moderating and with hours worked flat, weekly earnings, adjusted for inflation went nowhere in April.  I suspect that the big gains in hourly worker incomes are behind us, though they should still be rising decently.  Unless inflation decelerates faster, we are likely to see household spending power continue to decline, and that doesn’t bode well for sustained solid consumer spending.

Meanwhile, the labor market remains as hot as it can get.  The Conference Board’s Help Wanted OnLine index  jumped in April after having risen sharply in March.  Over the year, the index is up nearly twenty-eight percent.  That is a huge gain that shows that the demand for workers not only remains strong but may be accelerating. The pressure on wages is not going away anytime soon. 

IMPLICATIONS:The inflation fire continues to burn out of control and there is little that policymakers can do to stop it, short of slowing growth massively.  Unless you want wage and price controls, firms will continue raising prices and workers will keep demanding higher wages.  Releasing oil from the strategic reserve may have some modest impact on energy prices, but unless OPEC expands supply and/or the Russia/Ukraine war ends, don’t expect energy costs to crater anytime soon.  As long as bird flu rages and Ukraine’s agricultural sector remains under duress, food prices are not likely to fall sharply.  If you think inflation is being driven by government spending, well most of the stimulus monies have been spent and the budget deficit is likely to be cut nearly in half this year.  In other words, the factors that are driving inflation are not under the control of policy makers.  Which brings us to the Fed.  It was late to the party and it isn’t clear if it wants to make the decisive moves needed to slow the economy down enough to ease the demand pressures on prices.  It seems to be willing to take its time getting to where it needs to be.  That go-slow approach may limit the likelihood of a recession, but it would also sustain high inflation for an extended period.  The alternative is to attack the demand side by raising rates sharply.  But that approach risks throwing the economy into recession.  The Fed has put itself between a rock and hard place and the likelihood the economy emerge unscathed is slim, at best.

KEY DATA:  Payrolls: +428,000; Private: +406,000; Revisions: -39,000; Manufacturing: +55,000/ Unemployment Rate: 3.6% (Unchanged); Participation Rate: -0.2 pct. pt.; Wages (Over-Year): +5.5%

IN A NUTSHELL: “Once again I have to ask, where’s the labor shortage?”

WHAT IT MEANS:  If you pay them, they will come, which seems to be the case in the labor market.  Wages are soaring and that is attracting workers, as payrolls jumped again in April.  Since April 2021, over 6.6 million workers have been added, an extraordinary number.  The total number of jobs is now just 1.36 million below where it was at the peak in February 2020.  The gains were widespread, with over 71% of the private sector industries posting increases.  There weren’t a whole lot of outliers in the report, which given the level of gain is a surprise.  Maybe the surge in manufacturing employment was on the too high side, and restaurants keep adding workers like crazy despite their low pay, but otherwise, the numbers look reasonable.  Indeed, there was a surprise on the downside as the go-to labor shortage sector, employment services, posted a decline.  In other words, this is a solid report.

On the unemployment front, the rate was stable.  However, the labor supply dropped and the participation rate declined.  That usually happens in a weakening market, which doesn’t seem to be the case given all the hiring. 

Meanwhile, firms continue to pay up for new employees. Yes, there was a moderation in the pace of wage gains both over the month and the year, but the smoothed trend is still up.  This signals that the economy is still in good shape despite the negative first quarter growth number.    

IMPLICATIONS:I know that every business is complaining about the inability to find workers.  Well, they seem to be doing just fine. The pace of job growth is two times or greater than the sustainable rate.  Given all the stories about the difficulty in hiring, it is likely the increases in payrolls will moderate.  The big unknown is the labor force.  It has been expanding robustly, which has been needed given the demand for workers.  But I am just not sure the pace can be sustained, even with Covid nearing endemic stage.  I expect that by the end of the summer, we will be looking at job growth numbers closer to 200,000 than 400,000 per month.  Normally, that would be called really good, but given what we have been getting, some will be disappointed.  Economists would be pleased to see a softening as the current level of wage gains is also not sustainable.  For the Fed, this number is a problem.  It wants to slow the economy but there are few signs that is happening.  That puts pressure on the FOMC to repeat at the June meeting the fifty-basis point increase that was implemented this week.  It also raises questions about how high rates will have to go to wring inflation out of the system.  Sometimes good news is not necessarily good news and this report, thought it shows that economy is still moving forward solidly, may be a problem for investors.

KEY DATA:  GDP: -1.4%; Consumption: +2.7%; Nonresidential Investment: +9.2%; Federal Government: -5.9%; Trade Deficit: $191.6 bil. wider; GDP Prices: +8%; Consumer Prices: +7%/ Claims: -5,000

IN A NUTSHELL: “The headline is misleading; the economy is not falling apart.”

WHAT IT MEANS:  The economy contracted in the first quarter of this year.  Okay now that I got that out of the way, let’s look at the details, which were actually pretty decent.  Consumer spending grew at a moderate pace, despite having to pay an awful lot more for everything.  Corporations invested heavily, especially in equipment and intellectual property.  The two key sectors, households and businesses, more than held their own. So, why did the economy decline?  The answer, my friend, is in the trade data.  There was a surge in imports, as the supply chain problems slowly unwound, and firms continued the process of rebuilding inventories.  The biggest reason growth fell was that the trade deficit skyrocketed, reducing growth by a whopping 3.2 percentage points.  Imports were up nearly 18%, but exports fell.  The U.S. economy remains the strongest in the industrialized world and to feed the machine, we buy lots of goods from around the world.  That is an outflow of income and therefore drags down growth. In addition, the federal government cut back its spending sharply.  Fiscal responsibility is a nice idea, but it does come with a cost: Declining government spending slows growth, in this case by 0.5 percentage point.  But even here, the signs are not necessarily negative.  With the U.S. bearing the largest burden of supplying Ukraine and other countries affected by the Russian invasion with military and humanitarian aid, we should see a major increase in government spending in future quarter numbers.  Finally, companies rebuilt their inventories at an awesome pace.  Unfortunately, it was slower than what occurred at the end of 2021, so inventories took out almost one percentage points from growth.

If you think the economy is faltering, look at the labor market data.  Jobless claims fell last week and the level is extraordinarily low.  With job openings extraordinarily high, look for hiring to remain firm, though slower than it had been, and the unemployment rate near fifty-year lows. 

IMPLICATIONS:The economy did not falter in the first quarter.  But there were some warning signs in the details.  Most concerning is that disposable income, when adjusted for inflation, dropped solidly.There are few signs that inflation will moderate rapidly, so consumer spending power may continue to decrease.  That is not a positive trend for consumption.  With inventories largely rebuilt, the second quarter could be negatively affected by a modest inventory growth.  The housing market is being battered by high prices and rising mortgage rates, which could lead to a slowing in residential construction later this year.  So, there are some negatives to keep an eye on.  However, even though war is good for absolutely nothing, we are involved in the Russia/Ukraine war for the long haul, so government spending is going to surge.  Taken together, the economy should continue to expand, but with the Russian invasion affecting energy and food prices, inflation is also likely to remain elevated for an extended period.  It’s an insane world out there.  Be safe.

KEY DATA:  Starts: +0.3%; Over-Year: +3.9%; 1-Family; -1.7%; Permits: +0.4%; Over-Year: +6.7%; 1-Family: -4.8%

IN A NUTSHELL: “Home construction is hanging in there.”

WHAT IT MEANS:  With the 30-year fixed rate mortgage topping five percent for the first time in over eleven years, the future of the housing market is becoming questionable.  For now, home construction is still decent.  Housing starts edged up in March, but the rise came with some doubts.  The entire gain can be traced to a nearly 250% surge in new multi-family construction in the Northeast.  That was a clear anomaly, so we shouldn’t draw any conclusions from the overall rise in housing starts for the nation.  Construction was up in the West but dropped in the Midwest and South.  Looking into the future, there was good news in the report. Permit requests remain well above starts and that is a sign that future construction should be improve.  Indeed, the number of homes permitted but not started keeps climbing and builders aren’t spending money for permits for the fun of it.  Indeed, the number of units under construction is higher than at any point during the housing bubble and the fourth highest on record.    

IMPLICATIONS:With housing supply scarce, builders are stepping into the gap and trying to fill it with new housing units.  That makes sense, as homebuyers are willing to purchase anything available.But there could be some trouble brewing, as mortgage rates are likely to continue rising.  Initially, homes, be they new or existing, should continue selling as buyers make moves before rates get too high.  But eventually, the combination of higher rates and prices should slow demand.  With so many homes under construction and so many more permitted, it is not clear the market will be able to support all that activity.  Is there a bubble building in the new home market?  It isn’t here yet, but the indicators need to be watched closely.  The saving factor is that the existing home market, which comprises over eighty-eight percent of the sales, has few homes on the market.  The much smaller new home market can fill in some of the empty space, but it might take a surge in existing home inventory to create a major bubble in supply.

KEY DATA:  CPI: +1.2%; Over-Year: 8.5%; Ex-Energy: +0.4%; Energy Commodities: +18.1%; Food: 1%/ NFIB: -2.4 points; Expectations: -14 points

IN A NUTSHELL: “Let’s hope this is the peak, as we really don’t want to hit double-digit inflation numbers.”

WHAT IT MEANS: Yes, Mr. Powell, there is inflation.  In March, the first full month after the start of the Russian invasion of Ukraine, energy prices skyrocketed, building on the sharp rise posted in February.  But let’s not blame the inflation just on energy.  Food, clothing, medical care, transportation, and shelter were all up sharply.  Excluding energy, prices rose sharply but not outrageously.  I guess that is something small to hold onto.  That said, food prices are pressuring consumers greatly.  If you go through the details of food costs, every category is showing large increases over the year. With rent also jumping, the staples of life, food, energy, and shelter, are likely forcing some people to do without.     

Given the soaring inflation, it was hardly a surprise to see small business optimism fall in March.  The National Federation of Independent Business reported that owners are not a bunch of happy campers.  Maybe the most eye-opening number in the report was the index that measures whether owners are expecting better conditions over the next six months: It cratered and hit the lowest point in the 48-year history of the survey.  Given we have been through a financial meltdown and a pandemic during that period, it shows that the key small business sector is really depressed.  As for prices, the net percent saying they raised prices also hit an all-time high.  Everyone is on the price hike bandwagon, which does not bode well for future inflation. 

IMPLICATIONS:  Not that long ago, the Fed wanted inflation to pick up.  Well, it got what it wanted and a whole lot more.  Businesses of all sizes, in all industries, are raising prices and that is causing increases in costs throughout the supply chain.  With labor shortages pressuring firms to raise wages, we are in the midst of a wage-price inflation cycle that will require extreme action on the part of the Fed to rid the economy of the spreading inflation threat.  I am not talking Paul Volcker nuclear option approach, but given how modest rates have been for so long, it may seem like that to many.  The FOMC is meeting on May 3,4 and it would be a shock if there isn’t a rate hike of at least 50 basis points.  Indeed, I cannot exclude a 75-basis point increase.  The last time that was possible (almost thirty-years ago), I was asked by the CEO of the bank I worked for the probability of that happening. I responded “zero”.  A note indicating that Fed did raise rates that much was brought into the meeting while I was explaining why it wouldn’t happen, so I will never rule out a 75-basis point increase again. There are likely to be some members who will be pushing for a big statement.  Inflation should moderate, if only because some of the biggest increases are behind us.  But there is a difference between decelerating and low.  Since monetary works with a lag, don’t expect major progress on the inflation front even if the Fed acts aggressively.  The ability of any Fed to sharply raise rates to slow extremely high inflation, while not driving the economy into a recession, is limited, especially given factors such as war that are out of its control.  We are talking about art here, not science, and there is little history of this Fed painting pretty pictures.  For me, the likelihood of a recession in the next year has now moved over fifty percent.  Indeed, while a soft-landing is nice to think about and something to which the Fed should aspire, ridding the economy of inflation is job one.   

KEY DATA:  Payrolls: +431,000; Private: 426,000; Revisions: +95,000; Unemployment Rate: 3.6% (-0.2 percentage point); wages: +0.4%; Over-Year: +5.6%/ ISM (Man.): -1.5 points; Orders: -7.9 points/ Construction: +0.5%; Private: +0.8%

IN A NUTSHELL: “The employment machine is pumping out the jobs like crazy, and new workers are pouring into the market to take those positions.”

WHAT IT MEANS:  If you need them, they will come.  Okay, the labor market may not be quite like the field of dreams, but it is full of green(backs) and opportunities.  There was another huge number of workers added to payrolls in March and so far this year, nearly 1.7 million new positions have been created.  Yes, there are still 1.6 million fewer jobs than at the peak posted in February 2020, but we are getting there.  The employment gains were spread across the economy.  Indeed, I normally can point to some anomalies in the numbers, but there are no major outliers, as most sectors posted gain that can be viewed as reasonable.  On the unemployment front, the rate dropped to its lowest level since the month before the pandemic crushed the economy.  That happened despite a sharp rise in the labor force.  Increasing wages and massive numbers of openings are doing their job – bringing forth greater supply of workers.  A lot of those workers are part-timers, most of whom wanted part-time jobs.  While that may have led to a small declined in hours worked, it is good to see people getting back into the labor force. 

Manufacturing activity hit a bump in March.  The Institute for Supply Management’s index of activity fell, though not significantly.  That said, there were some warning signs in the report.  Order growth dropped sharply, and production and backlog gains decelerated.  Hiring, as we saw in the employment report, remained robust.  But the real eye-opener was the prices component, which soared.  As noted in the discussion, “all 18 industries reported paying increased prices for raw materials”.  Cost pressures are rising, and they were already high.

Construction activity improved in February, led by solid increases in both private and public residential spending.  There was also a strong rise in private commercial activity, though office building was off.

IMPLICATIONS:  Yesterday’s weak report on consumer spending has reinforced the view that first quarter growth was modest at best.  But the amazingly strong job gains this year point to a solid economy.  Thus, what we are likely seeing is a deceleration back toward more normal levels of growth after having posted clearly unsustainable robust numbers.  That’s perfectly fine since it will be hard to keep up the job creation pace with an unemployment rate as low as it is.  That said, businesses are in for more rounds of wage increases as the reserve army of the “not in labor force but want a job now” is shrinking rapidly.  It has not declined to the lows seen just before the pandemic hit, but it is getting there rapidly.  That means it will be tough to keep up the recent breakneck pace in job creation.  With costs continuing to rise, there also appears to be little possibility of inflation decelerating rapidly anytime soon.  That is bad news for the economy as spending power is deteriorating despite the wage increases.  Put this all together and it screams for the Fed to take decisive action.  The next FOMC meeting is May 3-4 and it would be extremely disappointing if rates are not hiked at least one-half percent. 

KEY DATA: Sentiment: -3.4 points; Current Conditions: -1 point; Expectations: -5.1 points/ Pending Sales (Monthly): -4.1%; Over-Year: -5.4%  

IN A NUTSHELL: “Consumer pessimism about the future is rising and that does not bode well for spending and overall economic growth.”

WHAT IT MEANS:  Prices are soaring, supplies are limited, and income growth is faltering.  Should anyone be surprised that households are losing faith in the future? No. The University of Michigan’s Consumer Sentiment Index fell in March to its lowest level since August 2011.  While the view of current conditions eased modestly, there was a sharp decline in expectations of the future.  Respondents are concerned about inflation and its impact on their financial situation.  As the reported stated, “more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past fifty years”.  Dimming views of the future, despite rising wages, raises serious questions about whether households will keep spending at the pace we have been seeing. 

Home sales are being constrained by a lack of inventory and the easing in purchases is likely to continue.  The National Association of Realtors’ Pending Home Sales Index dropped solidly in February, and that was before mortgage rates surged. Contract signings were up only in the Northeast, but that is where sales had tumbled the greatest.  Pending home sales were down over nine percent since February 2021in that part of the country. The drop in home sales is a real concern, not just because home construction is such an important sector. Sales of homes generally are followed in the year after by added demand for housing-related products, especially when it comes to existing homes.     

IMPLICATIONS:  Economic growth this year will depend greatly on the extent that inflation can be brought under control.  Business leaders may talk all they want about labor shortages and the need to raise wages much more sharply than in decades, but for consumers, it is all about spending power.  If inflation eats up all and more of the rising income, the ability to buy goods declines.  And that is what is happening.  The second potential impact of high inflation is deteriorating confidence and we are seeing that as well. The cutbacks in government stimulus monies have helped keep demand under control, but that hasn’t stopped businesses from grabbing for all the gusto they can.  Whether it is the local electrician, who claimed his prices were so high because it cost so much to fill up his pick-up (that really happened to me), to the manufacturer or retailer who thinks consumers will pay anything for their product, inflation is beginning to get out of control.  Monetary policy works with a lag and rates are so low that the Fed has a long way to go before interest rates start restraining demand enough that firms begin to think they cannot keep raising prices whenever and by whatever they want.  And it is not as if the Fed started off raising rates robustly.  With the Russian invasion creating more problems for the global supply chain, it doesn’t look as if inflation will moderate significantly for an extended period. 

Comment on Gasoline Tax Holiday: There is a lot of talk about helping drivers cope with the high price of gasoline by implementing a temporary gas-tax holiday.  Unfortunately, that is more a political move to “not just stand there but do something” than an effective way to ease the pain.  Some economists argue that the tax cut would largely wind up in the hands of producers and retailers, as they can raise prices to offset the tax reduction.  Others argue it would benefit consumers, but admit that not all of the tax cut would wind up in consumers’ wallets. Indeed, even the conservative think tank, the Cato Institute, noted in a recent piece that “forthe U.S. as a whole, consumers and producers … would share the benefits of a tax reduction equally.”  Yes, to some extent, drivers would see gasoline costs drop, but producers and retailers could take a significant share of the tax reduction and widen their margins, while governments would lose revenue needed to fund infrastructure investment by the total decline in taxes.  Lowering the tax would be a very inefficient way to help people in need right now and potentially have long-run negative implications. 

KEY DATA:  Sales: -2.0%; Median Prices (Month): -6.3%; (Over-Year): +10.7%

IN A NUTSHELL: “The housing market remains strong, but how long it will remain that way is a real question.”

WHAT IT MEANS:  The housing market has been a strong component of the economy, and the surge in starts in February is a sign that it is still in good shape.  But not all the data are solid.  The National Association of Realtors previously reported that existing home sales fell sharply in February and today we saw that new home purchases declined in February as well, though not as steeply.  January’s sales pace was revised upward, so we really didn’t see much change.  Sales in the Northeast rebounded sharply from recent declines, and demand improved in the Midwest, but sales fell in the South and West.  On the pricing side, costs dropped significantly from the January level and the rate of increase over the year has clearly decelerated.  Part of that may be due to the recovery in inventories, which are pretty much back to normal levels. 

Rate Hikes, Mortgage Rates and the Implications for Housing:  The housing market data are still solid, though that may not be the case in a few months.  With Treasury rates soaring, mortgage rates are following and are now in the 4.50% range.  Conforming rate mortgages are higher than jumbos.  The conforming rate is 1.1 percentage points above where it was a year ago while the jumbo is up 0.8 percentage point.  And mortgage rates are likely going to rise a lot more.  On Monday, at a speech given to the National Association for Business Economics, Fed Chair Powell noted that the Fed’s “policy actions and those to come will help bring inflation down near 2 percent over the next 3 years.”  The Fed is expecting inflation to remain elevated into and possibly through 2025.  That is a clear signal to the markets to assume the higher levels of inflation are not going away anytime soon, and should be priced into mid- and longer-term rates.  Mr. Powell also made it clear that, if necessary, the Fed will go above what economists call neutral, which for the Fed is about 2.50%.  That is projected to occur by next year.  So, both long-term and short-term rates have quite a way to go before they peak.  Since home buyers have already been battered by soaring prices, the additional burden of sharply rising mortgage rates implies a slowdown in sales and a softening in prices is coming.  If you are thinking of doing so, it just might be a good idea to sell your house soon. (I just did.)

KEY DATA:  Sales: -7.2%; Over-Year: -2.4%; 1-Family: -7%; Condo: -9.5%; Prices: +15%/ Leading Indicators: +0.3%

IN A NUTSHELL: “The housing market may be softening, as rising prices and mortgage rates is starting to crush affordability.”

WHAT IT MEANS:  If you are a seller, the housing market has been great.  If you are a buyer, not so much.  The big problem has been supply, but now we may be seeing declining affordability constraining sales.  The National Association of Realtors reported that existing home sales dropped sharply in February.  Demand for both single-family homes and condos plummeted.  Part of the problem is the inventory of homes on the market.  It is miniscule.  The number did rise a bit, but it is so low that even if it doubles, it will still be low.  The lack of supply is continuing to pressure prices.  That hasn’t constrained buyers very much, as rates have been incredibly low.  But that is starting to change.  Mortgage rates broke the 4% level for the first time in nearly three years.  Okay, that is not high on an historical basis, but first-time buyers who are at the entry income level are now getting priced out of the market since prices are up so much.  The report noted that: “Monthly payments have risen by 28% from one year ago…”.  And rates are still going up. 

The outlook for the economy was a little more positive in February.  The Conference Board’s Leading Economic Index posted a moderate rise in February, after having declined sharply in January.  Can growth really accelerate with all the difficulties the economy is currently facing?  That is not clear.  The report noted that: “… the latest results do not reflect the full impact of the Russian invasion of Ukraine, which could lower the trajectory for the US LEI and signal slower-than-anticipated economic growth in the first half of the year.”  The risks are that energy prices will remain high and the supply chain will take longer to untangle.  And if China starts outwardly supporting Russia, who know what will happen?  Consequently, I am not reading too much into the February increase.

IMPLICATIONS:  Let’s see now, oil remains comfortably in the $100/barrel range and the secondary and tertiary impacts of the skyrocketing energy costs will not be felt for months. China is shutting down towns again as COVID is breaking out in parts of the nation and that could slow the process of untangling the global supply chain tangled.  The Fed has embarked on raising rates and the former true believers of transitory inflation now fear the worst and have become rate-hike hawks.  One regional bank president seems to want to emulate former Fed Chair Paul Volcker’s scorched economy strategy.  Okay, maybe not the nuclear option, but we are likely in for rates hikes that are larger and get us to higher levels than this conservative, see-no-inflation-evil Fed ever signaled as being possible.  The risk is that the Fed will repeat history and wind up jamming on the brakes.  Unfortunately, the inflation cluelessness has put the central bank in a box and given Fed Chair Powell’s comment that you cannot have extended periods of strong job growth without price stability, the risk is to the upside on rate hikes.  So now we have to ask the question, is a recession this year is possible?  The answer is yes, though I still have the probability less than fifty percent.  Of course, it was only twenty percent a couple of months ago, so it is clear conditions have changed dramatically.  As for the markets, a fifty-point rate hike is distinctly possible at either the early May or mid-June FOMC meeting.  That could be viewed as a sign the Fed is well behind the curve (it is), or that it is intent on curbing inflation (it is).  Those alternative views imply different reactions from investors.   Buckle up, we are likely in for some real volatility in the months ahead. 

INDICATOR:  February Producer Prices and March Empire State Manufacturing Activity

KEY DATA:  PPI: +0.8%; Over-Year: +10%; Goods: +2.4%; Ex-Food and Energy: +0.7%; Services: 0%/ NY Fed: -14.9 points; Orders: -12.6 points

IN A NUTSHELL: “The pressure on prices remains intense as the Fed begins its two-day rate-setting meeting.”

WHAT IT MEANS:  Will inflation ever get back to acceptable levels?  Yes, but probably not for quite a while.  Wholesale prices soared once again in February, led but jumps in food, energy, and lots of other goods.  The only thing that kept the report from being totally ugly was little change in services prices.  Over-the-year, the rise was the largest since this method of measuring producer prices was introduced. Goods costs continued to surge, which is not a good sign for consumer prices.  Some elements of wholesale services, trade in particular, did settle down.  Whether that continues to be the case is uncertain.  Regardless, the Fed is meeting, and this report cannot help support the view that going slowly is the best course of action.

The New York Federal Reserve Bank’s Empire State Manufacturing Index cratered over the past month.  The March number was the lowest since spring 2020, when the pandemic was raging and only some firms were starting to reopen.  Orders were off sharply.  Still, the headline number was not representative of the details – what a surprise.  While most other components were down a little, they were still pointing to growth.  In addition, expectations actually improved.  I suspect that will change as the Russian invasion cannot be helpful for business outlook. 

IMPLICATIONS:  Producer costs keep rising sharply, especially when it comes to goods.  The surging food and energy prices are likely to move through the economy, but that takes time, so the expectation is that producer costs will continue to rise strongly over the next few months, though maybe not as massively as they have been.  For the last 10-15 years, firms had limited pricing power.  I used to say that, outside of food and energy, the path from rising producer costs to increased consumer prices was winding and often wound up at a dead end. Thus, price increases driven by higher wholesale expenses were frequently temporary or limited.  Now, firms have pricing power and one way they can retain that power is to limit the reduction in prices as input costs decline – if or when they do.  That is likely to be the case for as long as firms can keep that going.  Meanwhile, the FOMC has started its two-day meeting.  The outcome is set and a 25-basis point rate hike should be announced at 2:00PM tomorrow.  But what the statement says about future increases, future balance sheet reductions, and the risks to growth are more important.  That means Mr. Powell’s press conference should be very interesting.  The press has really started pressuring him and issues such as how long the Fed expects inflation to remain elevated, what the Ukraine invasion may mean for policy and details on any asset sales should dominate.  We also get the latest Fed forecast charts and tables.  That should provide some thinking not just on where things are going, but also on the differences on the Committee that exist.  I expect a sizeable number of members to forecast faster rate hikes than the markets currently expect.  The Fed boxed itself in by failing to recognize the potential for inflation to remain high for an extended period.  With Ukraine raising risks to both growth and inflation, the members must fight inflation, which at least in part is being driven by factors way outside their purview, and a slowing in growth being created by faltering spending power and confidence.  The ending of government stimulus funds is not helping either.  It should be a fun meeting.