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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

KEY DATA: IP: +0.9%; Manufacturing: +0.1%/ NAHB: down 2 points/ Vitality Index (Over-Year): +4.0%

IN A NUTSHELL: “The energy-sector rebound is helping accelerate the economy.”

WHAT IT MEANS: In 2015, the economy expanded at a very strong 2.9%. But conditions faded in 2016, with growth coming in at a tepid 1.5%. What was one of the biggest reasons for the slowdown? The collapse of energy prices and the energy sector!   Well, conditions changed last year and the energy sector is now leading the way again. Industrial production surged in December, and for the year as a whole, but not because of manufacturing. Manufacturing activity ticked up minimally in the last month of the year. There was no consistency in the sector, with almost as many industries posting large declines as those showing solid gains. For the year, manufacturing was up a solid, but not spectacular 2.4%. On the other hand, the mining sector surged in December and was up double-digits over the year. The large rise was driven by a 40% rise in oil and gas drilling for the year. With energy prices continuing to increase, I expect that the energy industry will help lead the way again this year.  However, the vehicle sector, which was largely stagnant in 2017, may see both lower sales and output.

Homebuilders have been ecstatic about conditions lately and that really didn’t change despite a decline in the National Association of Home Builders’ Index in January.   The level is very high and has rarely been seen except at the peak of both the dot.com and housing bubbles. I am not saying that we are in another bubble, just that you have to have really good economic conditions for developers to feel this euphoric.

ADP’s Workforce Vitality Index was up again in the fourth quarter, which should surprise no one. This report is worth following because it is one of the more comprehensive reports on wage gains we have. It breaks down wage changes by region, industry, age of worker, tenure in job, company size, by full-time vs. part-time and whether workers switched jobs or held them. Obviously, it is too extensive to easily summarize, but it can be said that wage gains are accelerating, especially in the resource and mining and hospitality and leisure industries. Job switchers are doing better than job holders and that has led to a further rise in the turnover rate. It is now over 50% in leisure and hospitality. If firms want to hire stable workers, they should look to those over 55, not those under 35. Of course, that is not what they do, but that is a topic for another commentary.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports really don’t change much for anyone. We are in earnings season. Investors are either going to love a lot, or a love a lot more, the earnings report. It will likely take a lot of terrible reports to get the animal instincts under control. And the data are not so strong as to cause any of the Fed members to rethink their views on rate hikes. Sometime this month the Senate will confirm Jerome Powell as the next Fed Chair, but that is a formality. Right now, doing something that is largely noncontroversial is not something most Senators want to do. Instead, they will focus on how to keep the government running. The supposedly World’s Greatest Deliberative Body has devolved into a Tower of Partisan Babel, so what will happen is anyone’s guess.

KEY DATA: Consumption: +0.6%; Disposable Income: +0.4%; Prices: +0.2%/ Orders: +1.3%; Excluding Aircraft: +0.5%/ Home Sales: +17.5%/ Sentiment: -2.6 points

IN A NUTSHELL: “The economy may be booming along but households are just not so certain about the future.”

WHAT IT MEANS: It’s a data dump day and we sure got a lot of them – and almost everyone was really good. First, it looks like consumers hit the stores and websites really hard in November as consumption rose solidly. This was not a month where soaring vehicle sales drove things. Indeed, durable goods spending was flat. Demand for nondurables and services soared, though. Can households keep it up? I am not sure. Disposable income did increase solidly, driven by a good but not great rise in wages and salaries. But what troubles me, and it has for several months now, is the savings rate. It fell again, dropping to 2.9%. Except during the insane housing craze, this rate was never seen. That raises real questions about the sustainability of consumer spending, even with tax cuts coming next year. As for prices, they rose moderately, but excluding food and energy they were up just a touch. Over the year, the increase remains below the Fed’s 2% target.

After investing like crazy businesses took a wait and see attitude in November. Private sector capital spending fell slightly. Nevertheless, it was still 5.1% above the November 2016 level, which clearly indicates that the investment slump is over. The tax bill will only add to the spending, though it is hard to know when and by how much.

All week we have been getting really good housing numbers. Today we got a great one. New home sales, which had been floundering, skyrocketed in November to the highest level since July 2007. The increases were strong in every region but it was the West where the gain was really outsized: Sales rose by 31% there. The supply of homes is exceedingly low and that should trigger even more construction.

Despite all the great economic data, the passage of a tax bill and the exuberant spending, consumer sentiment fell in December. Though the University of Michigan’s index eased, it remained at a very high level. Respondents are very happy about current conditions. It is the future they are somewhat less confident about.

MARKETS AND FED POLICY IMPLICATIONS: The run of strong economic numbers clearly indicates the economy is in great shape. There are few major imbalances, save the issue with consumer spending. Keep in mind, the tax cuts are heavily loaded toward the top end of the income ladder, with lower income households getting little and middle income families seeing only moderate cuts. Yet that may work to the economy’s advantage. Without any major windfall, most of the tax breaks that go to the lower and middle-income groups should be spent. That could support spending even if wage gains don’t accelerate significantly. While some large firms have announced bonuses and/or wage increases, small and most mid-sized businesses don’t have the wherewithal to do that. Between seventy-five and eighty percent of all private sector jobs are in small to mid-sized businesses. That means the bonus/minimum wage announcements make for good PR but not necessarily strong income gains for workers. And it is wage increases that really matter. Let’s hope the added growth that should derive from the tax cuts will force companies of all sizes to increase worker incomes. If that happens, the economy could really boom.

Happy Holidays!

KEY DATA: Sales: +5.6%; Inventory (Over-Year): -9.7%; Median Prices (Over-Year): +5.8%

IN A NUTSHELL: “Strong sales and a scarcity of inventory are causing home prices to soar.”

WHAT IT MEANS: Yesterday we saw that new home sales were on the rise and today we got a similar result from the existing home data. The National Association of Realtors reported that home sales jumped in November after increasing solidly in October. The sales pace was the highest since December 2006. Sales were strong in three of the four regions with only the West posting a small decline. The robust sales pace is exceeding the number of homes being brought onto the market. As a result, inventories have fallen to levels that are almost half what they should be, given the sales pace. That has caused prices to surge. There is little doubt that prices will continue to increase sharply as there are no signs people are changing their minds about selling their homes.

MARKETS AND FED POLICY IMPLICATIONS: This was a really strong report that indicates the housing market has pretty much wiped out all the losses, in terms of both sales and prices, which occurred as a result of the housing bubble bursting. But that doesn’t mean there are no issues. The percent of homes bought by first time buyers is falling as the rising prices make it harder afford even an entry-level house. The tax bill, if it increases growth even a little bit, could lead to higher inflation and rising interest rates. This would also pressure the market. And the reduced deductibility of state and local taxes and mortgage interest could pressure prices in high cost states. Nevertheless, it is a good sign that the demand is strong and likely to support further sales gains as well as additional home construction. As for investors, now that the tax bill is done, they will have to actually see better growth or the valuations that may have been made on the basis of a stronger economy could prove to be questionable. Remember, once the corporate tax cuts are recognized, firms have to increase earnings from that higher level. And that will only happen if they actually expand their top line. Taxes hit the bottom line. That said, there is little doubt that firms will reward their investors by using lots of the newfound profits to increase dividends, buy back stock and expand merger and acquisition activity. Those should bolster stock prices, at least for a while.

KEY DATA: Starts: +3.3%; 1-Family: +5.3%; Multi-Family: -1.6%; Permits: -1.4%; 1-Family: +1.4%; Multi-Family: -6.4%

IN A NUTSHELL: “Home construction is picking up steam and should boost growth this quarter.”

WHAT IT MEANS: For the past two quarters, a softening in home construction has restrained overall economic growth. It looks like that is changing. Housing starts rose in November, led by a surge in single-family activity. Multi-family activity ebbed, but this is an extremely volatile segment of the market and it was up sharply in October. So far this quarter, starts are running nearly 9% above the third quarter average, with both single-family and multi-family construction doing quite well. Looking at the November report, there were the usual oddities. Construction soared by double-digits in the West and South but dropped sharply in the Midwest and fell apart in the Northeast (it was down almost 40%). That just shows how wildly the numbers can swing and why you cannot look at just one month of data. Looking forward, the single-family segment is in for even more increases as permits hit a level not seen since September 2007. Total permit requests over the past two months were still running hotter than starts, indicating construction could be strong in December.  

Yesterday, the National Association of Home Builders’ index was released and it indicated that developers are near giddy. The index is now above every reading we saw during the housing bubble. Indeed, the last time it was above the November level was in July 1999, 18.5 years ago! In other words, housing is in great shape, at least if you don’t live in high-tax, high-value areas. The tax bill doesn’t do any favors to homebuilders or homeowners in those areas.

MARKETS AND FED POLICY IMPLICATIONS: The data keep saying the economy is in good shape and soon, a potentially massive fiscal stimulus will hit the economy. How long it will take for the tax cuts to hit household wallets is unclear, but businesses will have the all-clear as soon as the bill is signed. But there are still lost of questions. For example, how much will actually be spent, how long will it take to see the additional spending, will labor shortages cause firms to raise wages to meet the growing demand and if so, will prices and therefore interest rates rise? Normally, expansionary fiscal policy is used when the economy is weak and needs to be kick started. This is not the case now. Alan Greenspan let the tech bubble build until it blew up and then he and his successor, Ben Bernanke watched the housing bubble burst and flatten the world economy. Will we see something similar from the next Fed Chair Jerome Powell? Stay tuned.

KEY DATA: IP: +0.2%; Manufacturing: +0.2%/ NY Fed: -1.4 points; Orders: -1.2 points; Expectations: -3.3 points; Order Expectations: -12.6 points

IN A NUTSHELL: “The manufacturing sector is in pretty good shape, driven by consumers who are spending like crazy.”

WHAT IT MEANS: Yesterday, the November retail sales numbers were released and they showed that households really did like all those amazing Black Friday, Small Business Saturday and Cyber Monday deals. The only sector that posted a decline was vehicles, but that came after a huge October sales pace. Manufacturers are scurrying to keep up with the demand. Okay, output didn’t rise a whole lot in November, but once again, that came after a massive rise in October. When you average the two months together, and averaging does make sense since these data are volatile, output rose quite strongly. Indeed, so far this quarter, manufacturing production has increased at a 6.4% annualized pace, compared to the third quarter. In other words, the sector is on fire, though I need to point out that the rebound from the hurricanes did play a role. The details of the November report show that additional output gains could be forthcoming. Most of the increase in production was in durable goods manufacturing, and the gain was modest. Nondurables were flat. Given how strong retail demand was in November, there may have to be some catching up.

A less closely watched report, the New York Fed’s Empire State Manufacturing Index, posted a small decline in early December. Now let’s be real here, there is not a whole lot of manufacturing in the New York Fed’s district, so don’t jump to any conclusions. Still, the level is still high. If there was a red flag in the report it was the decline in expectations. Respondents were a little less certain about future business activity. Confidence is still high, but there was some concern that the rapid order growth could slow.  

MARKETS AND FED POLICY IMPLICATIONS: The economy is in good shape, which I seem to say in every report I write. A tax bill will add fuel to the fire. The question the new Fed Chair, Jerome Powell, will have to struggle with when he takes over in February, is how big a conflagration will the added demand create. Former Fed Chair Bernanke blew it badly in his first year by failing to understand the extent of the housing bubble and how it could impact the entire economy. He spent the rest of his tenure trying to clean up the mess he, at least in part, helped create. Will the new Fed Chair be willing to risk things based on a belief that the economy has enough slack to grow more rapidly without creating any threatening bubbles? We will find out soon enough. Since Fed policy acts with a lag, he may not have a lot of time to find out. But that is just conjecture and as long as a tax bill is passed, investors will keep singing, “happy days are here again”.