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”.