KEY DATA:ISM (NonManufacturing): -3.1 points, Activity: -5.3 points; Orders: +0.2 points/ Employment Trends: +1.38 points

IN A NUTSHELL: “Growth may be moderating but it is hardly slow.”

WHAT IT MEANS: The government’s data mills may not be churning out all the numbers they usually do, shutdowns have a tendency to do that, but the private sector is still providing some important data.  The Institute for Supply Management’s NonManufacturing index dropped in December, but there really is nothing to be alarmed about.  The level of the index is still fairly high. While overall activity in the services and construction sectors has eased, it is not falling apart, as can be seen by the continued strong rise in new orders.  It is hard to make the argument that the economy is about to fall off the cliff if demand is accelerating.  Firms are still hiring solidly, but not robustly, which is also nothing to complain about.  There was just one warning sign in the report: Backlogs have pretty much stopped building.  But they are not falling, so the warning is more yellow than red. 

Was the huge December jobs number an aberration or a sign of things to come?  Well, it is doubtful we will be seeing payroll increases above 300,000 many times, if at all, this year, but we could get some above 200,000.  The Conference Board’s Employment Trends Index popped back up in December after declining in November.  It is pointing to continued solid job gains.

MARKETS AND FED POLICY IMPLICATIONS: While the markets crashed and burned, economists spent their time trying to explain that a recession was not likely to start for another year or more.  Of course, investors didn’t believe that, otherwise why were they selling their stocks? Well, the selling was due to, well, you tell me and we both will know.  There is a moderation in growth occurring,but only those who think unsustainable growth is actually sustainable didn’t understand that.  Solid but not robust growth is just fine. And the reaction to Fed Chair Powell’s comments that the Fed could change course was fascinating.  Keep in mind; he didn’t say to which direction the Fed would tack.  The markets took his words to mean the Fed might not raise rates this year or hike only one time.  But if the economy stays solid and inflation rises, does anyone think the Fed will not hike rates more than most investors now believe?  That would be changing direction, but in the opposite way that the markets now think.  You see, Fed Chairs rarely say anything specific.  They leave their options openand if you read Mr. Powell’s comments, they said nothing specific about raising, lowering or keeping rates constant.  As far as the balance sheet reductions go, the Fed has never done this before, so it has no idea about the impact the changes will have on the economy.  Saying they are flexible about changes is hardly news.  The members like schedules but have always been willing to deviate from them.  But hey, investors wanted to hear something and even if that something wasn’t actually said, they will believe they heard it.  So, if the Fed doesn’t do what the markets want it to do because they thought the Fed had said it would do that, investors have only themselves to blame – which of course they will not.  For me, the economy is growing above trend, which points to at least two and possibly three moves this year.