KEY DATA: PPI: +0.1%; Ex-Food and Energy: +0.1%/ Orders: +0.4%; Ex-Aircraft: -0.6%; Capital Spending: +0.8%/ Construction: +1.3%; Public: +4.9%
IN A NUTSHELL: “Despite some decent headline numbers, the data still indicate that growth is moderating while inflation remains tame.”
WHAT IT MEANS: The Fed is trying to read the economic tea leaves before deciding on what to do next and one thing they are watching carefully is inflation. Well, they can probably start focusing on something else. Wholesale prices went largely nowhere in February. Energy costs did jump, but they were largely offset by a decline in food prices. Excluding those categories, there were few places where prices rose with any gusto. There were some large increases in chemical products, electronic components, appliances and cable services, of course, but otherwise, producer costs we well contained. As for the pipeline, it is largely empty.
Will demand pick up sharply enough to move the needle on inflation? I don’t think so. Durable goods orders rose moderately in January but that was due to a surge in aircraft demand. Excluding planes, demand for big-ticket items fell sharply. The measure that most closely mirrors business capital spending did jump. But that came after very large declines in new orders the previous two months. Even with that increase, capital spending was up only 3.1% from the January 2018 level. Since these data are not adjusted for prices, you can see that orders are no soaring.
Despite the terrible weather, construction spending jumped in January. But again, you have to put that into perspective. There were significant decline in both December and November and the level of construction was still below the October pace. In addition, just about all the gain came from a surge in public construction as private sector activity rose minimally. MARKETS AND FED POLICY IMPLICATIONS:It’s nice to get some decent improvement in the economic indicators, but given how soft the previous data were, you cannot read too much into those increases.The rise in retail sales in January, reported earlier this week, tells us only that we ended the year on a major down beat.The December number was revised sharply lower and that may mean fourth quarter growth was slower than initially estimated. The revision will come out in two weeks and could show growth closer to 2% and it looks like first quarter growth could be well below 2%. Indeed, many forecasters have it closer to 1%, a pace that as of now cannot be ruled out. In other words, the economy lost steam at the end of last year and the while the fire in the engine has not gone out, it is not roaring either. Since inflation is also showing no signs of becoming a problem anytime soon, the Fed members will have little to do at their meetings for quite a while. Washington in the spring is very pleasant, so I suspect they will be taking lots of walks, especially if the cherry blossoms are in bloom. As for investors, they have little to cheer about and lots to worry about. There is Brexit and trade, Boeing and consumer lethargy. March Madness cannot be coming at a better time as there are now lots of game watching to be done over the next few weeks. Since my two alma maters, Stony Brook and Brown, didn’t make the tournament (as usual), I am stuck rooting only for local Philadelphia teams. Of course with Villanova being one of them, there is always hope.