KEY DATA: Sales: 0%; Ex-Vehicles: -0.8%/ IP: +0.7%; Manufacturing: +0.4%/ Import Prices: +0.7%; NonFuel: +0.7%; Export Prices: +0.8%; Farm: +0.6%

IN A NUTSHELL: “Spending and production remain so strong that second quarter growth looks like it will be a lot stronger than the robust first quarter gain.”

WHAT IT MEANS:  Funny thing about having money to burn, if you got it, you spend it.  Yes, retail sales were flat in April and when you exclude the huge jump in vehicle purchases, they were down sharply.  But the total level of retail demand was as high as we have ever seen it.  It is just hard sometimes to keep spending more.  The details of the report were crazier than normal.  For example, apparel purchases dropped 5.1% and sales at general merchandise stores were off 4.9%.  Those are huge changes that are hard to explain.  Internet demand fell – really?  We did eat out and eat in, purchase more health products and appliances and electronics, but we cut back on furniture, sporting goods, and building materials.  Lower gasoline prices led to lower sales, but that gets wiped out when adjusted for costs. 

Industrial production was up solidly again in April.  Manufacturing activity increased moderately, but it would have been much better if the vehicle sector was not restrained by input supply issues.  Assemblies declined by nearly five percent even as demand jumped.  That caused durable goods output to fall.  Excluding vehicles, which is valid since the reduction was not due to demand, manufacturing would have increased by a strong 0.6%.  Nondurable goods production rose solidly.  If manufacturing stays flat from here, second quarter output would rise by 4.4%.  That is not likely to be the case, especially if assembly rates rebound.  Strong production gains going forward should power growth this quarter.

It’s broken record time.  Another price report, another set of rising prices.  Import prices surged in April even when you remove energy costs.  But the details are not quite as worrisome as the headline number.  Imported consumer product prices were flat and vehicle prices rose moderately.  But food costs surged again, as did the prices of industrial supplies and materials.  Producer prices should continue posted strong gains which undoubtedly, firms will try to pass along.  On the export side, U.S. firms, both farm and non-farm, were able to hike prices sharply.  IMPLICATIONS:The economy is growing strongly and there are no reasons to expect a major slowdown anytime soon.  Consumers and businesses are still being subsidized by the government and that will not change for a few more months.  So, there is little reason to worry about growth.  Indeed, estimates for second quarter GDP are being revised upward.  But that could be the high point, as the funds begin to run out in the third quarter.  Unless a new bill is passed, they will largely disappear in the fourth quarter.  That doesn’t mean we are headed for a downturn.  We still have a lot of reopening to go through and that will keep activity rising strongly, at least through the summer.  But for investors, it does raise the warning flag that the strong periods of growth may be coming to an end and the economy will start easing back toward trend growth.  What that means for the equity markets is unclear, as there appears to be little forward looking in the markets.  For the Fed, the hopes that the surge in inflation is transitory stems from the belief that trend growth will return soon, whatever soon means.But trend growth on top of robust growth could embed greater pricing power in the economy and that should concern the members.  Don’t be surprised if in the fall, the Fed’s inflation hawks, who have been hibernating, start shrieking again.  And they might have good reason to do so.