NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

215-497-9050

joel@naroffeconomics.com

KEY DATA: CPI: +0.2%; Excluding Food and Energy: +0.2%/ Real Hourly Earnings: +0.1%/ Leading Indicators: +0.2%

IN A NUTSHELL: “Inflation and earnings are rising moderately, not minimally, but I am not sure the Fed members want to admit that.”

WHAT IT MEANS: As long as inflation remains well below the Fed’s target, the members can be patient, even if they don’t use that word anymore. Well, we don’t have high inflation, but neither do we have low inflation. Consumer prices rose moderately in March, led by rising energy costs. But it wasn’t all oil, by any means. Vehicle costs jumped and there were moderate increases in clothing, medical care and shelter expenses. The only major categories where prices went down were food and utilities. Services inflation is stabilizing somewhat but that is being offset by a pick up in commodity inflation. Over the year, consumer costs excluding energy are nearing the Fed’s 2% target.

The battle over who should get what share of earnings is raging and with the number unemployed and underemployed falling, the pendulum is swinging. In March, for the fourth time in five months, real average hourly earnings for all workers rose and the gain over the year remains above 2%. While that is nothing great, it is enough to allow consumers to spend at a decent pace.

Will the economy continue to grow at a solid pace? The Conference Board’s Leading Economic Index rose moderately in March, but the gains have been smaller than we saw for much of the past year. That is not a positive sign for strong growth. Indeed, it implies only an average expansion going forward. However, the University of Michigan’s mid-month reading on consumer confidence rose to its second highest level in eight years. With incomes growing, that bodes well for future spending.    

MARKETS AND FED POLICY IMPLICATIONS: The FOMC starts its next two-day meeting in eleven days and there is little in the data to cause the members to stop believing that patience is still a virtue. As long as they continue to believe that, they can leave us in the dark about when rate hikes will come. But the music will likely stop playing sometime soon, and the monetary authorities and investors will have to face reality. Right now, the worries are foreign, with Greece and China once again at the top of the list. It’s not as if the problems in those countries had gone away, it’s just that they were put on the back burner. What those concerns remind us is that the Fed’s ability to return to normal interest rates faces an awful lot of hurdles even if the U.S. economy is not one of them.