KEY DATA: Orders: -1.8%; Excluding Aircraft: +0.7%; Capital Spending: +0.4%/ Home Sales: +2.2%

IN A NUTSHELL: “Businesses are investing again and the housing market is shifting gears, so why is the Fed so unsure about the economy?”

WHAT IT MEANS: And the hits keep coming, except in this case, it’s the good kind – the ones that make lots of money. The data seem to be moving to the top of the charts and while all the songs are not that great, they are making sweet music. Today, we saw that durable goods orders improved in May, though the April gain disappeared. Still, when you exclude aircraft, the rise in demand for big-ticket items was strong and the increases were pretty much across the board. Primary and fabricated metals, communications and machinery were up solidly. There was a decline in computers and appliances and electrical equipment, while vehicles were flat. Importantly, business capital spending, excluding defense and aircraft, was up solidly for the second time in three months. Still, there was a warning sign in the report: Order books are thinning. That does not bode well for a strong improvement in production.

Housing is getting better, no if, ands or buts about it. Yesterday we saw that existing home sales rose solidly in May and that result was duplicated in the new home market. While the percentage increase was not huge, it came on top of a sharply upward revised April sales pace. The level was the highest since February 2008, so we are starting to claw our way back toward more normal levels. We still have a long way to go, though. The long-suffering Northeast finally showed some strength. While total sales for the first five months of this year compared to last year are up by 24%, they are down by 23% in the Northeast. The West was also strong in May but there were declines in the South and Midwest. Interestingly – or strangely – median prices declined even though inventory is largely nonexistent. These data are volatile and given the existing home price increases, the decline will likely turn around next month.

Two other reports indicate that the economy is running strongly. The Richmond Fed’s June manufacturing index jumped while the Philadelphia Fed’s June non-manufacturing index eased but remained at a very high level. Both surveys point to strong job and wage gains.

MARKETS AND FED POLICY IMPLICATIONS: I love to poke fun at the Fed’s inability to forecast and right now, the monetary authorities are easy targets. The economy may not be soaring, but it is hard to say that conditions haven’t rebounded strongly from the winter downturn. I will wait until Thursday when the consumer spending numbers come out before I say the central bankers are clueless. We aren’t certain what households are thinking right now and while they are clearly buying big-ticket items such as homes and vehicles, they also have to doing something other than borrow money. If Thursday’s consumption report is as strong as I expect, and if the inflation data point to a continued move upward toward the Fed’s target, then there is every reason to think that at the July 28-29 meeting, the FOMC will start to signal a rate hike is near.