KEY DATA: LEI: +0.6%/ Claims: -26,000

IN A NUTSHELL: “With jobless claims hitting the lowest level in over forty-one years and indicators of future growth soaring, we are seeing clear signs that the economy is in really good shape.”

WHAT IT MEANS: Next week we get the first reading of second quarter GDP growth and whatever the level may be, it is only the starting point for what looks like accelerating economic growth. The Conference Board’s Leading Economic Indicators Index jumped once again in June. This makes three consecutive months of large gains and the index is clearly pointing to an economy that is picking up steam. The moderate rise in current economic indicator shows that the expansion was decent but not spectacular in the spring. But if the economy is building off of those gains, then the summer could be really strong. Indeed, with the housing market starting to soar, we should expect growth this quarter to be really good, possibly above 4%.

Another reason I am forecasting robust economic activity for the rest of the year is that the labor market is really tightening. Weekly jobless claims hit their lowest level since November 1973. Keep in mind, the labor force was only about 58% of what it is now, so we are looking at historically low numbers. One week’s jobless claims numbers shouldn’t be over-valued, but the rise we had seen over the past few weeks looks like it was temporary or just a seasonal adjustment issue. It is awfully hard to seasonally adjust data on a weekly basis, which is why I always argue that we should watch the four-week moving average. That remains at a pretty low level and points to a pretty good July jobs report. Keep in mind, the number of jobs “created” is really a net number. It is the difference between new hires plus new companies creating new positions minus the total of job losses, which includes terminations, retirements and company shut downs. If terminations are low, the net is high, everything being equal. That is why we follow jobless claims and translate the level into job gains.

MARKETS AND FED POLICY IMPLICATIONS: The next two weeks should be telling for the Fed. Yes, they meet next Tuesday and Wednesday, but if the members really are data driven, then second quarter GDP and employment costs, as well as the July payroll and unemployment data should be critical to any decision to raise rates in September. Next week, the FOMC, which hates to take any firm stand, will likely send a strong signal that it is getting ready to move but temporize by wanting to see additional solid job, income and inflation data. They should have it by the end of August and the members will have enough time to give enough speeches to make it clear a hike is coming. Meanwhile, investors are probably more worried about earnings than the Fed, but if they are, then they have lost their way. Earnings look backward while some of the data are telling us about what will happen. If my forecast is anywhere close to being right, firms that are domestically focused should do well going forward and isn’t that what investors should be concerned about?