KEY DATA: IP: +0.9%; Manufacturing: +0.5%/ Starts: -3.8%; Permits: -0.2%/ PPI: +0.1%; Energy: -5%; Services: +0.5%

IN A NUTSHELL: “The economy moved forward in fits and starts in January as industrial production surged but home construction eased.”

WHAT IT MEANS: The battle between those who think the Fed should save the stock markets and those who think interest rate policy is all about the economy not equity prices continues unabated. Today’s data, though, do tend to come down on the side of those who believe the economy is in reasonably good shape. The biggest news was the sharp rebound in manufacturing output. So much for the manufacturing sector being in recession. Firms ramped up production of consumer goods, business equipment and business supplies. The output of both durable and nondurable goods was up solidly, with vehicle assembly rates jumping. Nothing helps like strong sales. The cold weather led to a sharp rise in utility output. The falling energy prices did lead to a cut back in oil and gas drilling.

While manufacturing seems to shrugging off its lethargy, bad weather battered the housing sector during January. Housing starts fell as declines were posted across the nation. Rain, snow and El Nino all showed up during the month. That weather played a major roll in the construction decline can be seen by the minimal decline in permit requests. If the issue was demand, permit demand would have followed downward more closely. Instead, permit requests have been running about 8% above starts for the past three months and that means construction should jump in the months to come. There are an awful lot of homes permitted but not yet started.

On the inflation front, wholesale prices rose modestly despite another sharp drop in energy costs. Finished consumer goods prices, excluding food and energy, rose solidly again and are up 2.4% over the year. That hardly points to low inflation. And on the services side, which is 64% of the index, prices rose sharply there as well. It had been that I had to scour this report for any sign that prices were rising. Now, increases are much more common than price declines.

MARKETS AND FED POLICY IMPLICATIONS: If we step back and view the economy from afar, we see that consumers are spending, manufacturing is beginning to rebound and housing, though not great, is hardly weak. That is, the domestic economy is fine. While the stock market is probably once again sending out a false signal that a recession is coming, it hardly looks that way from the real economic data. So, what will the Fed do? The members will give lip service to concerns about China, the dollar and some may even think the equity markets matter, but I suspect they will be watching the labor market and non-energy capital spending numbers more closely. And if the last few days signal that the wackiness in the markets is coming to an end, then that will be a major public relations burden off their backs. The uncertainties about the world economy might be enough to put off the next rate hike past March, but I still do not rule April. Chair Yellen would like to prove the Fed doesn’t need a press conference to raise rates and one or two solid jobs reports would make it easy for the FOMC to do just that. As for investors, the trend is their friend and right now that is up. Let’s hope it stays that way.