Early May Consumer Sentiment and April Leading Indicators

KEY DATA: Sentiment: +5.2 points; Expectations: +8.6 points; Current Conditions: +0.1 point/ LEI: +0.2%

IN A NUTSHELL:  “Hopes for the future run high, but that was before the trade war went nuclear, so let’s wait and see where things stand.”

WHAT IT MEANS:  Consumers will drive this economy and it looks like they are quite exuberant – maybe.  In the first part of May, the University of Michigan’s Consumer Sentiment Index hit its highest level in fifteen years, led by a surge in the expectations index.  But the report indicated that most of the data were collected before the trade talks collapsed.  The numbers coming in afterward were a lot different, with expectations much weaker.  This is especially important since the current conditions component was largely flat.  So, before we celebrate a consumer that is as happy as can be, let’s see what happens when the final numbers come out on May 31st

Looking ahead, the Conference Board’s Leading Economic Index rose moderately in April.  After having pretty much flattened early in the year, the index is moving back up.  However, the rate of rise points to more moderate growth in the near future, which is in line with what most economists and the data are forecasting.

MARKETS AND FED POLICY IMPLICATIONS:  The markets reacted quite negatively to the raising of tariffs and will likely do the same if the tariffs on Chinese goods are broadened.  But after thinking it over, investors seemed to decide that it was just a “never mind” moment.  I am not sure what investors are thinking or even consumers and that is a concern.  Do people think that tariffs don’t matter?  Really?  If so, then you can describe the current consumer confidence numbers and the behavior of the markets as showing signs of irrational exuberance.  Even worse, if tariffs don’t matter, what would stop our trading partners from putting tariffs on our goods and why would we not do the same with Europe and/or Japan.  Those nations may not be as egregious in their trade restrictions as China, but they have some pretty significant ways of controlling trade as well.  Do we really want to go down that road?  The trade situation undoubtedly will add even more volatility to the already volatile data.  That makes the Fed’s “data dependency” not much different than a roller coaster.  The Fed members need to buckle up, because things could get really crazy in the next few months.  

April Housing Starts, May Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: Starts: +5.7%; 1-Family: +6.2% Permits: +0.6%; 1-Family: -4.2%/ Phil. Fed: +8.1 points; Orders: -4.7 points/ Claims: -16,000

IN A NUTSHELL:  “The housing market is coming back a little, another sign the economy continues to expand at a decent pace.”

WHAT IT MEANS:  If you believe the bond market, where rates have been plummeting, you would think that the economy is in deep trouble.  But that is just not the case.  Housing starts rebounded in April, which really should not have surprised anyone.  The levels we had been seeing over the previous two months were way below where they should have been.  Why do I say that?  Because permit requests, which also rose, had been and still are running above the level of actual construction.  That had to change and there still is more to come.  For the past three months, permits have averaged nine percent more than starts, which means there is a backlog of construction that will likely be filled in the next few months.  In April, construction activity showed what was likely the effects of weather.  Starts skyrocketed by 85% in the Northeast and by 42% in the Midwest, but fell by roughly 5.5% in both the South and the West.  Wet weather may play havoc with activity in May, so any result should be viewed accordingly.  One issue for the economy that comes out of this report is that the number of homes under construction declined for the third consecutive month.  Building activity is what really matters for economic growth and right now, that is softening.

On the manufacturing front, conditions there may be firming a little as well.  The Philadelphia Fed’s survey of regional manufacturing activity jumped in early May.  Keep in mind, this measure is wildly volatile, so the surge we saw was not really out of the ordinary.  Indeed, the details don’t consistently argue that conditions are improving significantly.  For example, while employment improved a touch, new orders expanded at a less rapid pace.  Looked forward, expectations were largely the same, though firms are thinking that hiring may pick up.  As for inflation, which was in the special question section, firms say their prices may rise a little less than had been thinking in February, but that overall consumer inflation would run a little hotter. 

Jobless claims declined back to more typical, at least for this tight labor market, last week.   MARKETS AND FED POLICY IMPLICATIONS:  In a normal world, where it is all about the economy, concerns should be minimal.  However, this is not a normal world.  Fighting a full-fledged trade war with China and a shooting war with Iran at the same time should be enough to unnerve investors.  But it appears as if many don’t believe that will be the situation.  How else can you explain the cratering and unwinding of that decline that has occurred over the past week?  Maybe investors are starting to understand they are mere puppets and the strings are being pulled by the tweeter in chief?  I make that statement not because I think those risks are not real; I believe they are.  But at some point, you have to start seeing it to believe it.  And then you have to determine the extent to which the economy will be harmed.  Right now, it is all fear and little analysis, so expect volatility to hold sway. As for the Fed, the uncertainty plays right into its hands.Why do anything until you know what direction policy will take us?  The difficulty, though, is that economic data tend to tell us what happened or is happening, not necessarily what will happen.  Being data dependent in an uncertain world where the data – and the markets – can be whipped around is an awfully risky approach to take.

April Consumer Prices and Real Earnings

KEY DATA: CPI: +0.3%; Ex-Food and Energy: +0.1%; Food: -0.1%; Energy: +2.9%/ Real Hourly Earnings: -0.1%; Over-Year: +1.2%

IN A NUTSHELL:  “Inflation is neither too hot nor too cold, but for the Fed, it is hardly just right.”

WHAT IT MEANS:  Normally, news about inflation would take center stage and it should.  So let’s keep it there, even though there are now higher tariffs on Chinese imports.  Consumer prices rose solidly in April, but much of the gain came from a surge in energy costs.  Meanwhile, food prices dipped.  Netting out those two volatile sectors, prices rose modestly for the third consecutive month.  Over the year, both headline and core prices were up about two percent, so the Fed’s target has been reached, at least for this measure.  The details of the report were a bit odd.  Clothing prices cratered again, but there was a change in the data collection process, so maybe we should also exclude clothing.  And there was a large drop in used vehicle costs, but it is unclear why that is happening given all the vehicles coming off of lease.  Maybe we should exclude that too.  And while I am at it…  Okay, just kidding around.   Not really.  There is a serious point in saying we should exclude most components.  The Fed claims there are transient factors restraining inflation and we have to determine which ones they are referring to and how much of an impact they are having.  Right now, core – i.e., non-food and energy – prices rose at a less than two percent pace over the past three months.  How long will the Fed wait to see if the impacts are indeed transient?  The one factor that we can agree is not transient is the continued surge in housing costs.  Those should remain high for an extended period.

With prices up solidly but hourly and weekly earnings rising more slowly, real, or inflation-adjusted earnings fell in April.  Consumer spending power has grown about one percent over the year and that is hardly enough to support strong consumption growth. 

MARKETS AND FED POLICY IMPLICATIONS:  Today’s news on inflation may disappear in the uproar about the raising of tariffs on Chinese imports and the threats to broaden them to all Chinese products.  But consumer prices are something that need to be watched.  It’s not that inflation is likely to soar; there is little reason to believe that.  It is that the tariffs are passed through to consumers.  The tariffs affect only a small percentage of the economy, so the pass though of the costs should not raise consumer prices significantly.  But the impacts don’t fall evenly across income groups.  In addition, inflation-adjusted earnings are growing modestly and the combination of higher tariffs and slow spending power does not bode well for consumption going forward.  First quarter household spending was weak and April’s vehicle sales were really soft, so second quarter consumer demand may not be that much better.  Meanwhile, the tariffs only make the Fed’s job more difficult.  They slow growth but may raise inflation enough to keep it near the Fed’s target.  Yet any agreement would unwind those impacts, whipsawing the data.  With no clear idea where the economy and inflation are going, the Fed will likely stay on hold for a long time.   

April Producer Prices, March Trade Deficit and Weekly Jobless Claims

KEY DATA: PPI: +0.2%; Goods: +0.3%; Services: +0.1%/ Deficit: up $0.7 billion; Exports: +1%; Imports: +1.1%/ Claims: -2,000

IN A NUTSHELL:  “It looks like the big bump the economy received from a narrowing trade deficit in the first quarter will disappear in the spring.”

WHAT IT MEANS:  The events swirling around the economy continue to create chaos but economists still have to make sense of the economic data.  Wish me luck.  Let’s start with inflation, since that is the key to Fed behavior.  As long as inflation remains near the target, there is not likely to be any change in rates.  Well, that is likely to be the case.  Wholesale prices rose moderately in April, led by another sharp increase in energy prices.  Offsetting that, though, was a decline in food costs.  As a result, producer goods prices, excluding food and energy, were largely flat.  Since April 2018, business costs are up between 2% and 2.5%, depending upon which special index you look at.  As for the pipeline, there appears to be some pressure building in the cost of food.  Those higher prices tend to be passed through.  Still, given that the path from wholesale to retail prices is not straight and is often a dead end, it is hard to make the case that inflation will accelerate significantly due to rising costs of production.   That is especially true given that the trend in services inflation, which had been leading the way, is down.   

Meanwhile, all is not quiet on the trade front, even before the president made his threat to impose higher tariffs on Chinese imports.  The trade deficit widened somewhat modestly in March, in line with what would have been expected given the data in the GDP report. But while I don’t expect a major revision to the trade numbers for the first quarter, it looks like the narrowing we saw has largely disappeared.  At least in March, the numbers were actually heartening, despite the widening.  Both exports and imports rose, which is what should happen when the economy is strong and the rest of the world is growing.  On the export side, the soybean farmers were back in the market, as sales surged.  But that could change quickly if the tariffs are imposed.  Energy exports were also up.  On the other hand, aircraft exports cratered. As for imports, higher prices and growing demand led to a rise in demand petroleum-related productsIndeed, imports of just about everything else rose, the major exceptions being cell phones and televisions. 

Jobless claims remained slightly elevated, but there are few signs the labor market is weakening.    MARKETS AND FED POLICY IMPLICATIONS:The latest research makes it clear that consumers are paying the cost of the tariffs.  But the volume of goods being taxed is small given the size of the economy, so there is little pressure on prices.  That is likely to be the case if the tariffs in Chinese products are raised.  But the threats, their imposition, their relaxation, new threats and on and on just makes it impossible to determine where the trade deficit is going.  Clearly, given sufficient lead-time, firms will expand imports in the months before the tariffs are imposed and lower them afterward.  Just the threats change patterns.  With companies now making decisions on what to order for the holiday shopping season, the uncertainty over when and how much to order is heightened. If new tariffs do come on, as is likely to be the case, then firms could hesitate importing goods, hoping that the tariffs will be rescinded.  On the export side, the Chinese will be true to their word and respond in kind. I suspect the farmers are not a very happy bunch.  Since trade flows have been modified by politics, it is necessary to look at growth excluding this crucial sector.Trade added one full percentage point to growth and could add nothing or even subtract from growth this quarter.   That could help create an artificially low growth rate in the second quarter, just as it created an artificially high number in the second quarter.  As for inflation, there is no reason to think it will accelerate or decelerate, which is good news for the Fed.  Finally, while today’s data are important, the trade threats matter and until some of the fog of trade war lifts, uncertainty will likely drive investment decisions.  And that is rarely good for the markets.

March Job Openings (JOLTS report)

KEY DATA: Openings: +346,000; Separations: -142,000; Quits: -38,000

IN A NUTSHELL:  “Job openings are near record highs despite limited layoffs and quits.”

WHAT IT MEANS:  Is the labor market tight?  You bet.  Job openings surged in March and are once again nearing the record high reached in January.  All of those new vacancies were in the private sector as the public sector openings declined.  The need for additional workers rose sharply in transportation and warehousing, health care, restaurants and real estate.  With demand increasing, firms continue to hold onto their workers as tightly as possible.  Layoffs dropped like a rock, as it makes little sense to cut workers if you cannot find replacements.  I guess anyone, almost regardless of the issues, is better than no one.  But to me the most impressive data in this report were the quit numbers.  You would think that in this sellers market, workers would be moving around like crazy.  That just doesn’t seem to be the case as the number of people quitting declined. 

In a separate report, CoreLogic indicated that home prices rose moderately in March, but the increase over the year continued to decelerate.  There are few metro areas where housing price increases are either accelerating or even high.

MARKETS AND FED POLICY IMPLICATIONS:  You have to hand it to the business community:  Despite being on the wrong side of the tight labor market, firms are managing to keep from a major bidding war for workers and are still not losing workers to competitors.  Yes, compensation is rising decently, but it is no longer accelerating.  At the same time, companies are squeezing out more output per worker.  This rise in productivity has kept labor costs down and earnings up.  All of this is happening in a world where information flows freely and quickly.  Workers know about openings yet they appear to be either reluctant to apply for them or unwilling to accept those offers. For the Fed, that has to be worrisome.  Inflation has moved back below target even as labor markets are tightening further.  What happens if the economy softens or even worse, falls into recession and the wage gains disappear?  One would think that the Fed should lower rates under these circumstances, but that would not make sense.  First of all, the economy is not weak and it is not clear that lower rates would actually improve growth.  Mortgage rates are extraordinarily low and it is housing supply that is the problem.  Businesses investment hasn’t surged even after a tax cut that almost paid firms to invest.  So cutting rates is not likely to accelerate growth significantly. But it would put the Fed in a bind if the economy faltered.  There are already few arrows in the Fed’s interest rate quiver and lowering rates would empty it further.  Also, the impact of lowering rates is not linear.  Does anyone really believe that going from one percent to zero would do anything, especially if the need to hit bottom occurs when the economy is collapsing?  Fed Chair Powell repeated that interest rate policy is the Fed’s main tool and lowering rates now would limit that tool greatly.  What the Fed needs is more inflation, but it is largely powerless to accomplish that goal.  To use a phrase that former President George H.W. Bush liked to use, the Fed is in “deep doo doo”.

April Employment Report and NonManufacturing Activity

KEY DATA: Payrolls: +263,000; Private: +236,000; Unemployment Rate: 3.6% (down 0.2 percentage point); Hourly Wages: +0.2%/ ISM (NonMan.): -0.6 point; Orders: -0.9 point

IN A NUTSHELL:  “With job growth strong and the unemployment rate barely measureable, it is hard to see why the Fed would even consider lowering rates.”

WHAT IT MEANS: If the Fed were to cut rates, it would have to see weakness in the labor market.  Well, forget that.  Job gains in April came in well above expectations.  Yes, the headline number was hyped by a surge in local government hiring, which is not likely to last.  But the gains in the private sector were also robust.  Health care, social services, restaurants, construction and employment services added new workers like crazy.  On the negative side, retail keeps thinning its payrolls and utility employment faded.  Otherwise, there were few areas where firms cut workers.  There was one really odd number in the report.  Building and swelling services added almost 21,000 employees, a nearly 1% rise in just one month.  That seems way out of line.  But even excluding that likely aberration, the hiring pace was still strong.  

As for the household side of the report, the unemployment rate dropped to its lowest level since December 1969, near the peak of the Viet Nam War when draft rates sliced the labor force dramatically.  But while the number unemployed fell, so did the labor force, which inflated the decline in the unemployment rate.  The labor force numbers bounce around like crazy, so don’t make too much of that drop or the decline in the labor force participation rate.  Despite the strong demand for workers and the low unemployment rate, wages rose moderately over the month and the increase over the year continued to decelerate modestly.

The strong labor market is keeping the economy going, but the less than stellar income gains are keeping it from accelerating.  We could see that in the Institute for Supply Management’s April report on nonmanufacturing activity.  The overall index eased and the details were mixed.  Activity did expand faster, but order growth moderated and so did hiring.  In addition, orders books filled more slowly.  Basically, this report, when coupled with the manufacturing sector numbers, points to an economy that is growing decently but is not shifting into the next gear.

MARKETS AND FED POLICY IMPLICATIONS:  So much for a faltering economy that requires a kick-start from the Fed.  The labor market is in great shape yet wage inflation is not becoming a major threat.  We can thank the solid gains in productivity for that.  The high level of payroll increases has surprised myself and most other economist but there may be some special factors at work.  The monthly number is a net number.  It takes all additions to payrolls and nets out all reductions, which includes layoffs, company closures and, here is a key, retirements.  Baby-boomers are staying in the workforce longer and the labor force participation rate for those over 65 is rising not falling.  Thus, the willingness to continue working is easing the pressure on firms to find new workers, which indeed are in short demand.  That is the equivalent of reducing the “reductions” portion of the calculation, raising payroll gains.  That may sound somewhat wonky, but it makes sense, at least to me.  It would be awfully hard for the Fed to explain a rate cut given the strong job market. So forget that.  Indeed, this report argues more for a continuation of the normalization process than a reversal of it.  But to raise rates, the Fed would have to see an inflation rate well above target for an extended period.  So a hike is likely off the table for quite a while as well.  As for investors, strong labor markets should buoy expectations that earnings can hold up, even if the Fed is not likely to start mainlining liquidity into the markets’ veins once again. 

First Quarter Productivity, April Layoff Notices and Weekly Jobless Claims

KEY DATA: Productivity: +3.6%; Over-Year: 2.4%; Labor Costs: -0.9%; Over-Year: 0.1%/ Layoffs: 40,023/ Claims: Unchanged

IN A NUTSHELL:  “The rebound in productivity is restraining labor costs and keeping inflation in check.”

WHAT IT MEANS: With wages rising, it has been unclear why inflation remains tame.  One logical explanation is the rapid increase in productivity.  The growth in the first quarter was the strongest in over four years and over the year, it was the best in nearly nine years.  Output was up sharply while hours worked rose only modestly.  The improved production of workers more than offset the moderate gain in wages.  Indeed, wage increases have been decelerating for the past year and a half, even as productivity was accelerating.  So much for the theory that rising productivity leads to improved wage gains. 

Challenger, Gray and Christmas reported that layoff notices in April were up sharply (9%) from the previous April.  So far this year, plans to cut workers have increased by thirty one percent.  The industrial goods sector notices have soared this year, while retail, which is still cutting people like crazy, is doing so at a much slower pace than in 2018.

Jobless claims remained at a really low, but no longer record low level, last week. The new claims numbers still point to a tight labor market. 

MARKETS AND FED POLICY IMPLICATIONS:  The Fed noted yesterday that inflation was running below target but chalked it up to transitory factors.  That may be true, but fears that inflation may surge are unrealistic unless the improvement in worker productivity fades.  Businesses are managing to pass through only part of the productivity increases to workers, which is allowing them to keep profits rising and prices down.  While firms have some wiggle room to continue raising wages, that will be the case only if productivity remains strong.  If it starts easing back toward the longer-term trend, pressures on earnings and/or prices will rise.  But until that happens, the Fed will have to contend with inflation that is at best, fairly close to its target and I suspect the members would not mind seeing it run hot for a while.  Indeed, I suspect that one factor they believe is “transitory” is the unusually high level of productivity growth.  If that is the case, I would have to agree that it is more likely productivity will moderate than remain at current levels.  Thus, investors will likely have to wait quite a while before they see a rate cut. I don’t expect any easing in policy unless the economy fades significantly, which might not come until next year – or later. 

April 30-May 1, 2019 FOMC Meeting

In a Nutshell:  The decline in core inflation is due to “transient” factors. – Fed Chair Jerome Powell

Decision: Fed funds rate target range remains at 2.25% to 2.50%.

With the president ramping up pressure on the Fed to lower rates, today’s FOMC statement and press conference took on even greater importance than usual.  Would the Fed signal that its next move would be down?  Or, would it stand its ground?  Well, the answer depends upon whether you looked at the statement issued after the meeting or listened to the Fed Chair’s comments at the press conference. 

The statement seemed to lean toward a possible rate cut.  Indeed, the members noted that “… overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.”  That seemed to signal that the Fed was worried about inflation decelerating and the logical conclusion was that it was biased toward the next move being an easing.

But then there was the press conference.  Multiple times, Fed Chair Powell stated that the decline in inflation was likely due to transient or transitory factors.  That insistence on playing down the easing in inflationary pressures makes it clear that at least for now, the Fed is very comfortable with its wait and see data dependency approach.  Thus, there is little reason to believe the Fed will be cutting rates soon or even if the next move is down. 

The markets got whipsawed by the Fed’s poor communication of its view on inflation.  First they reacted as if rates were going down and then they backed it all out and even some more. 

The Fed is walking a difficult line given the president’s insistence on trying to politicize monetary policy.  Nothing less than the credibility of the Fed is at stake, and I am not overstating that.  Mr. Powell blew it when he caved to the markets in December.  The economy was never as bad as investors thought yet he behaved as if it was.  So, we know the markets can push him around.  If the president can also bully him, the concept of an independent Fed will be damaged. 

For now, Chair Powell has regained the high ground.  But he faces real risks. He make clear in an answer to a question that political issues are not part of the policy discussions, but every member knows what is going on. It could be difficult to cut rates without strong evidence that either the economy is faltering or inflation is collapsing. If the Fed waits too long to do so because it doesn’t want to appear to be appeasing the president, the economy would suffer. To the extent that is now a possibility, harm has already been done to the Fed.

(The next FOMC meeting is June 18-19, 2019.) 

April Manufacturing Activity, Private Sector Jobs and March Construction Spending.

KEY DATA: ISM (Manufacturing): -2.5 points; Orders: -5.7 points; Employment: -5.1 points/ ADP Jobs: +275,000/ Construction: -0.9%

IN A NUTSHELL:  “The slowing manufacturing sector needs to be watched carefully as income gains are not strong enough to support solid growth.”

WHAT IT MEANS:  Today we get a Fed decision on rates and a press conference, while on Friday, the April jobs report will be released.  So, should we be concerned with the days data dump?  Yes!  First, the Institute for Supply Management reported that manufacturing growth moderated in April.  The overall index was the lowest in over two years and there were sharp declines in the growth of new orders and in hiring.  The good number in the report was backlogs, which continued to expand.  The filling of order books should mean that production would remain solid.  Basically, this report says that while manufacturing continues to expand, the pace is slowing and that may a signal that so is the economy.

We normally look to the ADP estimate of job gains for some guidance on the government’s employment report.  However, this month, that is not the case.  The reason is that the chemist, I mean economist behind the estimate indicated there were several factors that may have led to an overstating of the gain.  Being an economic data chemist myself, I get it.  Sometimes, the models don’t work quite right and you either use judgment and adjust the data or go with the results.  He went with the results and that is fine since he did qualify the numbers.  That said, the report was huge, led by an enormous rise in construction payrolls.  Leisure and hospitality also hired like crazy as did firms in the education and health and professional and business sectors.  All sizes of business added workers solidly, but mid-sized firms went all out.  In any event, let’s just wait and see what comes out Friday.  My number is in the 165,000 range.

Construction hit a rough spot in March as activity fell.  There were almost no major sectors that posted gains as private and government, residential and nonresidential spending were all off from February levels.  Weather is always a wild card when it comes to construction, so again, let’s wait and see before getting too concerned.  Still, this is another sector that must be watched.    MARKETS AND FED POLICY IMPLICATIONS:The Fed is likely to continue to take a “wait and see, data will drive our decisions” stance when the statement is released.  Chair Powell will try to be as neutral as possible in his press conference and in reality, he has good reason to be so.  The strong first quarter growth number was largely puff as the two key sectors, household and business spending, were soft.  Inflation has faded and is running below target.So, there is no reason to threaten to hike rates anytime soon.  At the same time, it is hard to argue that the economy needs a boost, so cutting rates makes absolutely no sense.  Therefore, don’t expect the Fed to move the markets in any direction.  That may not make the president happy, but it is not the job of the Fed to do the president’s bidding.  As for investors, they should like what the Fed says, but they will also watch the earnings numbers carefully.  It looks like profits have been good, while the economy is remains solid, so that there is no reason to think we are in for a major period of market volatility.  Of course, if the trade talks with China fall apart, all bets are off.  Don’t rule that out as improving Chinese economic data mean they have less reason to cave to U.S. demands. 

1st Quarter Employment Costs, April Consumer Confidence and Pending Home Sales and February Home Prices

KEY DATA: ECI (Over-Year): +2.8%; Wages: +2.9%/ Confidence: +5 points/ Pending Sales: +3.8%/ Home Prices (Over-Year): +4%

IN A NUTSHELL:  “Confidence is strong, labor costs are relatively restrained and the housing market is stabilizing, so what is the Fed worried about?”

WHAT IT MEANS:  Is the economic lull now null?  I think that is a fair thing to say.  First quarter growth was okay, even given the softness in consumer and business spending.  With job gains also decent and labor market tight, there is every reason to expect that worker compensation costs would accelerate.  We are even seeing firms announce future increases in wages to maybe even as much as $20 per hour in the future.  But happy days for workers is not here yet.  The Employment Cost Index, which includes both wages and benefits, rose at a moderate pace in the first quarter and the gain over the year actually decelerated.  That was true for both wages and benefits and for most industries and occupations. There were some exceptions in those industries that are suffering from extreme labor problems, such as transportation, warehousing and hospitality, but there were not many others.  Basically, there may be labor shortages, but firms are not trying to attract workers by raising compensation significantly.

The lack of sharp increases in wages is not depressing households.  The Conference Board’s Consumer Confidence Index rose solidly in April and the details were even better.  Jobs were more plentiful, the current economy was better and the outlook for growth and income improved.  The index is below its peak, but it is still at a high level, indicating the slowdown in spending we saw early in the year should dissipate.

As for the housing market, things there may be improving – at least a little.  Pending home sales jumped in April.  Demand in the West surged, was up solidly in the South and Midwest but eased in the Northeast.  Still, the index is off from the levels posted in the first half of 2018, so we may not see a huge rebound in sales. 

One aspect of the housing market that doesn’t appear to be changing is the slowdown in price gains.  The Case Shiller index posted a moderate increase from February 2018, but the year-over-year rise continued to decelerate.  We are even starting to see some weakness in San Francisco – yikes.  In the past year, the increase in the Bay Area was the second slowest of the twenty large areas in the index.  Only San Diego posted a smaller gain.  The sharp rise in prices in so many areas has priced people out of the market and coupled with the lack of inventory, helped create the softening in sales.  Thus, an easing back in housing price gains can only be good for the market. 

MARKETS AND FED POLICY IMPLICATIONS:  Friday we get the April jobs report and it should be good, though maybe not great.  Regardless, with growth decent, the labor market tight and housing at least stabilizing, the Fed members, who are starting their two day meeting today, should have little to complain about.  Yet there is a concern.  Inflation is actually decelerating and is back below the target.  As long as that is the case, the Fed can hide behind the lack of inflation to support their do nothing policy.  I suspect that will be the argument when the statement is released early tomorrow afternoon and Chair Powell holds his press conference afterward.  As for the markets, earnings are driving decisions and they have tended to be good, with the usual random misses.  The economic data are not arguing investors should be greatly worried.

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