KEY DATA: CPI: -0.2%; Excluding Food and Energy: +0.3%/ Starts: +5.2%; Permits: -3.1%/ IP: -0.5%; Manufacturing +0.2%

IN A NUTSHELL: “With the manufacturing and housing sectors improving and inflation on the rise, the Fed could easily signal that rate hikes are coming, possibly sooner than most think.”

WHAT IT MEANS: It was a good day for the U.S. economic data, at least if you like growth and a continued pick up in inflation. Consumer prices fell in February. So what else is new? Well, how about the broadening of price pressures outside the energy sector? Excluding energy, prices rose solidly. The core, which also excludes food, rose by the fastest pace in nearly four years. Looking at the details, there were few categories where prices actually declined. While it was good to see that cookie prices were down, that was offset by a rise in donut costs. Oh, well. There was one major outlier that may have artificially upped the price increase: Apparel prices surged 1.6%. That makes no sense at all since most of our clothes are imported and I don’t see that kind of increase in the import price data.

On the housing front, builders look like they are getting those shovels back into the ground. Housing starts jumped in February despite a massive, likely snow-induced, 50% drop in the Northeast. The Midwest, South and West were all up solidly. There were also increases in both the single-family and multi-family segments of the market. Looking forward, permit requests did fall. However, they had been running well ahead of starts. Even after the February decline, the three-month average for permits is still above the average for construction, so I don’t look at the drop as indicating a future slowdown in activity.

Industrial production fell sharply in February. Not to worry as utility output was down big-time. That’s weather. Meanwhile, manufacturing output increased decently, adding to a strong gain posted in January. The industrial heartland is coming back and is no longer the weakest link.

 MARKETS AND FED POLICY IMPLICATIONS: While yesterday’s data came down on the side of the Fed taking the cautious route at its meeting, today’s numbers, especially the inflation report, is a warning that the days of no price pressures are behind us. The FOMC cannot slough off the idea that inflation is not an issue, despite the headline declines in the reports. There is a broadening in the price pressures and while it is not high yet, it is no longer below the Fed’s target, when you remove energy. Because of the recent drop in petroleum prices, it may take until the fall before the year-over-year energy price decline is largely wiped out. But when that happens, the overall index will also exceed the Fed’s target and the Fed members have to start planning now for that eventuality. With the Fed’s statement and Janet Yellen’s press conference coming soon, investors are likely to remain cautious. But while the Fed is likely to keep rates steady, I think the members are willing to hint that rates could be going up. Investors may not be fully prepared for that.

KEY DATA: Sales: -0.2%; Gasoline: -4.4%; “Control”: 0%/ PPI: -0.2%; Finished Consumer Goods less Food and Energy: +0.3%; Services: 0%

IN A NUTSHELL: “As the latest FOMC meeting starts, the members are faced with a consumer that is far from exuberant and prices that are well contained.”

WHAT IT MEANS: The Fed members are meeting to figure out what to do next, if anything, and today’s numbers are no help. Not surprisingly, retail sales fell in February. Lower gasoline prices and a modest decline in vehicle sales were major factors in the drop. But there were also declines in furniture, electronics and appliances, department stores and supermarkets. We even bought less online. The only strong areas were clothing, building supplies and restaurants. Eating out is once again in. So-called “control group” sales, which exclude autos, gasoline, building materials and food services, were flat. Since this measure best mirrors the GDP consumption number, it points to less than stellar household spending this quarter, especially since last month’s control group gains was revised downward sharply.

On the inflation front, wholesale prices declined, as usual. With another sharp drop in energy costs, a fall in overall producer costs was a given. Most other areas were also tame. There was no rise in services costs, which had been driving the index. However, prices of finished consumer goods excluding food and energy continue to increase faster than any other category, indicating pressure on household prices may be building. Looking down the road, the pipeline appears to be largely empty. Intermediate and unprocessed goods prices were also largely down over the month.

One other number was released today and it was a good one. The New York Fed’s Empire State manufacturing index rose sharply. What it now shows is that instead of declining dramatically, the New York manufacturing sector is starting to increase, though modestly. Orders are picking up and expectations are rising. Hiring, however, has remains stunted.

 MARKETS AND FED POLICY IMPLICATIONS: Well, if you don’t like the economic data, wait a month and they will be revised. That is what happened with the retail sales numbers, which is a warning to the Fed. What you see today may not be what you see not too far down the road. The FOMC made that mistake in September, when it saw all sorts of weakness around the world and stepped back from hiking. That was also the case in January, when the Committee was again worried about the world and commodity prices. One constant, whether the Fed members wanted to accept it or not, was that the U.S. economy was in good shape. It is, but is it in as good a shape as we thought when the data told us consumers were spending this quarter? The retail sales report will only make it more difficult for those on the Fed who want to resume the tightening process. That said, with incomes rising and job growth strong, the prospects are for households to spend on things other than vehicles, both new and used. All those new vehicle loans – and the resultant monthly payments – are sapping consumer buying capacity. Still, household spending is disappointing and that could temper the statement that the Committee issues as well as Chair Yellen’s comments at tomorrow’s press conference.

KEY DATA: Spending: +0.5%; Income: +0.5%: Prices: +0.1%/ Confidence: -0.3%/ GDP: +1% (Up from 0.7%)

IN A NUTSHELL: “With consumers spending, incomes growing and confidence stable, it is hard to understand why we are seeing all those stories about a recession on the horizon.”

WHAT IT MEANS: “The recession is coming, the recession is coming” – Really? While I may look a little like Alfred E. Neuman (not really), I don’t go around saying: “What me worry?” I do worry when there are good reasons to worry. That is not right now. It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust. Wages and salaries are on the rise, which is what we would expect from the tight labor markets. Consumers may be spending, but the rise in incomes has been enough to keep the savings rate constant. On the inflation front, while the overall increase was not significant, a lot of that was from commodities. The cost of services, which is nearly two-thirds of consumption, continues to accelerate. The year-over-year increase in the Fed’s favorite inflation measure, the Personal Consumption Expenditure price index, was the highest in over a year. Excluding food and energy, the index was up the fastest in three years. We may still be below the Fed’s inflation target, but the target can now be seen by the eye, not just on radar.

Another reason to be optimistic is that consumer confidence is not crashing, despite the mayhem in the markets. The University of Michigan’s February reading of Consumer Sentiment did tick down, but the decline was not nearly as much as might be expected given the stock market declines. The concerns did show up in expectations, which fell sharply.

The government revised fourth quarter GDP growth up a bit. A small decline was expected, so the modestly faster growth pace was a nice surprise. The revisions were minor in most categories and don’t alter the perception that the economy eased at the end of last year.

MARKETS AND FED POLICY IMPLICATIONS: The long awaited rise in wages and salaries is starting to show up. Now, we shouldn’t expect the sharp January increase to be repeated as some of the gain came from first of the year raises. But with jobless claims low and job openings high, it is likely that the wage acceleration that has been occurring for the past three years should continue this year. With incomes rising and financial conditions improving, there is every reason to believe households will continue opening their wallets. This report provides more ammunition for those at the Fed who say that market volatility should be watched but should not be the determinate of policy. It’s the economy and inflation that matter. Growth is rebounding, inflation is picking up and stocks have recovered about half the loss posted this year. In other words, conditions are moving back toward supporting a rate hike.    

KEY DATA: Durables: +4.9%; Excluding Aircraft: 1.7%; Capital Spending: 3.9%/ Claims: +10,000

IN A NUTSHELL: “The broadly based rise in demand for big-ticket items is a sign that manufacturing sector is starting to stabilize.”

WHAT IT MEANS: The weakest link may still be the weakest link, but it may not be that weak anymore. The manufacturing sector, battered by the rising dollar and the collapse in oil prices, has faltered recently. However, given the surge in durable goods orders in January, the problems are starting to disappear. Yes, the wildly volatile aircraft sector accounted for about two-thirds of the gain, but demand for private and defense airplanes was not the only source of strength. Machinery, electrical equipment, computers, communications equipment, motor vehicles and metals were all up solidly. As for business capital spending, there was a strong rebound there as well. One month doesn’t constitute a trend, but maybe the oil complex cut backs are easing and demand in the rest of the economy will start showing through. Though orders were strong, so were shipments, which led to a modest rise in backlogs. Order books need to fill faster if production is to accelerate.

On the labor market front, jobless claims rose solidly last week, but that is hardly a concern. The previous week’s level was extremely low, so we just got back to very low levels of claims. The data are consistent with a solid rise in payrolls in February.

MARKETS AND FED POLICY IMPLICATIONS: So, what should we make of the economy? If the weak is no longer that weak, and the strong, which is the labor market, remains strong, then I think it is fair to say the economy is in good shape. But investors don’t seem to care that much about the economic data. If oil prices fall, so do stock prices. If oil prices rise, so do stock prices. So, maybe we should just forget the economy. Not. Ultimately, the umbilical cord binding stock and oil prices together will be cut and economic fundamentals will once again matter. Will the markets rebound at that point? It really depends upon which stocks you are looking at. Domestic firms should do just fine. However, international firms have to worry about the dollar and growth in the countries where they do business. The dollar has stabilized, at least when you look at the indices, so executives will have to come up with other excuses if their earnings don’t do as well as investors thought they should. Regardless, the Fed will not place huge importance on foreign earnings, and therefore the stock prices of international companies, unless the markets crash and burn. It is still the U.S. economy that is job one. Friday we get January incomes, spending and the all-important Personal Consumption Expenditure index. Other inflation measures have been moving up and if the PCE follows, that would be another reason to think the Fed members will start talking about future rate increases.

KEY DATA: Sales: -9.2%; West: -32.1%; Median Prices: -4.5%

IN A NUTSHELL: “Every once in a while you get a really weird number and the huge decline in new home sales in the West perfectly fits that description.”

WHAT IT MEANS: Yesterday, we saw that existing home sales eked out a small increase in January. Of course, many were expecting a decline, so the rise was a pleasant surprise. The only part of the country where sales were off was the West and the drop was fairly modest. Today, the new home sales numbers were released and once again, demand was off in the West. However, the decline was eight times as great for new home sales than existing home sales. So what happened? I don’t know, so if you do, please fill me in! Huge ups and downs in the numbers happen periodically and what you have to do is simply grin and bear it. Meanwhile, sales were pretty much flat in the rest of the country, with the Northeast and South showing gains while the Midwest was off. As for home prices, the median value was down over the year for the second consecutive month and third out of the last four. That is opposite of what is happening in the existing home market, where prices remain quite firm. There appears to be a shift to somewhat lower-priced new homes. The percentage of sales in the less than $200,000 range rose from 19% in January 2015 to 23% this year.

MARKETS AND FED POLICY IMPLICATIONS: So, what is the condition of the housing market? Given the inexplicably large drop in the West, I would have to guess that conditions remain solid. The number of homes under construction is rising and it is doubtful that builders would spend the money moving dirt and putting up structures if traffic and expected sales were not holding up. I am assuming housing has not faltered, which is important given that consumer confidence is easing, probably in reaction to the problems in the stock markets. With investors marching to the beat of oil prices, rather than economic fundamentals, the volatility is likely to continue. But while some may believe the markets are the be-all, end-all of economic indicators, Fed members don’t necessarily think that way. Yesterday, Fed Vice Chair Stanley Fischer said: “If the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years–including in the second half of 2011–that have left little visible imprint on the economy, and it is still early to judge the ramifications of the increased market volatility of the first seven weeks of 2016.” In other words, the markets forecast upcoming recessions almost as well as economists. Actually, we do a little better, but that is not the point. Focusing on the equity markets may not provide a lot of knowledge about the economy. As I’ve pointed out before, a decline in one sector, such as oil, that has long-term positive offsets, or a rise in the dollar that simply reduces earnings translation should not matter greatly when talking about the domestic economy. The FOMC meets in three weeks and the members have been quiet enough about the next move to take the March meeting off the table. But if it is the economy, not the markets, that is driving Fed decisions, we need to watch the economic data, not the S&P 500. Before the April 26-27 meeting, two employment and inflation reports will be released. We also should have a good idea about first quarter GDP, which comes out on April 28^th. Don’t count out a move in April just yet.

KEY DATA: CPI: 0%; Year-over-Year: +1.4%; Excluding Energy: +0.3%; Year-over-Year: +2%/ Real Hourly Earnings: +0.4%; Real Weekly Earnings: 0.7%

IN A NUTSHELL: “Inflation may not be high, but it is clearly rising, and that is something the Fed will be watching closely.”

WHAT IT MEANS: Energy has dominated the discussion as the large declines brought smiles to consumers’ faces but frowns to investors. But energy comprises less than 7% of the consumer costs. What happens to the prices of the rest of the goods we buy is more important, unless you think oil prices can keep falling 40%. Eventually, we approach zero, as in zero U.S. fracking companies. I don’t think we get there, so I will focus on the non-energy consumer costs. Here, we are seeing price increases starting to accelerate. The January headline Consumer Price Index number, which was flat, totally misrepresents the report – as usual. For the first time in a very long time, every component except energy was either flat or up. Food costs were the one flat number, largely because the egg price surge is being unwound. Otherwise, food costs are also starting to increase, especially cakes, cupcakes and cookies. And if you eat out, well you are paying more as well. Prices of medical care, clothing, vehicles, transportation and shelter were all up solidly. Services, which are nearly two-thirds of consumer spending, continue to rise at a strong pace. Even commodities, when you exclude energy, are up. In other words, inflation pressures are starting to build across the economy.

Low inflation has saved workers, whose incomes have risen modestly. Bgs and weekly earnings rose solidly in January, even when adjusted for inflation. The tight labor market, which the declining unemployment claims show is tightening further, is finally translating into better wage gains. That bodes well for future consumer spending but should put additional pressures on prices.  

MARKETS AND FED POLICY IMPLICATIONS: While investors watch oil and react in a lock-step manner, following energy costs up and down, inflation continues to move back toward normal. At the end of last year, I warned that inflation could break the Fed’s target rate by spring. That forecast assumed energy prices would be largely stable, which it turns out was a pretty poor assumption. That said, headline inflation is accelerating and excluding energy (my preferred measure) or excluding food and energy, price gains are at or above the Fed’s target. Yesterday, we saw that producer prices are beginning to rise and while the pathway from wholesale to retail is hardly direct, the messages being sent is that the inflation is not something that will keep the Fed from tightening. However, the Fed needs to delink itself from the quarter-to-quarter insanity in the equity markets. A strong dollar that lowers earnings is irrelevant unless there is a major impact on exports. What about oil? There is nothing the Fed can or should do about the price of oil. It is being driven by supply and we all know, supply-side economics should be left to run its own course. As for the manufacturing recession, the sharp January production increase hints it may be modest or even over. Meanwhile, wage pressures are building, inflation is slowly accelerating and growth should be quite solid this quarter.  Maybe the nattering know-nothings of negativity who fret about falling stock prices and claim that the Fed’s quarter point increase killed growth think the world revolves around stocks, but the Fed shouldn’t. The economy is evolving as the Fed members thought it would when they raised rates in December and there is little reason to believe that rate hikes will stop with that one move.

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.