KEY DATA: Sales: -7.1%; Year-over-Year: +2.2%; Prices (Year-over-Year): +4.4%

IN A NUTSHELL: “The volatility in the housing market continues, though the sharp decline in February is something to watch.”

WHAT IT MEANS: With the Fed on hold, or whatever, data move back into the spotlight and this week it is largely about housing. The first number up was the National Association of Realtors’ existing home sales report for February. It was ugly. Sales fell sharply and it wasn’t just due to some weather issues. Demand was off across the nation, though the Northeast and Midwest led the way with double-digit declines. One of the biggest problems holding back the market is supply. While the number of homes on the market rose a touch, inventory, as measured by the number of months of supply given the sales pace, was a meager 4.4 months. A more normal, vibrant market would have something close to six months of supply. Without the product to sell, it is hard to sell homes and that is a factor to consider when determining the meaning of this report. The lack of supply has driven up prices, but the year-over-year gains have also bounced around due to the unevenness in sales across price levels.

The Chicago Fed’s National Activity Index was also released today and it showed the economy slowed in February. This index also has been quite volatile, but has remained in a range that indicates the economy is growing, but not at any great pace.

MARKETS AND FED POLICY IMPLICATIONS: Housing has been trending upward and that is still the case, but the key word is “trending”. Some months are strong, some are weak and it is important not to jump to any conclusions based on just one report, especially given the issues with inventory. The consumer is spending money and we saw that with a recent report that said retail sector profits went up solidly during the fourth quarter. And that spending should spill over into housing. With job gains strong and the labor market tightening, wage gains are holding up and coupled with the continued low mortgage rates, there is every reason to think that housing sales will rise. But since you cannot buy what is not for sale, at least not usually, don’t expect sales to rise consistently. This report will probably be read as another sign of weakness, but that would be jumping to conclusions. On the other hand, and there is always another hand, this is not a report that makes anyone at the Fed worried about the cautious statement that was issued last week.

KEY DATA: Openings: +260,000; LEI: +0.1%; Phil. Fed: +15.2 points; Claims: +7,000

IN A NUTSHELL: “The economic data are firming up and while the Fed appears worried about growth, it has nothing to do with the U.S. economy.”

WHAT IT MEANS: Janet Yellen believes that the lack of wage growth is a sign there is still some slack in the labor market. There may be some truth in that observation, but there isn’t a whole lot of slack. Job openings rebounded in January after having softened at the end of last year. Interestingly, hiring, terminations and quits eased. Firms are looking for a lot more people and they are also holding onto their own workers as hard as possible. I suspect the decline in hiring was due to a lack of supply, not demand. The labor market continues to defy traditional economics, which says that if you have excess demand, prices (in this case wages) should rise. Still, there just aren’t enough people around to fill all the openings and the steady acceleration in wage gains should continue.

Adding to the view that the labor market is tight was the weekly jobless claims number. Yes it rose. However, adjusted for the size of the labor force, claims are at historic lows. In addition, the number of people continuing to collect unemployment insurance is going down and percent of those receiving aid is also at the lowest in history.

On the manufacturing front, the Philadelphia Fed’s Manufacturing Survey jumped sharply in early March. Orders went from declining modestly to rising solidly. This report reinforces the similar results seen the New York Fed’s Empire State survey that was released on Tuesday.

Looking forward, the Conference Board’s Leading Economic Index rose in February after declining the previous two months. This is another indication that whatever slowdown we had been seeing is behind us.

Fed Policy Commentary: A Day Later: Yesterday, the FOMC backed off on the number of expected rate hikes this year. Why, I really don’t know, but they did. If you look at the recent data, and the members are supposed to be data dependent, it is clear that whatever economic issues concern them, it cannot be U.S. economic weakness. Which brings me to the conclusion that there are real problems with the way the Fed is seeing things. How can you go from expecting four 2016 rate hikes in December to only two in March while the data indicate the labor market is at full employment and inflation is on the rise? Their dual mandate is close to being met. The change in expectations was not a small one: It cut this year’s projected rate increase in half! Solid job gains and the recent indications that China and Europe are not falling apart would seem to support as strong if not stronger U.S. growth this year, but the members downgraded their GDP forecast from 2.4% to 2.2%. Huh? I can understand their downward revision to overall inflation since few were expecting the subsequent huge decline in energy costs. But why was core inflation revised downward when all indications are that it is accelerating? The consensus forecast mystifies me and that raises questions about how many rate changes we will actually get. All this information was supposed to provide transparency. Instead, it seems to provide reasons to think the members have little idea what is going on.

In a Nutshell: “The Fed is more than willing to wait a little longer before making another move.”

 Rate Decision: Fed funds rate range maintained at 0.25% and 0.50%

Going into today’s FOMC meeting, there was great uncertainty about where the members stood as to when the next rate hike would happen and how many there might be this year. Well, we still are not certain about anything the Fed is going to do, but it looks like the members are willing to punt for a little bit longer.

The Committees statement was about as wishy-washy as it can get. The labor market is getting better, households are spending okay and the housing market is improving. But at the same time, business spending and the trade situation are soft. Inflation may be picking up but it is still below its target. Basically, nothing is strong, except job gains, but nothing is really weak.

In addition to the normal statement, the Fed also released the estimates of members’ forecasts for economic growth and interest rates. This occurs every other meeting. There was a downgrade to growth and inflation and a slowing in the expected rise in rates. Instead of the projected four rate hikes we saw in December, the members now think it might be more like two. Of course, the number will depend upon the course of the economy, so we can expect two rates hikes, give or take two rate hikes. I wish I was only kidding, but I am not.

The reason I am now even more uncertain about the Fed’s future course of action comes from an answer to a question posed to Fed Chair Yellen. Basically, it was put to her that the economy has pretty much met the Fed’s full employment goal (the current unemployment rate is 4.9% compared to the long run estimate of 4.8%), and inflation is moving up toward it’s 2% goal, and is only lagging because of the recent decline in oil prices. Given those facts, what would it take to get another rate hike? The answer seemed to be: “when conditions are right, the members will know it”. No, Chair Yellen didn’t say that, but that is what I took from the answer.

What is the Fed policy takeaway? The Fed seems to be willing to accept lower rates for a longer period of time and if that means higher inflation for a period of time, so be it. While I have forecast the next move to occur in April, it looks like June is the earliest that could happen. And for it to happen, core inflation would have to remain above target, overall inflation would have to move up closer to target, which implies oil prices would have to keep slowly rising, and wage gains would have accelerate. We could get all those things happening before the June 14-15 meeting, but not in the six weeks between now and the next FOMC meeting on April 26-27.

(The next FOMC meeting is April 26-27, 2016.)

KEY DATA: Payrolls: +242,000; Private Sector: +230,000; Manufacturing: -16,000; Mining: -19,000; Hourly Earnings: -0.1%; Unemployment Rate: 4.9% (Unchanged);

IN A NUTSHELL: “When the job market and the GDP numbers diverge, go with the employment numbers.”

WHAT IT MEANS: Some politicians, economists and business commentators still believe the economy is going into the tank. Well, don’t tell that to those doing the hiring in the private sector. Job gains soared in February and what made the number so impressive is that both the reeling mining and hurting manufacturing sectors cut back sharply.   Meanwhile, the services sector hired as if boom times were here. Firms may be making a commitment to workers as the number of employees coming from temporary help firms actually declined. Big increases were recorded in construction, retail trade, health care, professional services, education, finance, restaurants and hotels. In other words, we added jobs at every skill and pay level.

As for the unemployment rate, it remained at 4.9% for the second consecutive month. That was not a surprise. But with the labor force surging, the participation rate rising and the number of frustrated workers declining, worker confidence is growing that it is now possible to either find a job or find a new job. The U-6 unemployment rate, which includes every person who has a beef with the labor market for any reason, hit its lowest level since May 2008 and is where it was in the spring of 2004. The rate could be lower, but it is clearly no longer high.

The one disturbing number in the report was the decline in hourly earnings. But as I have noted before, these data have only been around for a decade and we really don’t know how the measure responds to changes in labor market conditions. There are better measures of compensation, but since investors seem to follow these numbers even though they don’t really know what they mean, I have to report them.

MARKETS AND FED POLICY IMPLICATIONS: In the fourth quarter of 2015, the economy added workers at a robust 240,000 per month pace yet GDP grew by a meek 1%. So far this quarter, job gains have averaged 207,000, also a solid gain and the consensus growth rate for the current quarter is just a little over 2%. Really, does anyone believe that businesses are hiring like crazy if the economy isn’t strong enough to require those added workers or there are real fears the economy is headed down the drain? Executives are being as conservative as possible so the strong job growth numbers point to a solid domestic economy. But that also means the economic concerns the Fed had in January have largely dissipated. The labor market is tightening, oil prices have stabilized, the equity markets are moving back up and fears of the world crashing and burning have eased. In other words, the Fed got fooled again. The members turned cautious last September when we had similar worries and then went into turtle position in January when they returned. This report allows the FOMC to send out signals that a second rate hike is coming. A good March employment report would provide all the cover the Fed needs. I think it happens in April. Janet Yellen has argued the Fed can increase rates at any meeting, not just one that has a press conference attached to it. She could prove her point after the April 26-27 meeting. That’s my guess and I am sticking to it.

KEY DATA: ISM (NonManufacturing): -0.1; Activity: +3.9; Orders: -1.0; Employment: -2.4/ Layoffs: -18%/ Claims: +6,000

IN A NUTSHELL: “With manufacturing stabilizing and the services sector still expanding, it should be clear to most that the recession fears were overblown.”

WHAT IT MEANS: The services sector has kept the economy going during manufacturing’s down period and while it is not booming along, it is still growing. The Institute for Supply Management’s NonManufacturing index eased just a touch in February, but the details didn’t confirm a major slowdown. The business activity/production index jumped, indicating firms are doing better. Yes, the new orders index eased, but orders are still increasing, just not as quickly. But there was one cautionary number. The employment index went into the red. Since most of the jobs come from services, this creates some concern that tomorrow’s job number may not live up to expectations.

Challenger, Gray and Christmas reported that layoff announcements in February were down from the January total but up from February 2015. The energy sector continues to hemorrhage positions. This is a lagging indicator, since it takes a while for layoff announcements to turn into actual job cuts. So, looking outward, the high level of announcements would seem to point to slower job gains in the months ahead. Looking backward, layoff announcements trended downward during the end of 2015 and that bodes well for the February jobs number.

Unemployment claims edged up last week but the four week moving average is still extremely low and well below the 2015 levels. This report also points to a decent payroll rise in February.

Finally, fourth quarter 2015 productivity and costs numbers were revised and came in better than expected. Of course, that is because everyone was expecting some really ugly numbers. Instead, they were just simply bad. Productivity fell “only” 2.2% instead of 3% while labor costs rose “only” 3.3% instead of 4.5%. A pick up in growth this quarter is likely to cause those numbers to change dramatically when we get the first quarter 2016 data.

MARKETS AND FED POLICY IMPLICATIONS: Most, but not all the data we have gotten in the past few weeks have been a little better than expected. Even today’s numbers surprised on the upside. That doesn’t mean the economy is booming – it is not. But growth continues and given that trend growth is maybe 2%, we are still exceeding that pace. And since we only need at most 150,000 new jobs to keep the unemployment rate going down, we should get that tomorrow as well. What I think will be key to Fed thinking is the hourly wage number. It rose sharply in January as firms came through with announced increases in minimum wages. If we get anything decent in February, it would signal that wage pressures that we see building are not temporary. That would provide the cover for the Fed to start sending out messages that their desire to raise rates further will be met, and possibly soon. Indeed, the March 16 FOMC statement and Janet Yellen’s press comments after the meeting could be more hawkish than people expect. But let’s see tomorrow’s report before we decide that rate hikes are coming.

KEY DATA: ADP: +214,000; HWOL: -162,100

IN A NUTSHELL: “It looks like the labor market is still tightening, though the softening in online want ads is a cautionary sign.”

WHAT IT MEANS: Friday we get the February employment report and with signs showing the economy is once again growing decently, the labor market is again the key factor in any future rate hikes. So, what might the jobs report look like? If the ADP estimate of private sector payroll gains is any guide, last month’s payroll increase should be a lot better than the 151,000 increase we saw in January. The ADP report showed that job increases were pretty evenly spread across all sizes of companies. They were also fairly even increases across industries. The services sector led the way, but there were a lot of new positions added in construction. The only weak link was, not surprisingly, manufacturing, which posted a decline in payrolls. Yesterday’s Institute for Supply Management’s manufacturing report showed the sector to be stabilizing, so there may not be many jobs cuts in the sector.

Whether job growth will accelerate was brought into question by the Conference Board’s February Help Wanted OnLine index, which fell sharply. The upward momentum seems to have been stunted over the past few months. Why that is happening is unclear. It could be that the economy is slowing, which seems to be the logical conclusion. The other may be that firms have not been able to fill so many of the jobs they already have open that they are cutting back on their advertising. Regardless, the softening is something to watch.

The Fed’s so-called Beige Book was released today. This contains discussions about economic activity in the nation and in each of the Fed Districts. Economic activity expanded in most districts and the labor market was decent, with wage gains strong in many areas. However, manufacturing, as we are seeing in most measures, was soft. The Fed members have done little to signal that the next rate hike is coming anytime soon, so we can be reasonably comfortable that there will not be any surprise at the end of the March 15-16 meeting.

 MARKETS AND FED POLICY IMPLICATIONS: The jobs report could be crucial in setting the tone of the FOMC’s statement in two weeks. A strong one where wage growth is solid again, could provide the cover for the members to warn that another rate hike may be in the works. I expect payrolls to increase by about 225,000. That would be enough to make the argument that the labor market is still tightening. If it were followed by an even better March report, which comes out before the April 26-27 FOMC meeting, especially if the unemployment rate falls again, then it would hard to imagine the Committee not considering a rate hike. The problems the FOMC members worried about, including declining equity markets and continued weakness in oil, seem to have dissipated. World economic weakness persists, but it is not any worse than in December when rates were increased. And it appears that investors are beginning to recognize that the reports of a recession on the horizon were not much different than the fears about Mark Twain’s death – somewhat premature. As long as oil prices remain stable or slowly increase, the equity markets should be able to accept the reality of a decent economy and higher future rates. But I never underestimate the ability of investors to react in ways that you never expect.

KEY DATA: GDP: +0.7%; 2015: +2.4%; Private Domestic Spending: +1.8%; Consumption: +2.2%; Consumer Prices: +0.1%/ ECI (Year-over-Year): +2.0%; Wages and Salaries: +2.1%; Benefits: +1.7%

IN A NUTSHELL: “The warm winter and low energy prices hurt growth at the end of last year and that helped keep inflation and worker compensation costs down.”

WHAT IT MEANS: Boy did the economy decelerate at the end of 2015. But the modest fourth quarter expansion hides some decent details. For example, consumer spending was pretty decent. Given that the warm December meant a lot lower heating bills and very little reason to buy winter-related products such as sweaters or shovels, it was actually quite good. The recent blizzard probably caused some change in spending habits, at least here in the East. For all of 2015, consumption grew at the fastest pace in a decade. A drop in business investment in structures was another place where growth was restrained. But that was likely due to the massive cut back in energy activity. Where we go from here is anyone’s guess, but the cut backs were due to supply side factors, not a decline in demand. Firms also reduced inventories. That too was expected, as there had been some artificially high increases earlier in the year. We are close to more sustainable levels now. One place where there should be continued issues is the trade deficit, which expanded and reduced growth by about 0.5 percentage point. The strong dollar and weak world growth, coupled with a decent U.S. economy, point to a further deterioration in the trade situation. Final Sales to Private Domestic Purchases, a closely watched measure that removes inventory swings, the government and trade, increased decently, another sign that conditions are hardly dour. Growth for all of last year was the same as in 2014 – good but not great. On the inflation front, there wasn’t any. Consumer prices barely budged and the only component where prices rose even moderately, was housing.

A second report released today was the Employment Cost Index, which measures total compensation cost trends. Surprisingly, it was fairly tame at the end of last year. Wages and salaries, despite all that we heard, didn’t rise very much and benefits remain well under control. Of course, any measure that says wages are declining, yes going down, in the aircraft industry has to be taken with a bit of salt.

MARKETS AND FED POLICY IMPLICATIONS: Much will be made of the tepid growth coming into this year, but as usual, the looking just at the headline number as an indicator of the state of the economy would miss the more complex underlying trend. Consumers are spending and that should hold up given the 3.2% rise in disposable income in the fourth quarter. Business investment in equipment fell, but in only one major category, transportation equipment. But that came after huge increases the previous two quarters, so some giveback was not unlikely. And the rig issue is largely unrelated to U.S. economic activity, so we cannot determine where that will go this year. Putting it all together, growth was disappointing, but we clearly shouldn’t fear a recession is imminent, or even in the cards. Instead, a return of winter and some moderation in the energy sector cut backs should allow first quarter growth to be pretty solid. What needs to change if growth is to accelerate is labor compensation. If wages keep growing modestly, it is hard to see how the economy can grow rapidly. And that would make the Fed’s job even more difficult given the below-target inflation rate.

KEY DATA: Durables: -5.1%; Ex-Transportation: -1.2%; Capital Spending: -4.3%/ Pending Sales: +0.1%/ Claims: -16,000

IN A NUTSHELL: “Once again, manufacturing has assumed the role as the weakest link.”

WHAT IT MEANS: While the economy may be growing due to decent consumer spending and a fairly solid housing market, the strong dollar, low oil prices and uncertainties overseas have combined to crater the manufacturing sector. Durable goods orders fell sharply in December, marking the fourth decline in five months. That is not a good trend. Yes, the volatile aircraft industry was off sharply, but that doesn’t tell the whole story. Just about every major category recording a drop in demand. Indeed, only electrical equipment and appliances was up. The measure that best indicates business demand for capital spending fell significantly as well. Confidence in the corporate sector has faltered with the difficulties many firms are facing in international markets. With orders slowing, order books are thinning and that is not a good sign for future production.

On the housing front, the National Association for Realtors’ Pending Home Sales Index rose minimally in December. This is a leading indicator of existing sales that should close in the following couple of months. The warm December weather brought out buyers in the Northeast but nowhere else. The index has been slowly moving downward since July and that could signal a more moderate home sales increase this year than the 6.5% rise recorded in 2015. However, the biggest impediment seems to be supply and with prices continuing to rise, we could see more homes coming on the market in 2016.

Unemployment claims fell sharply last week after having moved upward during December and early January. That rise, which has occurred before, caused some pundits to claim the labor market was weakening. Well, it is not. The less volatile 4-week moving average has not moved up significantly and remains in a range that has persisted since last spring – and when adjusted for the size of the labor force it is still near historic lows.  

MARKETS AND FED POLICY IMPLICATIONS: The Fed says it will watch and weigh all incoming data to determine when the next rate hike will occur. Today’s numbers don’t argue for anything happening right away. Tomorrow we get the first reading on fourth quarter GDP and it is likely to disappoint. So, for the Fed to have some cover to move again in March or April, we need to get better data on the economy and inflation. Tomorrow, the fourth quarter Employment Cost Index is released. If that points to accelerating labor expenses, as I suspect it will, the focus of attention could move back to the labor market. Regardless, investors are fixated on oil and it will require some outsized economic numbers to change that.

In a Nutshell: “Fed to Markets: It’s the economy, all of it, not just part of it and it’s not the financial markets.”

Rate Decision: Fed funds rate range maintained at 0.25% and 0.50%

Yes, even Central Bankers can learn their lessons. In September, the Fed seemingly backed off starting to raise rates because of financial and emerging market issues. The FOMC was blasted for taking its eye off the ball and the criticisms were well founded. Well, message received, though this time around, the financial markets were begging for the Fed to backpedal as rapidly as possible.

The statement released today kept rates stable, which no one thought was on the table anyway. But what people debated was whether the chaos in the financial markets and the uncertainty surrounding the Chinese economy would cause the FOMC to signal that a rate hike in March was off the table. In no way was that signal sent and I assume from the negative reaction in the markets, that message was received.

The statement was generally positive about the consumer, business investment and the labor market. Members continued to be concerned about inflation being below target but still believe it will “rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.” As for the rest of the world, it was not surprising that the “Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” That is, it’s a concern, but not yet a major concern.

As for future policy, about the only thing that may dissuade the members from raising rates at one of the next two meetings is a decline in inflation expectations. Inflation has been the dividing line in the discussions and though everyone voted for the statement, a deterioration in the medium term inflation outlook, which is not expected, could slow the pace of rate hikes.

To sum up, the Fed didn’t tell the markets that if they behave badly the Fed will come to the rescue. I have consistently said I expect the next rate hike to be in March and I am standing by that forecast. Nothing in today’s statement argues against that possibility.

(The next FOMC meeting is March 15-16, 2016.)

KEY DATA: Confidence: +1.8 points; Philadelphia Fed NonManufacturing Index: -21.6 points; Case-Shiller Home Prices (Year-over-Year): +5.3%

IN A NUTSHELL: “The stock market is falling and with it business confidence, but to households, it’s full speed ahead.”

WHAT IT MEANS: I remarked last week that Wall Street and Main Street were operating in parallel universes and nothing says that more than today’s data. The equity markets wild ride has hardly hurt consumer confidence. Actually, the Conference Board’s index rose nicely in January, led by a solid increase in expectations. I guess people have learned that markets go up, they go down and sometimes they just go. The days of the retail investor watching the indices and reacting look to be long gone. The details of the report also don’t show that the market volatility is having much of an impact, at least on households. Current conditions were flat and while jobs weren’t as easy to get, they didn’t get any harder to find. And respondents expect the labor market and business conditions to improve going forward.

While households are shrugging off the market changes, business owners are worried. The Philadelphia Fed’s index of nonmanufacturing activity in the region cratered in January. But when respondents were asked about their own business, they didn’t think conditions had declined very much. Sales, orders and hiring all were up, though at a slower pace than in December. But looking forward, business owners were really concerned. Expectations fell sharply. Let’s see: Current firm business conditions were largely stable, orders kept growing and hiring continued yet respondents became fearful. Hmm. That seems likes an emotional not a business conditions change reaction.

As for the housing market, The S&P/Case-Shiller national home price index rose solidly in November and the increase over the year accelerated. Using the seasonally adjusted data, every one of the twenty markets shown posted an increase in prices between October and November. There remain wide variations in price increases. Washington, Chicago and Cleveland were in the 2% range but Portland, San Francisco and Denver were up double-digits. Basically, the housing market, as measured by prices, is in good shape and the more prices rise, the more homeowners have the equity to make a move. That is good news.  

MARKETS AND FED POLICY IMPLICATIONS: Hey market commentators: It isn’t all about stock prices! If consumers are becoming more confident while stock prices fall, guess what will happen when they start rising again? Households aren’t worried about the labor market so they will continue to spend and in an economy that is two-thirds consumer based, it is hard to see how growth will slow significantly. The decline in the equity markets will not change Fed policy if the real economy, led by the consumer, keeps expanding. Fourth quarter growth was probably disappointing, but the largest part of the negative effects of the decline in oil prices has likely been felt already. How much more can investment be cut back when it was cut to the bone in 2015? Meanwhile, consumers are beginning to believe the low energy prices might be here for a while and they should start spending that windfall. Going forward, the positive effects of low energy costs will start overwhelming the diminishing negative effects and the economy should do just fine. Barring a meltdown in either China or the equity markets, don’t expect much change in the Fed’s rate hike strategy. I don’t.