Durable Goods Orders, Pending Home Sales and Weekly Jobless Claims

KEY DATA:  Durables: +3.4%; Civilian Aircraft: +390%; Ex-Aircraft: +1.1%; Capital Spending: +0.5%/ Pending Sales: -2.8%; Over-Year: +13%/Claims: -111,000

IN A NUTSHELL: “There seems to be exuberance entering into business planning as capital spending is really starting to boom.”

WHAT IT MEANS:  The massive tax cuts businesses received didn’t lead to a whole lot more investment spending and the pandemic slowed things even more.  But that is changing dramatically.  Orders for big ticket items rose solidly in January, led by a surge in both civilian and defense aircraft demand.  Boeing is starting to recover and that is showing up in the data.  But even if you remove aircraft orders, purchases of big-ticket items was still up sharply.  There was some weakness in communications equipment orders and, to a lesser extent, motor vehicles, but otherwise, the rise in demand was pretty much widespread.  The really key number, nondefense capital goods orders excluding aircraft, the proxy for business investment spending, rose strongly once again.  There was also a major upward revision to the December increase and the level of orders set its third consecutive record high.

The housing market remains robust.  Yes, the National Association of Realtors reported that pending home sales eased in January.  But the level remains extremely high, indicating that demand for houses will continue to be strong over the next few months. 

Jobless claims posted a huge decline last week, which is the good news.  Indeed, the level was one of the lowest since the pandemic shut things down.  But there are some caveats that go along with the data.  First, the level, 730,000, remains extraordinarily high.  Second, it is not clear how much the brutal weather affected new claims.  Third, the December stimulus bill, which refreshed the funding, led to a large uptick in the pandemic emergency program, which is where small business owners/gig workers apply.  As a consequence, the total number of people receiving assistance surged back over nineteen million.  Conditions are improving, but it isn’t clear how quickly.

Finally, there was a minor revision to fourth quarter GDP growth.  It is now estimated to have been 4.1%, not 4%.  There was really little new in the revisions.   

IMPLICATIONS:  Businesses have become exuberant and with the government soon to pass a new, massive stimulus bill and the Fed promising to keep the liquidity tap wide open for a really long time, there is every good reason to believe the optimism is not irrational.  The stimulus funding and asset purchases have been so large that they have overcome the negative impacts of the pandemic.  By sometime during the summer we should have wiped out all of the economic decline and GDP will have returned to where it was at the end of 2019.  That is impressive.  But that remind us that we had absolutely no growth for about eighteen months and that raises questions about the level of the equity prices.  Some argue that the relationship between U.S. GDP and the value of stocks is less relevant since much of the earnings come from overseas operations.  That may be true, but the U.S. has recovered a lot faster than other countries and is likely to have faster growth this year than much of the rest of the industrialized world.  Can we get enough earnings from U.S. operations to support the equity values?  And then there is the issue of how much longer the funding can continue at the levels we have seen?  Keynesian economics is alive and well in the U.S., as the economy is largely dependent on the free money and liquidity being provided by the federal government and the Fed.  However, even now, the Biden administration is trying to develop a mechanism to slow and ultimately end the massive flow of cash to businesses and households.  When that happens, what happens?  It may be too early to consider that issue, but it needs to be in investors’ minds as we move through the year.

January New Home Sales

KEY DATA:  Sales: +4.3%; Prices (Over-Year): +5.3%

IN A NUTSHELL: “With demand for housing so strong and supply so low, it is likely we will see housing starts rise for quite a while.”

WHAT IT MEANS: Last week, the housing starts reports indicated that construction was down in January.  But I commented that was likely to be a temporary decline as permit requests soared.  Today’s January new home sales numbers support the view that home construction should continue to support the recovery.  Demand was up solidly, with only the Northeast reporting a decline.  The level of sales moved back to the robust pace posted in the summer and early fall, when the “get me out of the city as soon as possible” movement was at its greatest.  In addition, the December number was revised upward sharply, indicating that there really was no major softening in the market.  What is remarkable is that sales are so high given that the supply of homes on the market remains at some of the lowest levels we have ever seen.  Indeed, we are pretty close to the lowest points posted during the housing bubble. 

As for home prices, they are still rising solidly.  When it comes to the median price of new homes, the change is very dependent on what segment of the market is getting the most attention from home builders.  Most of the other home price indices are rising near or at double-digits.  Yesterday, the Case-Shiller National Home Price Index report showed another surge in December and for the year, were up 10.4%.  The Federal Housing Finance Agency’s monthly purchase index rose 11.4% between December 2019 and December 2020.    IMPLICATIONS:Strong demand, a shortage of supply and rapidly rising prices is the perfect combination of factors that should convince builders that now remains a really good time to get the shovels in the ground.  Indeed, the surge in permit requests makes it clear that residential construction, which has been a key driver of the recovery, will continue to lead the way for quite a while.  About the only concern on the construction horizon is mortgage rates.They have started rising but have yet to reflect the increases in longer-term rates.  They should increase going forward, though I don’t expect any gap up in mortgage rates as the decline didn’t reflect the absurdly low levels seen last summer in the Treasury markets.  That doesn’t mean the pathway will be smooth.  There was pretty decent weather in December and January, but February has been brutal – and it wasn’t just a Texas thing.  So, don’t be surprised if the February housing numbers look ugly.  By when the spring weather kicks in, sales and starts should improve.  We also have to recognize that the December stimulus funds are showing up in household bank accounts and that should help consumer spending.  And, of course, the next stimulus bill is still on track to be passed by mid-March, which would boost consumer finances even more. As long as Uncle Sam the Candy Man keeps funding the sugar high the economy is on, growth should remain quite strong.  Assuming President Biden gets most of what he is wants in the next stimulus bill, it is hard to forecast anything but clear sailing for most if not all of this year.

January Existing Home Sales

KEY DATA:  Sales: +0.6%; 1-Family: +0.2%; Multi: 4.1%; Prices (Over-Year): +11.5%: 1-Family: 12.3%

IN A NUTSHELL: “The housing market just keeps rolling along.”

WHAT IT MEANS:  It was a quiet Friday on the economic data with only existing home sales being released.  But housing has been leading the recovery, so it is important to monitor what happens with sales and construction.  The first of the key January housing numbers indicates that there has been no softening in the market.  The National Association of Realtors reported that existing home sales improved in January, led by a solid gain in condo and coop construction.  Single-family demand increased minimally.  The overall sales level is nearly 24% above what it was in January 2020, which was before the pandemic hit.  Looking across the country, the Midwest and South were up fairly modestly while the declines in the Northeast and West were also limited.  What is most impressive about the report was that the level of demand is holding up despite the lack of homes on the market.  At the current sales pace, the supply is less than two months, which is about one-third what it should be.  As a consequence, home price gains remain in the double-digits. 

IMPLICATIONS: The December stimulus bill is beginning to resupply funds to those households and businesses who have become dependent on government funds and thus we should see some very strong income numbers next week.  But housing is a different story.  Yes, interest rates matter, but the surge in sales and prices is more a consequence of changing locational preferences.  That demand is holding up one year into the pandemic and resulting panic buying is impressive and may point to the housing market having longer legs than many expected.  The sharp rise in housing permits seems to point to builders thinking the same thing.  If starts follow permits, as it usually does, the residential market should keep leading the way.  Next week we get the January income and spending numbers and if they are as strong as expected, we could be in for a very solid first quarter growth number.  And if the third stimulus bill is anywhere near what President Biden has proposed, then the rest of the year should be solid as well.  Basically, Keynes was right: massive government spending works, at least in the short run.  And while many on Wall Street complain about budget deficits, when facing the option of significantly less stimulus and a much slower economy or enormous spending and deficits but strong growth, guess which one they will take?  And the markets reflect that attitude. 

January Housing Starts, Import and Export Prices and Weekly Jobless Claims

KEY DATA:  Starts: -6%; Permits: +10.4%/ Import Prices: +1.4%; Fuel: +7.4%; Exports: +2.5%; Farm: +6%/ Claims: +13,000

IN A NUTSHELL: “The economic data are all over the place, but the picture remains bright for the economy.”

WHAT IT MEANS: Well, it’s time for the good, news/bad news report.  So, let’s start with the mixed one.  Housing starts fell in January as a sharp drop in single-family activity overwhelmed a jump in multifamily building.  Still, the level of new construction remains really solid and the total number of homes currently being built is quite high.  But most importantly, permit requests soared and that means new homes should go up at a faster pace going forward.  The disconnect between starts and permits may be a function of weather.  January data are about as volatile as they get, since snow, cold and a bizarre polar vortex can often create havoc. 

The Fed wants inflation to pick up and it is starting to get what it wished for. Yesterday we saw that wholesale costs rose solidly and today it was reported that import prices surged.  Yes, fuel led the way and will probably keep doing so, given the cold and snow that has hit the country in February.  But even excluding fuel, the cost of foreign products still increased at a very strong pace. Food costs soared, prices of industrial supplies excluding petroleum jumped and vehicle costs edged upward.  But imported consumer goods prices eased a touch, so there may not be a significant rise in the inflation indices.  On the export side, there was similar prices power being shown and farmers benefitted the most.  Over the year, agricultural export prices are up over 9%, an impressive gain.

Weekly jobless claims rose solidly last week, but the headline gain hides one very important fact: The previous week’s number was revised upward by a huge 55,000.  Issues in the vehicle sector may have played a role as chip (computer not potato) shortages have been forcing shutdowns in assembly plants.  Thus, we could see that reversed when the problem is resolved.  Nevertheless, we have been stuck in a range between about 800,000 and 850,000 for four months now and that might not change dramatically anytime soon.  It is hard to see how the unemployment number can continue to decline when so many new workers are filing for government assistance.            IMPLICATIONS:Today’s data had some positives and some negative, but they don’t change the picture of an economy continuing to improve.  The uncertainty remains in the labor market.  Yes, the government keeps telling us that the unemployment rate is coming down and sometimes the decline is sharp, as was the case in January when it declined from 6.7% to 6.3%.  But at the same time, an enormous number of people are still filing for unemployment insurance.  It could be years before some industries get back near to where they had been before the pandemic hit and the nation’s unemployment rate is not likely to get back to the 3.5% unemployment rate we were at early last year for as long as a decade.  The pandemic created change that is real and lasting and with change comes winners and losers.  But the losers rarely can move from one industry or profession to another easily, so there will be an adjustment period that includes elevated unemployment rates.  But we are still in the recovery process, so the short-term looks pretty good.

January Retail Sales, Industrial Production, Producer Prices and February Housing Index

KEY DATA:  Sales: +5.3%; Department Stores: +23.5%: Restaurants: +6.9%; Internet: +11%/ IP: +0.9%; /Manufacturing: +1%/ PPI: +1.3%; Energy: +5.1%/ NAHB: +1 point

IN A NUTSHELL: “The economy picked up steam in January and inflation came along for the ride.”

WHAT IT MEANS:  Remember all those warnings about the economy potentially slowing starting early this year?  Well, never mind.  Retail sales exploded in January as every major component was up.  Indeed, the smallest rise was in supermarkets, which posted a “meager” 2.4% increase.  In a normal month, that would be a surge.  Furniture and electronics and appliances store sales rose double-digits and people ate out like crazy.  There were some relaxing of restrictions, so I can actually understand the restaurant rise.   But department store demand surging by over twenty percent?  Really?  I am just not sure what to make of some of these numbers. 

Industrial production rose solidly in January as the manufacturing sector continues its recovery.  That shows that the improvement is extremely broadly-based.  If it weren’t for a cut back in vehicle assemblies, the increase would have been even bigger.  And that slowing in production occurred despite a rise in sales, so look for vehicle production to bounce back once the parts situation is remedied. 

Everyone seems to be talking about inflation these days and the jump in producer costs may be a reason why.  The Producer Price Index rose sharply in January and not all of it came from increasing energy prices.  Services costs jumped almost as much as goods prices.  Just about every major and minor category posted a rise and those tended to be pretty solid.  The collapse in price brought on by the shutdowns have been wiped out and producer costs are pretty much back to rising at the same pace they were before the pandemic. 

The housing market remains rock solid.  The National Association of Home Builders’ index rose in February after having come down fairly sharply in December and January from its November peak.  Traffic picked up a touch, but future sales faded.  Still, the levels of all the sub-indices continue to be extraordinarily high.  IMPLICATIONS:The only logical explanation for the amazing retail sales numbers is that the second round of stimulus hit and was spent almost immediately.  That is possible, as some people did run out of income due to the politics in Washington.  But many may have had to reapply and that means we could see continued strong consumer purchases. The improvement in the manufacturing sector follows the rise in consumer demand and reinforces the view that as long as government funding flows freely and at a high rate, the economy can continue to recover.The December stimulus bill gets us largely through March and that is the target for the next round.  Since President Biden is intent on getting a major bill through, look for that to happen and for government money to continue to get into the hands of households and businesses.  And that raises questions about inflation: Is it going to rise (yes) and if so, what does that mean for Fed policy (not much)?  The real question facing the bond and equity markets is will inflation pressures force the Fed to make a move earlier than expected.  First of all, as I note just about every month, the pathway from producer prices is winding and usually does not end up where people think it does.  That is, except for a few categories such as food, changes in wholesale costs don’t foretell changes in consumer prices.The inflation pressures, if they arise on a sustained basis, would likely come from retailers, seeing a chance to make up for lost income, raising prices.  Forget the idea that companies will try to maximize sales by keeping prices low.  If they have a chance to increase income by pushing up prices, I expect that they will.  Over the past couple of decades, there have been few periods where firms have had pricing power, and this just might be one of them.  But Fed Chair Powell has made it clear that the Fed is willing to run hot for an extended period, which means the real questions are: What is hot and how long is extended.  My view is that if inflation remains below 3.5%, the Fed will not make a move for at least eighteen to twenty-four months. If it remains near or below 3%, the Fed doesn’t have to do anything until it nears its unemployment target.  That could take a very, very long time.  So, while longer-term rates are rising, that is not necessarily a sign of inflation fears.  Did anyone really think a 10-year note somewhere around 1% made any sense when the Fed was making it clear that they wanted to get inflation to average 2%, especially given how long inflation was below 2%?  The 10-year note is still way below where it will be once inflation gets to where the Fed wants it, so don’t be surprised if rates rise steadily for as long as the Fed is willing to run hot.That is, a long time.

January Small Business Confidence and December Job Openings

KEY DATA: NFIB: -0.9 point; Expectations: -7 points; Hiring: +5 points/ Openings: +74,000; Hiring: -396,000; Layoffs; -243,000

IN A NUTSHELL: “The small business sector has a bit of a frown on its face as conditions seem to be deteriorating.”

WHAT IT MEANS: If the small business component of the economy is the foundation upon which growth is built, then we need to be a little worried.  The National Federation of Independent Business’s January survey of small business owners was an eye-opener.  The decline in the overall index of business activity was modest, so what’s the concern?  Well, the details don’t point to a bunch of happy businesspeople.  Expectations fell like a rock and hit its lowest point since November 2013.  Sales and earnings softened.  Hiring continues, but firms still are having trouble attracting qualified workers.  But businesses are still investing, and they do have plans to hire more people in the future, if they can find them.  That said, future spending plans are limited.  Basically, this sector could use a shot in the arm (as could we all!).

The last two employment reports were not very pleasant, but that doesn’t mean the labor market is falling apart.  It has paused, however.  The Job Openings and Labor Turnover Survey, better known as the JOLTS report, was mixed in December.  Openings rose modestly, but the details were not quite as positive as the headline.  A variety of sectors posted declines, but a nearly 300,000 jump in openings in the professional and business services pushed the number into the positive zone.  While layoffs slowed, hiring plummeted, which we saw in the monthly employment survey.  Interestingly, the number of workers quitting their jobs rose solidly.  The level is climbing back closer to where it was before the pandemic hit. 

IMPLICATIONS:  The best was to summarize the situation facing the small business community is to quote the authors of the NFIB report: “January came in with a whimper”.  The softening economic situation has raised concern among business owners and will likely make them quite cautious about hiring and expansion in the near future.  Economists forecast this slowdown and amazingly, it actually happened.  No, seriously, with all the government money sloshing around, it is hard to really get a handle on what the economy will look like since spending patterns are being altered.  What is clear is the need for more stimulus.  What isn’t clear is how much.  Splitting the difference between the president’s and the Republican’s proposals would get us to about $1.25 trillion.  That should be more than enough, as long as the money is distributed to those who are actually in need.  Showering parents of children with tons of money without means testing or adjusting for family size makes little sense, but it is a politically popular approach.  Rescuing zombie businesses or supporting workers in profit-making businesses is also inefficient, but don’t tell that to the business lobby.  As for the deficit, the attitude is either it doesn’t matter or if it does and you are giving out money anyway, then just send it my way.  So, look for a bill that is large enough to keep most households and businesses afloat until the end of the year. 

January Private Sector Jobs and NonManufacturing Activity

KEY DATA:  ADP: +174,000; Manufacturing: +1,000/ ISM (NonMan.): +1 point; Orders: +3.2 points; Employment: +6.5 points

IN A NUTSHELL: “The labor market isn’t falling apart, but it isn’t booming either.”

WHAT IT MEANS:  With Congress trying to figure out what to do about the next stimulus bill, the economy will have to make do with what is already in the pipeline.  Given the bill passed in December contained over $900 billion in aid, that is a lot of help.  And it may need it.  On Friday, we get the government’s reading on January payroll gains and today we received an indication of what it might look like.  The ADP estimate of the private sector changes points to a decent, though not great job gain.  Of course, there was a decline posted in December, so up is good, at least when it comes to jobs.  Almost half of that rise was in health care, which should surprise no one given the virus surge and the vaccine rollout, as well as leisure/hospitality, which benefitted from some relaxing of restrictions.  Yes, it seems dumb to reopen when the virus is surging, but who said politicians are rational?  The strong housing market helped drive up construction hiring strongly.  The only really weak sectors were manufacturing and information, which were basically flat.  Manufacturing had been adding workers at a pretty solid pace, so any falloff there could slow overall job gains.   Looking across company size, it looks like large firms are moving cautiously on the job front, while small and medium size companies are adding workers at a moderate pace.

The service sector continues to rebound.  The Institute for Supply Management’s index of nonmanufacturing activity rose in January to a level not seen in almost two years.  That is impressive.  Of course, that is not to say the sector is booming.  This is a diffusion index and if you just stop falling, that is, move from declining to stable, the index rises.  That was the case with the rise in orders and especially hiring, where the number of firms cutting their workforces fell sharply while the share increasing payrolls was largely flat.  Nonetheless, this was a good report that points to growing strength in the services and construction components of the economy.     

IMPLICATIONS:  Today’s reports don’t really tell us much, other than the economy is still expanding.  On Friday, we get an important employment report.  Payrolls fell by 140,000 in December and it will be interesting to see the extent of the snap back.  I think it could be larger than ADP estimates.  I am closer to 300,000 than 200,000.  But I also think that we are due for a rise in the unemployment rate.  That would confuse the situation, especially if my job gain estimate, which is strong, turns out to be in the ballpark.  A strong job increase coupled with a rise in the unemployment is not what we want to see.  Regardless, given how fast the economy has rebounded from the spring collapse, a slower, but still decent growth rate is likely.  And that likelihood is what is creating some of the political differences in Washington.  One side asks if we really need a massive stimulus bill if the economy continues to expand moderately.  The other asks if we can risk not doing enough, given the pain being felt by so many households and businesses.  But the Democrats have control and a stimulus bill of some size, most likely larger than the one passed in December, could get signed into law by the end of the month.  That should cement growth for the rest of the year.  How strong it will be is uncertain, as we don’t know how much of the stimulus will go to households and businesses that don’t really need it and therefore will disappear into the abyss.  Regardless, by the end of the year, the economy could return to the level it was at before the pandemic hit.   

January Manufacturing Activity and December Construction Spending

KEY DATA:  ISM (Manufacturing): -1.8 points; Orders: -6.4 points; Employment: +0.9 point/ Construction: +1%; Private: +1.2%; Residential: +3.1%; Nonresidential: -1.7%

IN A NUTSHELL: “The unevenness in the economic expansion can be seen in the continued strength in manufacturing, while business construction keeps fading.”

WHAT IT MEANS:  The economy is in good shape, but that does not mean every component is doing well.  On the positive side, there’s manufacturing.  The Institute for Supply Management’s index of the manufacturing activity fell in January.  So, is this segment of the economy starting to fade?  Hardly.  The index level remains high.  The report noted that “Of the six biggest manufacturing industries, five … registered moderate to strong growth in January.”  Orders grew strongly, though not as robustly had they had been.  Nonetheless, backlogs built even faster and hiring picked up.  In other words, the sector kept expanding solidly, but maybe the robust growth should now be categorized as strong.

The construction sector has been the star of the economy, but that is due to the housing market.  While private residential activity soared in December, nonresidential construction spending continued the slowdown that we have seen since November 2019.  Not surprisingly, lodging led the decline, but it was not the only category to report either declines over the month or over the year.  Seven of the eleven components saw construction spending fall in December and all eleven were down when compared to the December 2019 pace.  Meanwhile, private residential activity was up almost twenty-one percent over the year. 

IMPLICATIONS:  If it’s all about the virus, actually the vaccines, then there is good news for the economy.  Two more vaccines may become available in the relative near future and that should help reduce greatly the bottleneck caused by a lack of supply and an inefficient distribution system.  I keep hearing that there is a lack of health care professionals qualified to give the shots, but that is hard to believe.  In the county I live in, none of the pharmacies listed as giving the shots are in chain pharmacies such as CVS, Walgreens or Rite Aid.  There are plenty of pharmacists trained to give shots at the chain stores as all of them offer most other common vaccinations.  The problem, it seems to me, is that the supply is so limited that it cannot be efficiently distributed to a larger number of locations.  Thus, once the supply increases, the rate of distribution should accelerate sharply.  The major question then becomes: How many people will not get vaccinated even when the supply is readily available?  And if that number is significant, what does it mean for the safety of the population? That ultimately makes a difference as to how fast the economy can return to what will be the next normal.  We are moving forward, but it will still take time to get through this, so some additional government support will be necessary.  How much we will need is unclear, but as this is likely a situation where if you have to make a mistake, you probably want to overdo it, not do too little.  Large numbers of zombie companies would fail and too many families would continue going without if the government winds up not doing enough.  But politics and economics operate in parallel universes, so who knows what kind of stimulus bill will be passed.  There is likely to be a fairly aggressive spending bill pushed through by the Democrats, and when you add in an aggressive Fed, the probability growth will falter significantly this year is low.   

4th Quarter GDP, December New Home Sales, Leading Indicators and Weekly Unemployment Claims

KEY DATA:  GDP: +4.0%; Annual: -3.5%; Consumption: +2.5%; Housing: +33.5%/ New Homes: +1.6%; Prices (Over-Year): +8%/ LEI: +0.3%/ Claims: -67,000

IN A NUTSHELL: “Economic growth is moderating, not weakening, a crucial difference.”

WHAT IT MEANS:  After expanding by a record rate in the third quarter, it was clearly not a surprise when fourth quarter growth came in way lower. But it is hard to argue that the pace was anything but strong.  When trend growth is a little over two percent, a four percent increase is really good.  For all of 2020, the economy posted its first annual negative growth rate since the Great Recession. It was also the largest annual decline in the last seventy years!  The details, though, were somewhat mixed.  Consumption expanded moderately, but the gains was entirely in the reopening of service companies.  Spending on goods was down.  Business investment was robust and the sharp rises in both equipment and intellectual property point to some improvement in productivity down the road.  There was a huge increase in housing.  Indeed, roughly one-third of the overall increase came from residential investment, a pace that is not sustainable.  On the trade front, exports surged but imports rose even more rapidly.  The widening trade deficit restrained growth even more than housing aided it.  Finally, all levels of government purchases were down.  As for inflation, it remains quite tame, with consumer prices increasing roughly 1.5% whether you included or excluded food and energy. 

New home sales rose moderately in December, but that came after a sharp decline in November.  The increase came from a robust rise in the Midwest and a solid increase in the West, but home purchases fell in the Northeast and the South.  More importantly, the level of sales has come down to something more reasonable, after having skyrocketed in the late summer and fall.  The panic buying may be coming to an end.  Prices, though, continue to surge, as the supply of homes is still quite tight.

The Conference Board’s Leading Economic Index rose moderately in December after having jumped in October and November.  That points to good growth as we move through the spring.

Initial jobless claims fell sharply last week, but let’s not think the report was anything but troubling.  The monthly level of 847,000 is indicative of a weakening not a strengthening labor market.  Even more troubling is the four-week moving average, which smooths out the ups and downs of this volatile measure, continues the slow but steady rise we have seen since it hit bottom at the end of November.   IMPLICATIONS:It is not likely that the economy can continue to expand at the strong rate we saw in the fourth quarter. If you look at the details, consumption was driven by people actually starting to purchase services once again. Meanwhile, household demand for both durables and nondurables was limited.  It doesn’t appear as if the vehicle sales are surging and if that is the case, the moderate consumption growth could continue.  Investment was great, but much of that came from housing, which is already moderating and should continue to do so.On the business side, while spending on equipment should remain strong, the huge increases posted over the last two quarters of the year are not sustainable.  And there is little reason to think that firms will be expanding their footprints anytime soon by building new plants or offices.  The trade deficit surfed and if the U.S. remains the strongest industrialized economy, import growth will likely continue to exceed exports.  That means the trade deficit should widen, restraining growth going forward.   And finally, there is the government spending on goods and services.  The financial reckoning that state and local governments are facing is coming soon.  Meanwhile, there are those in Washington who would rather fund an administrative assistance in a law firm than a teacher, so aid to those hurting entities remains uncertain. This implies a further moderation in growth during the first half of this year.  But I don’t expect that to trouble investors, as nothing seems to bother them.  And finally, there is the Fed, which yesterday told us that they are on cruise control – low rates and lots of investment in assets for a very long time.  Put it all together and you get moderate overall economic growth and the likelihood of more stock market gains.

January 26,27 2021 FOMC Meeting

In a Nutshell: “The pace of the recovery in economic activity and employment has moderated in recent months.”

Decision: Fed funds rate target range remains at 0% to 0.25%.

The Federal Open Market Committee, and in particular Chair Jerome Powell, wants to make one thing very clear: The economy cannot get back to normal until the virus is licked.  If there was a theme in today’s statement and press conference, that was it.  Yes, the statement noted that the recovery has weakened, but the key points was that the “… weakness (was) concentrated in the sectors most adversely affected by the pandemic.” 

The statement then went on to note that: “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”  During his press conference, Chair Powell reiterated those points. 

And there was one other key bit of information from his press conference that needs to be highlighted.  He made it clear that the Fed was prepared to overdo it rather than risk not staying accommodative long enough.  He said the costs of not getting back to full employment are much greater than the possibility of getting high inflation, something he said was not very likely.  That’s another way of saying rates will be kept low and asset purchases will continue for a very, very long time. 

So, barring an unforeseen crisis, when it comes to the Fed, what you see now is what you are going to get for probably two or more years. 

(The next FOMC meeting is March 16,17 2021.) 

Linking the Economic Environment to Your Business Strategy