- INDICATOR: December Industrial Production, Consumer Prices and Real Earnings and January Home Builders Index
- KEY DATA: IP: +0.8%; Manufacturing: +0.2%/ CPI: +0.3%; Less Energy: +0.2%/ Real Earnings: +0.1%/ NAHB: down 2 points
IN A NUTSHELL: “Inflation is at the Fed’s target and with manufacturing and home construction solid, there is every expectation that multiple rate hikes will occur this year.”
WHAT IT MEANS: Today’s data dump provides a clear picture of an economy moving forward and inflation that is steadily accelerating. Industrial production surged in December, but most of that was due to a bitter December that followed unseasonably warm October and November weather. But more importantly, manufacturing activity rose decently. This had been the economy’s weakest link but output was up for the third time in four months. The fourth quarter rise in manufacturing production points to a GDP growth rate that may not be greatly different from the solid third quarter number. The petroleum sector is starting to recover, which is good news for many firms that supply goods and services into that portion of the economy.
As for inflation, it continues to edge up. The Consumer Price Index rose solidly in December. Even excluding energy, which jumped once again, costs are starting to accelerate. While eating in is costing less (I’m paying less for my baked goods), eating out is more expensive – and we do eat out a lot. Health care, used cars, rent and transportation services costs are all rising more sharply. At least we are paying less for apparel. But the jump in consumer prices largely offset a strong increase in wages, so household spending power increased modestly. Workers keep spinning their wheels and as the election showed, they don’t like that and they vote.
Despite a decline in the National Association of Home Builders/Wells Fargo Housing Market Index in January, the level of confidence is the second highest in over eleven years. One year ago, the Index was at 61 compared to the 67 this January. The NAHB indicated that builders expect single-family home construction to rise 10% this year. I’ll take that.
MARKETS AND FED POLICY IMPLICATIONS: Unless the Republicans self-destruct and don’t pass any tax cuts and spending increases, expansionary fiscal policy should hype economic growth this year. The extent and timing of those changes and their impacts on the economy are unclear, as reality is beginning to set in. That is true both for the politicians and the monetary authorities. Inflation is pretty much at the Fed’s target and it is likely to accelerate. Indeed, a report today by ADP indicated that wage gains continued to accelerate during the fourth quarter of 2016. With the unemployment pretty much at full employment, the Fed’s dual mandate is being met. Now, they have to decide what to do about the looming fiscal stimulus. The next FOMC meeting is in two weeks and the March meeting is in the middle of the month. It is doubtful we will have clarity on tax changes and spending by either meeting. But there is an early May meeting and I am betting that the next move comes then. First, even Congress can get its act together in three months, especially since there is one party rule. The second reason is that the Fed has been looking to prove that all meetings, not just those with a press conference, are live. The timing of the May 2-3 meeting is perfect to make that point. As for investors, euphoria is great but reality ultimately rules. It is time to decide what is likely and what is a dream. The fiscal stimulus program remains unclear and I suspect investors are finally beginning to factor that into their decision-making.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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