Tags: federal reserve | economic growth | rates | manufacturing

Fed Must Hike Rates Despite Signs of Slow Growth

Fed Must Hike Rates Despite Signs of Slow Growth

By    |   Tuesday, 01 September 2015 12:45 PM EDT

  • INDICATOR: August Supply Managers’ Manufacturing Index and July Construction and Home Prices
  • KEY DATA: ISM (Manufacturing): -1.6 points; Orders: -4.8 points/ Construction: +0.7%; Private: +1.3%/ Home Prices (monthly): 1.7%; Year-over-Year: +6.9%
  • IN A NUTSHELL: “A deceleration in the manufacturing sector points to slower growth in the third quarter even as housing, construction and vehicle sales remain strong.”

WHAT IT MEANS: The economy’s yin and yang can be clearly seen in today’s data.

On the dark side, the Institute for Supply Management reported that manufacturing activity continued to moderate in August. Growth continued, but it wasn’t particularly fast.

What concerned me the most was the sharp deceleration in orders. The index hit its lowest reading in over two years. Export demand continues to fade as well, highlighting the problems created by a strong dollar and questionable Chinese growth.

Hiring also moderated, but that component has not been really strong for a while.

About the only good news in the report was that order books thinned at a slower pace.

However, backlogs continued to drop.

While manufacturing seems to be having issues, other portions of the economy are still strong. Construction boomed in July on top of a robust June gain. Both private residential and nonresidential building activity boomed during the summer. Indeed, there were increases in almost every sector, interestingly, including manufacturing. Since July 2014, private sector construction was up nearly 17%.

The sharp rise in residential construction is being matched by strong increases in home prices. CoreLogic reported a robust gain in July not just over the month but also since July 2014. Price gains are once again accelerating, a sure sign of housing market strength.

MARKETS AND FED POLICY IMPLICATIONS: Investors are trying to make some sense of the Chinese economic data but until we have confidence that the data are anything more than trend indicators, we will not know how hard a slowdown China is facing.

Hopefully, investors will now recognize what most of us have known but been unwilling to admit: The Chinese data are questionable given the difficulty to collect data accurately in a country that large and underdeveloped and the political needs of the government.

So take anything that comes out with a bucketful of salt. Uncertainty about data for the second largest economy in the world cannot be good for the markets.

Yet the U.S. economy continues to move forward.

Manufacturing is slowing, but domestic demand remains strong. Indeed, it looks like August vehicle sales pace could come in at a better than expect 17.4 million sales pace. With families buying houses as well, we should see an upturn in the demand for manufacturing goods that go into building those products.

The U.S. economy can sustain a solid growth rate unless the situation in Asia is a lot worse than expected.

Investors need to separate the international companies from the domestic ones.

And the Fed has to recognize that stock-price changes and the domestic economy are not one in the same.

Unlike the 1990s, when irrational exuberance reigned, households are not reacting rapidly to changes in wealth. They know better, sadly. Friday we get the jobs report and hopefully it is clear-cut.

We need something that sets the tone and I am hoping for an unambiguously strong one so the Fed has cover to raise rates.

I believe they should do that right away.

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A deceleration in the manufacturing sector points to slower growth in the third quarter even as housing, construction and vehicle sales remain strong.
federal reserve, economic growth, rates, manufacturing
Tuesday, 01 September 2015 12:45 PM
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