September 15, 2016
If the data say no, can the Fed really go?
NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: August Retail Sales, Industrial Production, Producer Prices and Weekly Jobless Claims
KEY DATA: Retail Sales: -0.3%; Excluding Vehicles: -0.1%/ IP: -0.4%; Manufacturing: -0.4%/ PPI: 0%; Excluding Energy: 0%/ Claims: +1,000
WHAT IT MEANS: If you have missed my economic missives, it was because of the dearth of information. Well, today, the economic data mills released a ton of numbers and they all seemed to say the same thing: Not much is happening in the economy. August retail sales were pretty soft, but we knew that would be the case from the decline in vehicle sales. However, even excluding vehicles, sales were down. People did eat a lot, both at home and in restaurants, and back-to-school clothing sales were good. But that was about it, as almost every other major category was either flat or down. Electronics and appliances did eke out a small gain.
With households not buying, manufacturers stopped producing. Industrial production fell in August as manufacturing output declined. Eight of the eleven durable goods producing industries and seven of the nine nondurable components were either flat or down. Why there was such a major retrenchment is strange in that the numbers looked like something we would get when the economy was in a major downturn. You know something is weird when the strongest sector was oil and gas production.
If the Fed members were hoping to see inflation pressures starting to build, their wishes were not granted. The inflation genie is still in the bottle as the Producer Price Index was flat in August. Energy prices fell sharply, but even excluding energy, wholesale costs went nowhere. About the only positive aspect of this report, at least for the Fed, was that goods inflation has finally flatlined. With services costs rising, wholesale prices could increase, year-over-year, going forward. And as far as the pipeline is concerned, intermediate level, non-food and energy costs are firming. That hints at slowly rising inflation as well.
The one truly positive number released today was unemployment claims. They rose minimally and the level remains near record lows, when adjusted for the labor force. The labor market is tight and firms are just not cutting staff.
MARKETS AND FED POLICY IMPLICATIONS: We will find out next week if the Fed is really data dependent as the recent numbers hardly argue for a rate hike. Vacations and a hot August may have depressed activity, something we will not know until the September numbers are released. Of course, those reports will not be released until after the meeting. The economy is moving forward at the pace we have seen for the past few years. The string of roughly 1% growth rates should be broken this quarter, but that would just start bringing us back to 2%, which most economists think is underlying the growth rate. The recent disappointing data places the Fed in a difficult position. If the FOMC raises rates, then it would give lie to the argument that the Fed is data dependent. If the Fed is data dependent, then the next time a hike would likely come is December, since the November meeting ends six days before the election. It looks like the Fed will have missed another opportunity to start the normalization process because the “data dependent” argument has placed the members in an untenable position. Maybe they should just drop the phrase. It’s dumb, as the data are so volatile, and weak numbers box in the members. With strong data, the Fed doesn’t need an explanation, as the markets will be expecting, if not demanding a move.