With lat­est re­ports, Fed may raise rates

Daily Local News (West Chester, PA) - - BUSINESS - Joel Naroff Colum­nist Joel L. Naroff is pres­i­dent and chief econ­o­mist of Naroff Eco­nomic Ad­vi­sors. He can be reached at 215-497-9050 or joel@ narof­fe­co­nomics.com

IN­DI­CA­TOR: >> Oc­to­ber In­dus­trial Pro­duc­tion, Pro­ducer Prices and Novem­ber Home Builders In­dex KEY DATA: >> IP: 0 per­cent; Man­u­fac­tur­ing: +0.2 per­cent/ PPI: 0 per­cent; Goods: +0.4 per­cent; Ser­vices: -0.3 per­cent/ NAHB: flat IN A NUT­SHELL: >> “In­fla­tion is slowly creep­ing up­ward and man­u­fac­tur­ing is com­ing back, fur­ther rea­sons for the Fed to move in De­cem­ber.” WHAT IT MEANS: >> Day after day, re­port after re­port, it is clear the econ­omy is slowly pick­ing up steam and in­fla­tion is on the rise and to­day’s num­bers sup­port that view. In­dus­trial pro­duc­tion was flat in Oc­to­ber as util­ity pro­duc­tion was down, likely be­cause of weather is­sues. Mean­while, man­u­fac­tur­ing out­put picked up steam. Al­most ev­ery com­po­nent in the durable goods sec­tor in­creased, some­thing we rarely see. The ve­hi­cle and com­puter and elec­tronic sec­tors led the way. Non­durables was weak, es­pe­cially en­ergy and ap­parel. In­ter­est­ingly, mining ac­tiv­ity rose. Maybe the en­ergy sec­tor is start­ing to sta­bi­lize.

In­fla­tion has been run­ning be­low the Fed’s tar­get, but the data hint that the days of sub-2 per­cent price gains may be com­ing to an end. Yes the Pro­ducer Price In­dex was flat in Oc­to­ber, but goods in­fla­tion, which had been the re­strain­ing force for quite a while, has turned pos­i­tive. While there was a sharp de­cline in ser­vices in­fla­tion, it looks to be more of an odd­ity than a trend. This seg­ment of the whole­sale costs has led the way for a long time, so a pe­ri­odic down tick should not be taken as a warn­ing sign, at least not yet. Look­ing ahead, in­ter­me­di­ate goods costs are ris­ing and that por­tends ad­di­tional pres­sures in the months to come.

The Na­tional As­so­ci­a­tion of Home Builders re­ported that its Hous­ing Mar­ket In­dex was flat through the first part of Novem­ber. Still, the level re­mains high, nearly match­ing lev­els seen dur­ing the hous­ing bub­ble. This sec­tor ap­pears to be grow­ing solidly and the strength is pretty much across all re­gions. MAR­KETS AND FED POL­ICY IM­PLI­CA­TIONS: >> Tues­day we saw that re­tail sales were strong and to­day that man­u­fac­tur­ing pro­duc­tion is pick­ing up. When it comes to in­fla­tion, yes­ter­day it was re­ported that im­port prices rose and to­day that whole­sale goods prices in­creased. Es­ti­mates of fourth quar­ter GDP are com­ing in near the 3 per­cent range, which could make it two con­sec­u­tive quar­ters of solid eco­nomic ac­tiv­ity.

With 10-year Trea­sury rates up over 70 ba­sis points in four months, the mar­kets are sig­nal­ing the Fed that it is time to move. And if you lis­ten to the Fed mem­bers’ speeches, the mes­sages are com­ing in loud and clear that a rate hike in De­cem­ber is likely. There are still four weeks and an­other em­ploy­ment re­port be­fore the next FOMC meet­ing, but bar­ring a ma­jor melt­down in some­thing, the funds rate is go­ing up. What does that mean for the econ­omy?

Not much, un­less it is fi­nally the start of an ex­tended pe­riod of rate in­creases. We thought that would be the case when the Fed fi­nally moved last De­cem­ber, but alas, the gu­rus of mon­e­tary pol­icy for­got to awaken from their win­ter slum­ber and did noth­ing. If Trump’s tax and spend­ing plans are im­ple­mented, fis­cal pol­icy will shift from neg­a­tive to strongly pos­i­tive, ac­cel­er­at­ing growth. Given we are near or at full em­ploy­ment, in­fla­tion should con­tinue to rise and that could put the Fed on a rate hike fast-path. Trump’s state­ment that he will not reap­point Yellen will not stop her from do­ing what she needs to do and that is likely give us at least two if not more rate hikes next year.

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