Tags: leading indicators | philadelphia | fed survey | jobless claims

Economy May Be Strong Enough For Fed Rate Hike

Image: Economy May Be Strong Enough For Fed Rate Hike
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By    |   Friday, 20 May 2016 05:53 AM


  • INDICATOR: April Leading Indicators, May Philadelphia Fed Survey and Weekly Jobless Claims  
  • KEY DATA:  LEI: +0.6%; Phil. Fed: -0.2 point; Claims: down 16,000
  • IN A NUTSHELL:  “It looks like the economy is picking up steam, just in time for the Fed’s next meeting in June.”
 
WHAT IT MEANS: The surprise comment in the April FOMC minutes that “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June”, has heightened the scrutiny of the incoming data.  Today’s numbers would normally be largely non-events, but the sharp jump in the Conference Board’s Leading Economic Index cannot be glossed over.  With almost every component except confidence rising, it is clear that economic conditions are improving since the sluggish first quarter.  And if we believe the University of Michigan’s mid-month reading on sentiment, even confidence is coming back.  In other words, strength should be broad based.

The strength of second quarter growth remains uncertain, especially when it comes to manufacturing.  The Philadelphia Fed’s May manufacturing survey was essentially stable, but in negative territory.  Nothing in this report tells me the sector is improving, at least in the Mid-Atlantic region, as orders, backlogs and hiring are all still falling.  Expectations remain at a decent level, though managers are hardly exuberant.  There were some interesting results in the special questions section.  Respondents indicated they thought that their workers wages would rise by 3% this year and that long-term consumer inflation would be in the 2.5% range.  Those are numbers that should open some eyes at the Fed.

As for the labor markets, jobless claims came down from their recent highs and are nearing extreme tightness levels.  We get ups and down in these data, but the trend tells me that there isn’t a lot of slack in the market.

MARKETS AND FED POLICY IMPLICATIONS:  For months, I stuck with my forecast that the next rate hike would come in June.  But after Chair Yellen’s defense of the go-slow approach and the weak first quarter GDP number, I threw in the towel and moved my forecast to July.  I argued that made sense since the Chair keeps telling us that all meetings, not just those with press conferences, are live and July would be the perfect month to prove that.  But given the bold statement that a June increase is indeed very possible, you have to make that the favorite.  Still, we need the data to drive the decision and the May employment report, which comes out ten days before the start of the next meeting could be crucial.  A strong one may not clinch a hike, but it would make it very likely.  On June 14, the first day of the meeting, the May retail sales report is released.  Given the robust April report, even a modestly positive one that shows continued gains would signal the consumer is up and running again.  And with energy prices rising, we know that the headline inflation rate is going up.  So conditions are coming together for another rate hike.  Whether it is June, July or September is important, though.  A June increase would put September in play and that would also mean a third hike in December cannot be ruled out.  In other words, the Fed minutes have played havoc with expectations and that should create an awful lot of volatility in the equity markets.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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JoelNaroff
It looks like the economy is picking up steam, just in time for the Fed’s next meeting in June.
leading indicators, philadelphia, fed survey, jobless claims
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2016-53-20
Friday, 20 May 2016 05:53 AM
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