August 27, 2015
Revised Second Quarter GDP, July Pending Home Sales and Weekly Jobless Claims
"Given the strong economy, if the equity markets were not so crazy, everyone would be saying the Fed should tighten in September."
Key Data: GDP: +3.7% (up from 2.3%); Private Domestic Demand: +3.3%/ Pending Home Sales: +0.5%/ Claims: 271,000 (down 7,000)
In a Nutshell: "Given the strong economy, if the equity markets were not so crazy, everyone would be saying the Fed should tighten in September."
What it Means: Ember that moderate second quarter economic growth rate that most people were pleased with? Well it was not moderate: It was strong! The Bureau of Economic Analysis revised upward spring activity and just about every category was upgraded Consumers spent more, businesses investment was higher and even governments added more to growth. There was one warning sign for future economic activity. We have been adding to stocks at record levels and ultimately, that build will have to slow down. When it does, growth will moderate. So don't expect third quarter growth to come anywhere near the spring level. However, looking just at private domestic demand, I expect it to match the strong increase posted in the second quarter. Two other indicators provided additional "compelling" reasons to hike rates. The National Association of Realtors said that pending home sales rose decently in July. supporting other reports that show a strong housing market. Also, unemployment claims fell and the level is consistent with continued solid job gains as well as a decline in the unemployment rate.
Markets and Fed Policy Implications: So, what is most important to the Fed – the U.S. economy or the equity markets?. If third quarter growth is slower than the second quarter because of an inventory slowdown, that is not a problem. The underlying fundamentals should remain solid. If wages begin rising even a little faster and gasoline prices remain low, the holiday shopping season could be great. The U.S. economy is in good shape and hopefully the equity markets will settle down over the three weeks between now and when the next FOMC meeting begins on September 16th. China is slowing and that will restrain world growth. But as I noted yesterday, this is more of an international corporate earnings and stock price issue than an underlying U.S. economy problem. We have one really critical economic number coming out before the September FOMC meeting: The August employment report, which will be released a week from tomorrow. We don't need a huge report to make the compelling argument that the Fed should tighten. One along the lines we got for July, coupled with a modest decline in the unemployment rate to 5.2% and a moderate rise in hourly wages would do it. But until we get that report, the debate will rage about whether the Fed should tighten in the face of uncertain markets (if that uncertainty exists three weeks) and a softening Chinese economy. One point I want to make. Today, some analysts wondered if a strong jobs report would be good for the markets since it would indicate a strong economy or bad for the markets since it would point to a Fed rate hike. When something as basic as a tightening labor market could be good, bad or maybe even indifferent for stocks because of the Fed, you know the Fed has become the issue, not the economy. The Fed must end the confusion.
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