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August Retail Sales and Industrial Production

Economics in a nutshell: “Given the strength of vehicle sales, I think we can safely discount the decline in industrial production that was the result of a cutback in vehicle assemblies.”

INDICATOR:  August Retail Sales and Industrial Production

KEY DATA:  Sales: +0.2%; Vehicles: +0.8%/ Industrial Production: -0.4%; Vehicles: -6.4%

IN A NUTSHELL:  "Given the strength of vehicle sales, I think we can safely discount the decline in industrial production that was the result of a cutback in vehicle assemblies."

WHAT IT MEANS:  In two days we will know whether the Fed has begun moving rates back toward normal or is waiting for a better time to do that.  Today's data really don't change any thinking.  Retail sales rose modestly, but that came after a sharp increase in July.  Also, there was a large cut in gasoline sales, which was likely due to price, not demand factors.  People ate at home and in restaurants, bought clothes and electronics, but stayed away from furniture and home building stores.  Essentially, after a very strong July, people continued to spend in August.

Industrial production was surprisingly weak in August.  But that was likely nothing more than vehicle makers changing over models more randomly than they used to, making seasonal adjustments difficult.  In July, vehicle production soared 10.6% but was down 6.4% in August. Huh?  Sales are booming and vehicle makers are just doing what they now do, which is to offer new vehicles when the time comes.  There was also a decline in airplane output and we know the contractors have massive backlogs.  So, don't worry about the output decline.  It was probably technical, not fundamental.      
 
MARKETS AND FED POLICY IMPLICATIONS: In 1999, former St. Louis Fed President Bill Poole presented a paper to the Philadelphia Council of Business Economists that argued the Fed should "synch" the markets, not "sink" the markets.  Basically, Fed moves should not be a major surprise to investors.  But that requires relatively clear communications.  The current Fed members have not done that very well at all.  Thus, as we await Thursday's decision, there remains uncertainty.  It may just be that high level of uncertainty is what prevents a rate hike.  If so, a move in October, which would come with better messaging and a clear indication that something is up (like rates?) by scheduling a conference call with the press become much more likely.  This Fed needs to  communicate much better.

Let me end this commentary with some of Dr. Poole's concluding comments made 16 years ago:

"I believe that a policy agenda designed to heighten the degree to which the Fed and the markets are in synch is an ambitious and worthy objective. We in the Fed need to work on two fronts, in my opinion. One is the policy front itself, making sure that policy actions are as appropriately timed and scaled as possible. The second is on the disclosure front making sure that knowledge inside and outside the Fed converges to the maximum possible extent. … The conclusion I have been discussing—that, with full convergence of information, Fed policy actions will not affect market prices because the market has already predicted them—initially surprised me. But the more I think about the matter, the more compelling the conclusion is."

To that I say, Amen!

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www.naroffeconomics.com