Effect of rising interest rates partially offset by job market growth

INDICATOR: August Pending Home Sales/2nd Quarter GDP/Jobless Claims

KEY DATA: Pending Sales: -1.6%;GDP: 2.5%; Consumer Inflation: -0.1%/Claims: 305,000 (down 5,000)

IN A NUTSHELL: "The housing market may be starting to feel the effects of the higher rates during the summer but that may be countered by improving labor market conditions."

WHAT IT MEANS: While Congress debates whether it should kill the economy or just wound it badly, it is important to understand the current state of the economy and where things may be going. The data are decidedly unclear. On the negative side, pending home sales fell for the third consecutive month. It looks like existing home demand may have peaked and that does not bode well for the housing market. Of course, the recent decline in interest rates may stabilize if not boost sales going forward, but we have to see if that occurs. Existing home sales are not likely to collapse, but the gains we have seen that may have been due to buyers jumping off the fence could be whittled away. Meanwhile, the labor market could be turning the corner. Jobless claims fell and the level of the four week moving average, which smooth's out the volatility, is the lowest in over six years. It appears that firms are not only slowing layoffs but they also are hiring as well. That raises hopes that the September employment report, which will be released October 4th, will be better than expected.

The last, at least for now, revision to second quarter growth was a non-event as the pace remained the same as estimated last month. But the one number in the GDP report that raises eye-brows is the price index for consumer expenditures. It was down in the second quarter and over the year, it was up only 1.1%. The Fed has an inflation target of 2% and it is willing to accept inflation up to 2.5%. It is not good that we are in a disinflation mode given that inflation is so far below the target. That is a concern of several Fed members and is a reason they are arguing for continuing QE. It is hard to make the case for inflation when it is so low and decelerating. Basically, firms have little pricing power and why they might develop some anytime soon is totally unclear. Oh, yes, that is precisely the point I have been making for a while.

MARKETS AND FED POLICY IMPLICATIONS: Good news and bad news makes for confusion but right now it is all about the theater of the absurd going on in Washington. The curtain has come back up on this too long running play and the gang that cannot legislate straight is trying to legislate before chaos occurs. Oh, boy, just what the economy needs. And the Treasury runs out of cash in three weeks so the debt ceiling has to be debated as well. Will Congress restrain growth over the next year as much as it did this past year? And will the politicians then complain about the lack of jobs? Those that love dysfunctional government are in all their glory. For the rest of us, it's just no fun at all. Meanwhile, investors have to navigate the roiled waters of unclear economic data and wacko politicians. Not even Alfred E. Neuman could be optimistic under these circumstances.