Sunday, August 2, 2015

Fed taking foot off the gas too soon?

Economics in a nutshell: The manufacturing sector is wandering along and inflation is largely tame, so why is the Fed in a hurry to ease up on the accelerator?

Fed taking foot off the gas too soon?

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INDICATOR: May Industrial Production and Producer Price Index

KEY DATA: IP: 0.0%; Manufacturing: +0.1%/PPI: +0.5%; Excluding Food and Energy: +0.1%

IN A NUTSHELL: "The manufacturing sector is wandering along and inflation is largely tame, so why is the Fed in a hurry to ease up on the accelerator?"

WHAT IT MEANS: May was hardly a break out month for the economy. Industrial production was flat and manufacturing output rose modestly. Even with vehicle and computer firms ramping up assembly lines, the production of consumer goods still fell slightly. There was more business equipment output but not when it came to construction or business supplies. In other words, the nation's industrial heartland moved forward but without a whole lot of gusto. That softness was likely a reason that wholesale prices, excluding volatile food and energy costs, were largely flat. There were some good-sized increases in the food and energy components but the critical confectionary products segment posted only a modest rise. My diet failed so I am giving up and eating again, as if I ever stopped. Wholesale price increases were minimal in most other consumer products and vehicle costs actually fell. In the business sector, capital goods prices were also tame. Looking outward, we could expect more food cost inflation and energy prices continue to slowly filter upward but that is about all.

MARKETS AND FED POLICY IMPLICATIONS: Let me understand this correctly: Inflation is largely non-existent outside of food and energy while there are few indications that economic growth is poised to accelerate. So, why are the inflation hawks at the Fed so intent on cutting back on the Fed's aggressive liquidity program? I really don't get it. Yes, the economy is resilient and is fighting off the negative effects of the tax increases and sequestration. But there is a difference between a Prius and Ferrari. Both get you to where you are going but one has the potential to get you there an awful lot faster. In this economy, however, we have the speed police in the form of Washington politicians and the average speed tends to go down when you are asked to pull over and show your license and registration. We are a long way from having low enough unemployment rates that would push up wage gains and generate strong growth and ultimately rising inflation. But, I am not on the Fed, I am only a Fed watcher so I will continue to watch and scratch my head.

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About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel L. at joel@naroffeconomics.com .

Joel L. Naroff
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