Hooray for trade!

INDICATOR: August Import and Export Prices/Weekly Jobless Claims

KEY DATA: Imports: 0.0%; Nonfuel: -0.2%; Exports: -0.5%; Farm: -4.3%/Claims: 292,000 (down 31,000)

IN A NUTSHELL: "Tame import prices are restraining inflation in check and that is keeping consumers, whose incomes are lagging, afloat."

WHAT IT MEANS: Hooray for trade! Let's face it; there is little hope for a consumer-based economy when household incomes lag as badly as they have. What is allowing consumer spending to hold up is that the prices of most goods people buy, except energy, have not increased very much. The key to that tame inflation is flat to declining import costs. Nonfuel import prices have fallen for the last six months. In August, consumer goods and vehicle prices were flat or down. The one disconcerting trend was continued increases in imported food costs, which rose solidly not only in August but also over the year. That could lead to higher supermarket prices soon. Meanwhile, other consumer goods and vehicle prices were off over the month and were flat or slightly down over the year. On the business front, non-petroleum based industrial supply prices are plummeting and capital goods costs are trending downward. Only energy is a problem. As for our exports, the boost to farm incomes from soaring agricultural prices is now behind us. But farmers are not alone. Almost all other sectors, except of course energy, are finding their pricing power withering.

The weekly jobless claims numbers were spectacular and I would normally be headlining this report. Unfortunately, the Bureau of Labor Statistics reported that two states had some computer issues that may have led to underreporting of claims. Don't be surprised if the claims number surges next week. Thus, we may have to wait a few weeks before we know the true level.

MARKETS AND FED POLICY IMPLICATIONS: The Fed meets next week and uncertainty over the timing of the "tapering" process remains. But it is coming and it appears that any good economic news is being translated into higher interest rates because investors are assuming the FOMC will not only start but also accelerate the reduction in security purchases as the economy improves. Meanwhile, falling import costs, which will also constrain the pricing power of domestic firms, would provide some leeway in starting the cutbacks. It would also allow the Fed to stretch out the reduction with the hopes of accelerating growth. And that is really the point. Reducing security purchases is not being done because the Fed is signaling "all clear". Economic activity remains lackluster. The concern is about damage being done to the markets by the Fed interference as well as worries about future inflation. Since the Fed's decision, at least in my mind, is not being driven by economic growth factors, it makes little sense to use economic data to determine what the Fed will do. Otherwise, the FOMC would wait for the third quarter GDP numbers to be released and only if they were strong would they be in a position to say the economy is largely out of danger. That would push the decision to the October meeting at the earliest. Instead, it could actually come next week, though once again, I hope it doesn't.