INDICATOR: February Industrial Production
KEY DATA: Total Output: +0.6%; Manufacturing: +0.8%
IN A NUTSHELL: "Manufacturing rebounded in February but averaging the wild swings indicates activity hasn't done much this year."
WHAT IT MEANS: The Fed starts its two-day meeting tomorrow with a lot of uncertainty about the economy. Chair Yellen has commented that she thinks weather played a major part in the weak economic data and the industrial production numbers seem to support her point of view. Output soared in February after collapsing in January. There is little logic behind those sharp changes except something odd, such as wild winter weather (I love alliterations). Overall production was pumped up by a surge in utility output in January that wasn't seen in February, so that component fell slightly. On the other hand, manufacturing output was down massively in January only to erase that decline in February. Why did that happen? Good question. That it did is an indication that the winter has wreaked havoc on the typical trends so the seasonally adjusted numbers wind up changing dramatically. As for the details of the report, production of both consumer goods and business equipment were up sharply. Vehicles and high-tech products led the way, though the gains were widespread. On the other hand, the weather probably caused some of the weakness in wood products. The National Association of Home Builders/Wells Fargo Housing Market Index rose minimally in March, as builders remain concerned about the weather and future sales. Interestingly, one of the major issues is a dearth of new homes for sale. That could lead to major increase in starts during the spring.
MARKETS AND FED POLICY IMPLICATIONS: Wednesday should be an interesting day as Janet Yellen conducts her first press conference after the FOMC meeting. It is likely the Fed will continue to taper and these data, which are the Fed's own numbers, support her view on the economy. But the real issue is what happens once we eventually get out of this winter mess (I am looking at new snow on the ground outside my window). Will there be a major increase in activity as consumers and businesses make up for lost time or will we see only a modest rebound? The February data, including the jobs report and the industrial production numbers, seem to point to a potentially big second quarter GDP number. That could push the unemployment rate to or below 6.5%, the Fed's initial trigger for rate hikes, by early summer. Chair Yellen will have to clarify the Fed's forward guidance on what would get the FOMC to not just complete the taper but also start raising rates. Right now, we really have no idea, which shows how poor the forward guidance communication has been. Thus, Wednesday's press conference will give Chair Yellen the opportunity to start bringing some light to the darkness, which is why it will be so interesting. As for the markets, China and Crimea should be the driving force but who knows if traders even know where those countries are. Chinese growth is clearly sluggish and Putin is not the type to back down. So, you would think the markets would be concerned, right? Maybe, maybe not. And you really thought markets hate uncertainty.