KEY DATA: IP: +0.3%; Manufacturing: +0.4%/Openings: +70,000; Hires: +10,000; Quits: +46,000
IN A NUTSHELL: "With manufacturing remaining strong and job openings rising, it is really looking like the economy is starting to accelerate."
WHAT IT MEANS: The manufacturing remains the driving force of the economy. Production rose solidly in December and since July, the sector has expanded at a greater than 6% pace. Much of that has come from a ramping up of vehicle assembly rates. But it wasn't all SUVs. Output of business and construction supplies, consumer goods and materials also were up solidly. Only business equipment manufacturers lagged, making it two months in a row now that this segment has restrained activity. Eight of the eleven durable goods industries and seven of the eight nondurable goods industries posted increases in production in December. That makes it clear that the improvement is broad based. From December 2012 to December 2013, manufacturing production rose 2.6%. That is nothing spectacular but there were some slowdowns during the year and this gain is not that bad.
The key to any really strong growth will be the labor market and the Job Openings and Labor Turnover report (JOLTS) is an important indicator of what is a happening. These data, which many at the Fed including the soon to be Chair Janet Yellen look at closely, are hinting at a stronger jobs market. Job openings broke the four million levels for the first time since March 2008. However, hiring gains have lagged. It appears that companies remain caution about the economy but with business confidence rising, we could see hiring soar as firms try to reduce the growing number of unfilled positions. Also, workers are quitting more often and that is an indication that jobs are becoming more available.
MARKETS AND FED POLICY IMPLICATIONS: The data released today were all pretty decent. Output is rising, the labor market is firming and the housing sector is hanging in there. The FOMC meets on January 28,29 and we get the first estimate of fourth quarter GDP on January 30. The expectation is that growth held up reasonably well at the end of last year despite what is expected to be a large swing in inventories, which will reduce growth. So, will the Fed announce another moderation in its buying plans? Despite the weak December job gains, most other indicators point to the labor market improving. And with the unemployment rate heading rapidly toward 6.5%, when the Fed indicated it could actually start raising rates (forget that story), there is really no reason for the Fed not to taper further. While markets may be focusing on earnings right now, the Fed will come into view soon enough. Interestingly, now that tapering has begun, further slowing in asset purchases should be viewed as saying the economy continues to improve and would thus be received positively. That is likely to be the message the Fed wants to send.