INDICATOR: August Industrial Production/Next Fed Chair Comment
KEY DATA: IP: +0.4%; Manufacturing: +0.7%
IN A NUTSHELL: "Manufacturing rebounded in August and let's hope this means consumers are starting to spend a little more."
WHAT IT MEANS: Manufacturing has gone through lots of ups and downs. It had been the strong shoulders of the recovery but ultimately slumped as consumer demand moderated. That may be changing as industrial production soared in August. The gains were broadly based as consumer goods, business equipment and construction supply output rose solidly. We knew the number would be good because vehicle sales were so strong but the increases were not limited to that sector. Manufacturers of appliances, home electronics and even clothing ramped up their factories. Information processing plants were humming and that may be pointing to more business investment. The only negative in the report was the major softening in utility output, but that was probably due to a surprisingly mild August. The Fed starts its two-day meeting tomorrow and this is their data so the meeting begins with good economic news.
Next Fed Chair Comment: The sudden withdrawal of Larry Summers from consideration for the Fed Chairmanship was a great surprise. While the political analysts will argue that it was the liberal wing of the Democratic Party that sunk his nomination, Janet Yellen had the greatest support in the surveys of economists. Whether Summers would have accelerated the tapering of quantitative easing faster than Yellen is unclear. The lackluster economy still exists and he is smart enough to know that a few months here or there would make little difference if his major concern were market functioning rather than economic growth. And being Fed Chair makes you realize that economic theory and the real world sometimes come in conflict. We have experience with that as Alan Greenspan experimented with the idea that financial institutions could self-regulate. We know how that turned out and I suspect all the candidates understand that lesson. Still, the markets feared Summers and there is likely to be a relief rally for at least one day.
The President will have to make a choice swiftly as the Fed continues to meet and must to decide on when and by how much quantitative easing will be slowed. On Wednesday, the FOMC will provide new projections about growth and discuss the future of QE. The business of monetary policy will continue unabated as it has to. Naming the next leader of the pack soon will limit the confusion about the direction of the Fed policy.
In all the surveys to which I have responded, I have picked Yellen as the person who would and should be nominated. My reasoning is simple. Both Yellen and Summers have all the skills and knowledge needed to lead the Fed. What I believe separated Yellen from Summers is the ability to work with Congress. The Fed's independence is under attack and the next Chair has to keep that independence intact. That is where Congressional relationships could make a critical difference. Both are strong enough leaders to make the case for independence but I thought Yellen was better suited to deflect the criticisms that always come the way of any Fed Chair. Hopefully, we will know very soon who is to be the next Fed Chair.