Where are we going?

INDICATOR: June Leading Indicators/July Philadelphia Fed Survey/Jobless Claims

KEY DATA: Leading Indicators: 0.0%/Phila Fed: up 7.3 points; Expectations: up 11.2 points/ Claims: 334,000 (down 24,000)

IN A NUTSHELL: "If growth was moderating in June, before the impact of higher rates hit, where will growth be during the summer?"

WHAT IT MEANS: The stock market is hitting new highs but interest rates are up and gasoline prices are jumping so where are we going? One indicator of future activity is the Conference Board's Index of Leading Indicators. After skyrocketing in April, the Index posted a more moderate rise in May and was flat in June. That is not a good trend, to say the least. It seems to imply that growth will continue but maybe at a slower pace than we had been seeing. Given that GDP expanded by only 1.8% in the first quarter, a softening of growth would hardly be welcomed. Whether the Leading Indicators' moderation accurately foreshadows a slowdown is to be seen but a sign that conditions are holding up was the large decline in weekly jobless claims. The level, if sustained, points to pretty decent July job numbers. But these are volatile data and the four-week average, though down, does not indicate overly strong job growth. We've been averaging about 200,000 new jobs per month this year and that is likely what we see when the July data are released.

As for the Philadelphia region, conditions seem to be finally picking up. This area has lagged and it just may be that growth is catching up with the nation. Of course, that is not saying much but since I live in the area, it would be nice if the acceleration were actually happening. This survey does a decent job of mirroring what goes on with the national Institute for Supply Management's survey so we could see the ISM manufacturing numbers rise.

MARKETS AND FED POLICY IMPLICATIONS: Mr. Bernanke has spent the last couple of days in front of Congress trying to explain what the Fed will do and when it might start doing it. The markets are fixated on "tapering" and the Fed Chair made it clear that the beginning of the end for quantitative easing will depend upon an improvement in the economy. The Leading Indicators don't show that is happening. Of course, the FOMC can be very headstrong and when it starts going in one direction it is hard to stop it from getting there. Meanwhile, higher gasoline prices are in the future given the rise in oil costs. That is an economic negative not an inflation negative, at least as far as the Fed is concerned. All that said, we get the second quarter growth numbers in less than two weeks. A bad number could reverse the thinking that the Fed will start to taper in September. A good one would cement the view. So let's wait a couple of weeks before we come to any conclusion about tapering.