The economic reports are continuing to improve. The industrial productiion number was down .1% for January as reported last week, but clearly due to temporary weather. December was revised up 1.2%.
The ISM numbers simply blew the cover off the ball. The manufacturing number was up over 60% and the service number was a few tenths of a percentage point away from 60.
Along with these improvements has come a wiff of inflation. The ECRI Inflation Gauge has climbed for three consecutive months. While that can bring some relief to the deflation hawks, it spurs some thoughts in the inflation camp. Inflation is running 1.6% overall (1% core inflation). Incidentially, it is always interesting to see these two numbers get reported side by side; but does anyone buying goods in this economy ever eat or buy gas?
The chart in todays article shows inflation has perked up and that 1.6% number for overall inflation has been largely affected by the last few months.
So if we have a stronger economy and if inflation is creeping in where are the jobs? Recent news reports have local, state and federal governments cutting back jobs too. Fed Chairman Benanke stated in a recent speech, ” Following the loss of about 8-3/4 million jobs from 2008 through 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market.”
It gets tough to get a specific sense of actual true unemployment as those folks that fall of the rolls or stop looking that still want a job do not get counted; and some analysts are saying that is what is responsible for the drop in the headline unemployment number from 9.8% to 9.4%. Of course the politians are saying it is their programs. You can decide.
The Fed has a dual mandate from Congress. One is to promote stable prices and the other is to foster employment. However, as the title of this article points out, the Fed is in a tough situation right now. Unemployment in today’s economy has become structural in nature, and not cyclical. It is going to be a long time before we get back to a preferred 6% or so unemployment. If we could create 6 million jobs over the next four years, that would just about take care of it. But for that to happen a string of solid consecutive job reports would need to happen and far better reports than we have had in the last year.
So economic data is improving. Normally that would signal the Fed to start raising interest rates. But Bernake also said in his speech, “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
That could be the answer to, Whats the Fed to do?” Fed Chairman Bernanke is telling us that rates are going to be low until we see stronger job creation. But with the QE2 easing to keep thoise low rates and inflation rearing its head, there is the possibility of these two mandates for the Fed coming into conflict.
It takes at least 12 months analysts say for monetary policy to work its way into the economy. That means the current small whiff of inflation is not due to QE2. It will show up later on. What could be registering now is simply the normal business cycle inflation. The economy has been improving for some time now.
Not to just be tossing more negativity into the mix of thoughts, but if we are reaching the top of an economic cycle, what happens to all those needed jobs when this normal business cycle falls back? And what happens to inflation? Anyone old enough that remmembers the stagflation (inflation with no growth), in the 70’s may ponder this. The 70’s could be a walk in the a park compared to our global situation now.
All this leads me to feel some relief that trading technically releases the need to resolve all those (and many more not known), fundamental issues. For now the stock markets are rallying, the trend is up, and trades are entered long. The environment in which this is all happening is not totally supportive long term and thus we are vigilant for any coming change.
Trade with a plan.