INDICATOR: November Industrial Production
KEY DATA: IP: +1.1%; Manufacturing: +0.6%
IN A NUTSHELL: "With manufacturing activity ramping up, it looks like whatever slowdown we had is well behind us."
WHAT IT MEANS: The economy seems to be picking up steam, despite all the crying coming from retailers. Industrial production surged in November, helped greatly by a jump in both energy production and utility output. Given how cold it has been in December, that is likely to be the case again when this month's numbers come out. But what really matters, at least to me, is the manufacturing output data and they were strong. Gains were in most sectors as more consumer goods, materials, energy products, construction and business supplies were produced. The only weakness was in business equipment and defense. Sequestration has its costs. The strong vehicle sales led to firms increasing assembly rates and high-tech industries also pushed out more product. In other words, output was expanding across all aspects of the economy.
In other news, third quarter productivity was revised upward sharply, mirroring the stronger growth in the latest GDP report and that led to an even larger decline in labor costs. But real hourly compensation continues to tank and if the retailers are wondering why they have yet to see a very, merry Christmas shopping season, they should look no further than the income numbers for an explanation.
MARKETS AND FED POLICY IMPLICATIONS: The Fed starts its last meeting of the year tomorrow and will release its statement and forecast on Wednesday. There will also be a press conference, so it will be an interesting day, meaning that the investors should watch and wait. Whether they do that is anyone's guess as the battle between tapering being good because it represents stronger economic growth or bad because it means fewer drugs being pumped into the system is being fought on a day-to-day basis. Nevertheless, the data have turned fairly consistently stronger and the Fed is likely to start the process of getting out of the quantitative easing business by the end of the winter. Whether the start date is this Wednesday (I don't think so but it is possible) or next year at either the January or March meeting is unclear but it is coming. The wild card is inflation: It is too low. That may seem weird, but that is the case. That the Fed would ease back on the pedal when the economy has yet to fully establish itself and inflation is well below desired levels seems odd to me. Last spring, I expected tapering to begin either in December of January but after the September FOMC meeting I pushed that possibility out to March. March seems like the outer-limit right now unless we have a surprise in the December jobs report. Remember, the Fed is trying to shift its guidance from a timeframe driven approach to a data driven approach. Of course, that has its problems as well since some think one or two data points are enough while others, including myself, like to see a much longer trend. The Fed Chairmanship is changing in February, but that transition should be seamless and not affect the timing of any Fed decisions.