Just a couple of data notes floating around my computer. First, based on dismal new orders for nondefense, nonaircraft capital goods, I am not expecting an upside surprise in tomorrow's ISM report:
In the past, such weakness has been met with Fed easing. Also supporting Fed easing was the read on PCE inflation:
Headed south, exactly the opposite of the expectations of the Fed hawks. Note that recent trends in core-inflation tend to confirm the decline in headline:
In such a context, I am not particularly worried about the rise in gas prices, which has tended to weigh on spending rather than trigger runaway inflation:
Overall, we look to be heading decisively below the FOMC's expected price path:
Even if the Fed put no weight on the employment mandate, they should be easing on the basis of the price stability mandate alone. The employment mandate could really be viewed as simply icing on the cake to justify an expansion of the balance sheet.
Initial claims continue to move sideways, much like we saw last summer:
Last year, claims didn't turn south until the fall. Presumably, this is the kind of thing that prompts some policymakers to want to wait for more data before easing further. It is not clear that Federal Reserve Chairman Ben Bernanke is willing to wait much longer. Friday's employment report could be decisive in determining the outcome of the next FOMC meeting. A very weak report should ramp up the odds that the Fed takes action later this month.
On a brighter note, consumer spending was up for in July, a good start for the quarter:
The hawks will take this as evidence not to take further action; the doves will take this as evidence that the underlying economy continues to track along a suboptimal path, and the failure of growth to accelerate beyond that path in an environment of falling inflation is reason to take further action. Simply put, the economy could be doing better in the context of the dual mandate.
Bottom Line: The manufacturing data suffers from the weight of the global slowdown. In general, the remaining data confirms neither runaway growth nor imminent collapse. Instead, more of the same low growth that we have become accustomed to. That same low growth looks consistent with inflation drifting below the Fed's mandate, providing the Fed with plenty of justification to act. This is especially case given the downside risks posed by the global environment and fiscal policy. Of course, that was the case three meetings ago. But each meeting has brought us closer and closer to a new round of easing, and we may finally have crossed the line.
