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Economic & Policy Incongruities - December 11, 2018

Discord, Catch-22s and Circular Logic

As economic data has come in over the last few weeks, we’ve seen an uptick in what might be categorized as incongruities. Last week, we highlighted one such incongruity between the ISM and Markit Manufacturing data, and the trend continued this week. In the NFIB’s Small Business Optimism data, the overall index declined with “more than half the decline attributable to Expected Business Conditions and Expected Real Sales”. Inventory investment plans “faded” and the percent of respondents viewing the current period “as a good time to expand lost 1 point”. Overall, “on balance, optimism faded modestly”. Meanwhile, there remained some superlatives. Finding qualified workers remained the single biggest problem, matching the record high set in August 2018. And the percent of respondents planning to hike prices hit a net 29 percent, “the highest since August 2008”.

Hiking prices in bad conditions? As the commentary explains, “The general consensus among forecasters is that the fourth quarter will be solid but slower.. Spending..has eliminated excess capacity.. Reports of unfilled job openings and few qualified job applicants are at record levels. Owners report raising compensation at record rates to attract new workers”. While productivity growth could help labor tightness, “continued spending demand will put pressure on capacity and prices, keeping the Federal Reserve ready to raise interest rates to try to keep demand from outstripping our capacity to produce which would produce more inflation”.

Also in a tangle are past and present Fed members. First, at a discussion held at CUNY Janet Yellen was worried about “another financial crisis”, faulting “gigantic holes in the system”. This is opposed to her 2017 statement that a recession like 2008 was not likely in our lifetime. Meanwhile, in an interview with CNBC, ex-Dallas Fed President Fisher gave a case for more Fed rate hikes, saying he didn’t understand Fed Dove Kashkari, and pointing to Europe as a potential source of weakness in another interview. All of this is occurring while Fed Chair Powell is upping the “charm” of the Fed “to build public trust and help insulate it from political attack”, according to an article from Bloomberg.

Finally, recent analysis of the housing market rounds out the merry band of mixed data. First, affordability is leading to dispersion among geographic areas. Alcynna Lloyd at Housing Wire reports, “while home sales in large U.S. metros cooled off, smaller affordable markets continued to heat up”. Also, labor tightness may be a double-edged sword. On the one hand, wage gains could be the solution to potential housing market woes, as we discussed here. However, the cost of labor is adding to affordability issues in the housing market, as we discussed in September, and labor remains a top challenge to builders as construction job openings continue to rise and layoffs decline, according to Robert Dietz in an article from Eye on Housing.