Believing the Hype

Lots of key economic numbers are being released this week, but the gap between hype and reality should be relatively small.
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Here Comes the Sun

JACKSON HOLE, Wyo. -- The anticipation hanging over the bond-geek economist-nerd segments of the market ahead of key economic numbers to be released tomorrow through Friday is every bit as thick as the kind that descended upon your narrator (and a couple hundred other suckers) as he stood in a blocks-long line waiting to see a "mockumentary" -- the fully "frightening" and truly "terrifying" likes of which you've never seen in your lifetime.

And the very good news for the market?

It just isn't possible that the gap between hype and reality for the data will clock in as enormous as the one for that movie did.

(a) The durable goods report for June will be released tomorrow.

Say it prints something north of 1.0% (consensus).

Recent

industrial production

and

NAPM

numbers suggest that the factory sector troughed in December; another beefy increase in orders for durables would do yet more to support the contention that manufacturing is firmly back on track. The overall economy seems that much less likely to falter now that this cylinder is firing again, and here a key piece of the

Greenspan

testimony comes to mind.

Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat.

The durables release speaks to the demand-growth portion of that nugget (see a recent

column for details about how it relates to business investment), as does the second item on our docket.

(b) The gross domestic product report for the second quarter will be released Thursday.

Say it prints something north of 3.4% (consensus).

The

Fed

has been predicting economic slowdowns for four years running. Leave aside something relatively challenging to forecast, like the price level or productivity, and another chunky GDP increase will show yet again that this group has no earthly idea what the future holds even for something relatively simple to forecast, like growth.

Remember that key

Meyer

quote from a while

back?

If inflation does not move lower, while growth remains above trend and labor markets tighten further, it would, in my view, be appropriate to relink real federal funds rate movements back to changes in labor utilization rates.

It's worked pretty well.

Note that

final domestic demand

boomed at a 6.8% annual rate during the first quarter and has increased an average 5.4% per quarter since the second half of 1997. (Final domestic demand is known technically as final sales to domestic purchasers and can be found in

Table 1 of the GDP release; it equals personal consumption expenditure plus investment plus government spending.)

Also note that the chain-type

price index for gross domestic purchases

(or PIGDPU) put in a bottom more than a year ago, when it fell 0.2% during the first quarter of 1998. It then went on to rise 0.4% during the second quarter, 0.7% during the third and 0.9% during the fourth, and it rose 1.2% during the first quarter of this year. (The PIGDPU measures the prices of everything Americans buy, including imports, and can be found in the Addenda section of Table 4 of the GDP release; it is the broadest available measure of the prices paid by U.S. residents.)

So is the second-quarter GDP report likely to show that inflation is not moving lower while growth remains above trend?

Yes. That's precisely what it's likely to show.

(c) The employment cost index for the second quarter will be released Thursday.

Say it prints at 0.8% (consensus).

That would represent an increase twice as big as its first-quarter gain.

And that is sure to catch the attention of a Fed expressing concerns like the ones below.

If new data suggest it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later -- one that could impair the expansion and bring into question whether the many gains already made can be sustained.

There can be little doubt that, if the pool of job seekers shrinks sufficiently, upward pressures on wage costs are inevitable, short -- as I have put it previously -- of a repeal of the law of supply and demand. Such cost increases have invariably presaged rising inflation in the past, and presumably would in the future, which would threaten the economic expansion.

As is the case with many of the price and cost indicators, the ECI is still turning in relatively kind year-on-year increases. (See this

column for recent data.)

Yet the point is that the favorable but temporary supply shocks that have helped to produce smaller increases in the price and cost indices over the past few years -- a whopping 7 percentage-point deceleration in medical-care costs in the case of the ECI -- have run their course.

They will not repeat. They are no longer capable of providing the kind of help they've already provided.

(d) The Chicago PMI for July will be released Friday.

Say it prints well north of 59.0% (consensus).

Say it really surprises on the upside.

That would pound plenty of fear into the market heading into a week that delivers the July NAPM

PMI

Monday and the July

employment report

Friday.

Anyway.

Now we wait.

Like

Carly Simon

said.

Anticipation. And all that.

Side Dish

Best horror movie?

Psycho.

Halloween.

The Exorcist.

Rosemary's Baby.

What Ever Happened to Baby Jane?