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Shadows and Fog: This Economy Isn't Slowing Down by Itself

Unless next week's PMI and employment report show unambiguous weakness, a Fed tightening looms.

Some Might Say

JACKSON HOLE, Wyo. -- And today we take a little inventory.

The Philly Fed manufacturing index was released on May 20.

The future prices paid portion of the index (a six-month-ahead price expectation) rose to 23.4 in May from 16.2 in April. It has tacked on 24.4 points since November and now stands at its highest level since July 1998.

Revised first-quarter gross domestic product (or GDP) numbers were released yesterday.

The GDP price index less food and energy just posted its biggest quarterly increase (1.4%) since the second quarter of 1997. Note that this index rose 1.1% last year.

The gross domestic purchases price index less food and energy -- this is the broadest possible measure of prices paid by U.S. residents -- just posted back-to-back increases in excess of 1% for the first time since the first half of 1997. Note that this index rose 0.9% last year.

The personal consumption expenditures price index less food and energy has shown no improvement whatsoever since the third quarter of 1997. It has posted rock-steady increases ranging from 1% to 1.3% for seven straight quarters. (All three of these price indices are shown in Appendix Table A in the GDP release.)

The personal income and consumption expenditure numbers for April were released today.

Disposable (after-tax) personal income rose 4% in 1998. It then boomed 5.4% during the first quarter of this year, and it is currently on track to rise a little more than that during the second. Please understand that

consumers have plenty of fuel for spending.

Personal consumption expenditure (or PCE) was rising at a 6.8% year-on-year rate as of April (compare to a 5.3% increase in 1997 and a 5.7% increase in 1998).

That marks the strongest pace of spending since March 1994.

Spending for services is set to rise more during the second quarter than it has at any time during this expansion.

Listen to me. Forget decelerating. Forget leveling out.

Consumption growth was still accelerating when May began.

The unemployment insurance claims numbers for the May 27 week were released yesterday.

The trend in claims (measured as a four-week moving average) has held in an exceptionally tight 291k-308k range since the Feb. 6 week. Also, it fell modestly (to 303k from 306k) between the April and May payroll survey weeks (the weeks during which the


collects the data used to produce the


report). Claims numbers that low typically correlate with monthly job gains in the 240k area, and monthly job gains in the 240k area are 80k higher than what is necessary to keep downward pressure on the

unemployment rate



Here we have fresh and conclusive evidence that inflation is not moving lower while growth remains above trend and labor markets are tightening further.

And yet many market morons want you to believe that deflation remains a significantly bigger threat than inflation.

And yet many market morons want you to believe that gold says the


is too tight.

And yet many market morons want you to believe that a host of special factors have made the economy look stronger than it really is.

And yet many market morons want you to believe that the economy is cooling down all on its own right now.

And yet many market morons want you to believe that the next move in the

federal funds rate

will be down rather than up.

Listen to me. There are some very dim and very disingenuous forecasters out there. The most prominent member of the former lot keeps screaming that there is no way the Fed would ever tighten in the absence of rising inflation.

Just how dim is this guy?

The Fed did precisely that as recently as 1994.

The most prominent member of the latter lot keeps screaming that there exists not one speck of evidence anywhere to suggest that price pressure is building.

Just how disingenuous is this guy?

As he faced the sun he cast no shadow.

But here's the real deal. The Fed no longer needs all of the insurance it bought last autumn, and financial conditions are now overly accommodative. Unless the


on Tuesday and the employment report on Friday show unambiguous weakness -- not just slight moderation, but clear and broad-based weakness -- market participants are wise to assume that the Fed will raise rates at the conclusion of its June 30 meeting.

Regardless of what the


prints on the 16th.

Side Dish

Best cigarette?



One with a drink.

One with lipstick on it.

Smoking sucks. It is for losers.