Bi-Weekly Economic Review: Embrace The Uncertainty

There’s something happening here
What it is ain’t exactly clear
There’s a man with a gun over there
Telling me I got to beware

I think it’s time we stop, children, what’s that sound
Everybody look what’s going down

There’s battle lines being drawn
Nobody’s right if everybody’s wrong
Young people speaking their minds
Getting so much resistance from behind

It’s time we stop, hey, what’s that sound
Everybody look what’s going down

For What It’s Worth, Stephen Stills and Buffalo Springfield

I’ve thought a lot about that song recently. A friend of mine also used it in a blog post recently so I guess I’m not alone. It isn’t just the economic and market situation that has me humming this song though. There’s been a lot of attention on the young people from down here in Parkland, some of it good, some of it bad (although frankly, I’m not sure I understand adults criticizing these kids).

Forget the content for a moment; they are traumatized and deserve their time of mourning however they choose to do it. And yes some of them probably like the attention a little too much. And yes, some politicians are happy to exploit them for their own purposes. But these young people, who have managed to organize and bring attention to an issue on which they have a unique perspective, deserve our respect. They have been more articulate than the vast majority of what passes recently for political debate in this country. They have produced thoughtful proposals that enjoy pretty wide public support and would probably pass Constitutional muster. One can’t help but compare them to the political mud wrestling that passes for debate among our elected representatives. I just hope they don’t lose interest and faith in the unique system that is our country when things don’t work out the way they want or as fast as they hope. And more than anything I hope that when this song is 100 years old that it doesn’t sound as current, as topical, as it does today at 50.

Enough of the political commentary and on to what has me scratching my head in the economic arena. Over the last two weeks, we got some pretty decent economic data. Not uniformly good but certainly enough that it was noticeable. Industrial production and durable goods orders, in particular, stand out. But existing home sales also improved and sentiment is ebullient across the board. Job openings surged, up nearly 16% year over year and the inflation readings moderated.

There were some worrisome reports as well, retail sales most prominently but the new home market also put up some weak numbers. Even in the case of the strong reports, there may have been some mitigating circumstances. In durable goods for instance, we see a large increase in primary metals which could certainly be companies trying to get ahead of the tariffs we all feared were coming. So maybe that artificially inflated the numbers last month. But overall, the economy looks about as sound as it has in this admittedly lackluster expansion. So, why then didn’t the bond markets react to this “strong” data? As discussed below, bonds are still in the same range they’ve been in since mid-2013. The top end of the range yes but in the range nonetheless. And credit spreads widened during that time, not something we associate with positive economic developments. 

So, as the song says, there’s something happening here but what it is isn’t exactly clear. Is the economy peaking? Are sentiment readings so high they have nowhere to go but down? Is the uptrend in durable goods orders since mid-2016 sustainable? Are we breaking out of the doldrums or is this another false dawn? The data leans a bit toward the former while the market leans a little more to the latter. I think you know which we think is more likely to be right.