Daily Commentary

MarketMinder’s View: “US industrial production rose for a second month in July, driven by continued strength in manufacturing tied to business investment. The 0.2 per cent advance in production at factories, mines and utilities followed an upwardly revised 0.3 per cent rise a month earlier, Federal Reserve data showed Tuesday (Aug 18). Factory output, which accounts for three-fourths of total industrial production, advanced 0.2 per cent following an upwardly revised 0.3 per cent gain a month earlier and despite a drop in auto manufacturing.” The trend is actually a little broader than this notes. After years of sliding sideways and contracting, US industrial output has climbed in four of the last six months, with manufacturing (the largest sub-industry) up in five of six and flat in the other. This looks more and more like a durable trend underpinned by business investment—a key plank supporting US expansion.

MarketMinder’s View: First, the data: “Government data released this week showed that [the Consumer Price Index] rose 3.4 percent in July from a year earlier, outpacing a 3.2 percent increase in hourly earnings over the same period.” The article suggests the resulting loss in purchasing power could have repercussions at the personal level (through reduced consumer savings) and national level (affecting voters’ choices during November’s midterm elections). The primary mechanism through which weaker wages supposedly affects consumers’ decisions: by knocking sentiment. “But coming on the heels of the earlier decline in pay — and at a time when affordability and the cost of living remain top of mind for many voters — it has sent measures of consumer sentiment tumbling. ‘The real hourly wage is absolutely the fundamental building block of working Americans’ living standards,’ said Jared Bernstein, an economist at the Stanford Institute for Economic Policy Research. ‘When it’s falling in real terms, that’s a huge problem for folks who are already stressed by affordability concerns.’” We feel for those navigating affordability concerns, but the argument here is off base for a number of reasons. First, sentiment doesn’t predict future consumer spending—never has, and we don’t see why this time is different. Second, wages follow inflation. As Nobel laureate economist Milton Friedman taught decades ago, employers compete for new talent with inflation-adjusted wages, so pay rises tend to lag upticks in inflation gauges. See the chart herein, which shows wages’ lagging inflation by a few months following pandemic-era hot inflation. This is always how society overcomes inflation eventually—not with falling prices, but with wages eventually catching up. We won’t try to guess what July’s declining real wage growth means for sentiment or politics ahead, as the former can shift on a dime for any or no reason and the latter still sits more than two months away. Too much can change. But we think the article’s fearful tone here fights the last war, a sign broader sentiment isn’t quite euphoric yet.

MarketMinder’s View: Here is a sensible take on new Fed head Kevin Warsh’s decision to not participate in the “dot plot,” a quarterly chart showing Federal Open Market Committee (FOMC) members’ projections of the federal-funds target rate. For weeks, headlines warned this will blur investors and economists’ views into upcoming monetary policy. But, as noted here, the dot plot consistently missed the mark, making this so-called transparency a false premise. “Of the 46 quarterly three-year projections to year-end 2025 since [January 2012], only two have been right. The average error is 1.8 percentage points, which is stunningly bad considering that the year-end federal-funds rate itself has averaged 2%.” With this in mind, we ask you, friends, which is better—inaccurate projections or no projections at all? As the article goes on to note, these inaccurate predictions have had consequences for investors and businesses alike—including contributing to 2023’s regional banking freakout. Thus, considering “transparency” is the crux of today’s worries, we reckon fewer inaccurate estimates is probably better for all Fed watchers. Mind you, we have long urged investors to tune out Fed members’ soundbites and quotes, as they are famous for saying one thing and doing another as their views and economic conditions evolve. Hence, we agree with the article’s overarching theme: Less Fed communication probably isn’t as bad as many warn today. For more, see our recent commentary, “Digging Into Last Week’s Fed ‘Credibility’ Concerns.”