Introduction

The good news on the economy keeps rushing in, an irony of sorts given the opening shots underway of a seeming trade war. Whether new agreements and reworked arrangements will ultimately limit the damage are a real possibility if not even a likelihood given the importance of cross-border trade to global prosperity. Yet watching tariff actions and counter actions unfold is an unsettling uncertainty that can help us focus our attention on the concrete and the immediate: where the economy stands right now.

The economy

The core CPI is the week's biggest news, edging higher to the 2.2 percent line as tracked in the blue line of the graph. The green line is the core PCE price index (personal consumption expenditures), an alternate measure that the Federal Reserve prefers. The core CPI runs several tenths over the PCE but they otherwise move together and the recent results of the former point to a 2.0 percent on-target landing for the latter. Late in the week, Jerome Powell underscored the good news, saying in a radio interview that Fed policy makers are "really close" to stabilizing inflation at the target in what would be a memorable accomplishment for central-bank policy.

Is there risk, however, that inflation will overshoot? That it won't stabilize at the target and instead shoot higher in what would be a policy-maker nightmare. When looking at consumer prices, most of the data are in fact subdued, showing no pass through from producer prices that have been rising all year. Yet the commodity side of the consumer price report, as tracked in the blue line, has been steadily rising driven by a 24 percent yearly gain in gasoline. The left side of the graph shows the weakness of commodity prices coming out of the 2014 oil collapse, a crater that is now long forgotten as oil, after toying with $75 early this month, is still holding over $70 at last check. In contrast to commodities, service prices, which are the green line, are very stable, holding at the 3 percent line all year. But it's commodities, specifically their path, that has to be carefully watched, especially whether a quick march through 3 percent toward 4 percent or higher would add pressure for the Federal Reserve to increase the pace of rate hikes.

The first hints of an overshoot would likely come from the producer level. If cost burdens here keep building, pass through to the consumer, at least to a degree, would be in play. Here the blue line, defined in this data set as goods, is also on the rise, peaking above 4 percent in what ultimately reflects high oil prices. And here the green line is showing more of a climb than on the consumer side. The trade services component of this line, which is closely watched and tracks costs at the nation's wholersalers and retailers, has posted very sharp gains the last two months. Some of this lift no doubt is coming from capacity constraints which are severe right now based on regional and private surveys that are showing unprecedented delivery delays and sharp gains in backlogs. These conditions point to higher prices ahead. Turning back to goods, some of the pressure is coming from higher costs for steel and aluminum, the result of the first tariff action in March.

Yet price pressure for metals may now be easing. After three months of elevated gains beginning in March, import prices for iron and steel declined slightly in June with prices for imported aluminum, which had also risen sharply, unchanged in the month. It will be interesting to see if these prices continue to flatten in the coming months. Working to keep all imported prices down is strength in the dollar as tracked in the green line of the graph. This year's climb in the dollar means greater purchasing power for foreign goods which will help to offset tariff effects: as the dollar goes up, import prices go down. Imported consumer goods, prices for which are tracked in the blue line, are the most pressing source of imbalance in the nation's cross-border trade, an imbalance that a strong dollar can help limit.

Another chapter in the inflation story, or at least a still pending chapter, is the jobs market. The lack of wage pressure is the big surprise of the last couple of years, showing no significant acceleration despite very low levels of unemployment and very high demand for workers. The blue line tracks job openings which are over 6.6 million against the green line of the unemployed which, for the first time in 20 years of available records, is below openings at just under 6.6 million. A job for everyone looking! This must be a worker's market yet prices, that is wages in this case, aren't showing any traction. The robust expansion in openings is evident in the  year-on-year rate, up a very impressive if not overheated 16.7 percent against a far distant 4.9 percent rise in hirings. This separation suggests that job hunters, though comparatively scarce relative to openings, may not have the right skill sets that employers are looking for. And maybe lack of skills helps explain the lack of wage pressure (not to mention softness in the nation's productivity growth). But those with skills are increasingly flexing their muscles and looking for new jobs as the quits rate keeps on rising, up 1 tenth to 2.4 percent. Jerome Powell, at his FOMC press conference last month, characterized the quits rate as elevated, a sign that workers are looking for other employers and higher pay.

And don't the employers know it. Jobless claims data continue to etch out multi-generational lows meaning that unemployment lines are looking very short. Initial jobless claims came down in the July 7 week, taking the blue line of the 4-week average back toward the 220,000 line. The green columns of continuing claims, which lag by a week, are at 1.729 million in the June 30 week. The dip for initial claims and the low levels for continuing claims offer very solid clues for the July employment report -- another month of standout strength.

Jerome Powell also said in the week that this year's tax cuts, together with the rise underway in government spending, point to several years ahead of economic strength. And make no mistake about it, the government's deficit is getting deeper. Nine months into the government's fiscal 2018, the deficit totals $607.1 billion which is up significantly -- exactly 16.1 percent -- from $523.1 billion at this time last year. Tax receipts this fiscal year are up 8.9 percent for individuals, at $1.305 trillion so far, and down 27.6 percent for corporations, at $161.7 billion. Narrowing the look to receipts starting when tax cuts took effect in January shows an 8.1 percent rise in individual taxes and a 32.4 percent decline for corporate taxes. The steep decline in corporate taxes is no surprise but the gain in individual taxes, reflecting the 1.5 million jobs created since January, does support the concept of dynamic scoring -- that lower taxes produce stronger economic activity which in turn generates employment and greater tax revenue in the end.

Markets: Never forget the Fed

It was only back in mid-June that the FOMC upped their rate forecast for the year, something that didn't go unnoticed by the Trump administration which has since, through Economic Council head Larry Kudlow, suggested the Fed take the slow path when hiking. But Jerome Powell isn't apparently taking the hint, speaking confidently on the Fed's independence and adding that there's been no behind-the-scenes contact by the administration. Independence speaks to the Fed's prerogative to raise rates, and as fast as they may want. But the stock market isn't scared as the Dow rallied sharply in the week from a year-to-date loss last week of 1.1 percent to a year-to-date gain of 1.2 percent.

For the bond market, it was a week of moderate selling especially in the short end of the Treasury curve. The spread between the 2-year yield and the 10-year narrowed several more basis points and now sands at 25 points (2-year at 2.58 percent and the 10-year at 2.83 percent). The tighter this spread narrows, the closer it gets to flashing a traditional recession signal for the economy. The dollar firmed on the week with the dollar index, at 94.75, adding 0.8 percent. Oil ended near $70.75 with gold near $1,240.

The bottom line

The economy is right where you want it: inflation is moderate and stable and employment strong and growing. And what risk there is in overshooting inflation, of overheated conditions, appears to be getting a remedy in the cooling form of tariffs. The economic currents right now are unusually crossed but the outlook for the second-half economy, barring a spike in wages or acceleration in trade frictions, does look favorable.

Week of July 16 to July 20

Aside from Jerome Powell at mid-week, the consumer and the factory sector are key themes in a week that gets started on Monday with retail sales where June strength is the call. But strength in May retail sales failed to pan out to overall strength in consumer spending which was held down by weak demand for services. Monday also sees the first of the week's factory updates with the July edition of Empire State which, in the last report for June, once again showed enormous strength along with, however, clear signs of capacity stress. Philly Fed will post its July data on Thursday following a June report that showed welcoming cooling. The week's most important factory update, industrial production on Tuesday, will offer the first definitive look at June's activity with solid bounce-back strength the expectation. Fed Chair Powell takes the hot seat on Tuesday before a Senate committee and on Wednesday before a House committee. Tariffs and trade wars and their possible effects, which were actively debated at the June FOMC and touched upon in Powell's radio interview in the week just passed, are hot topics certain to be discussed. Other data in the week include housing starts and permits on Wednesday, a report that has been showing uneven but often deceptive strength, and also the Fed's Beige Book that afternoon which will help set the atmosphere for the coming FOMC statement on August 1.

Monday

Retail Sales for June

Consensus Forecast: 0.6%

Consensus Range: 0.3% to 1.0%

Retail Sales Ex-Autos

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.6%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.5%

A second month of strength is expected for retail sales with the consensus looking for a sizable 0.6 percent headline gain. Two key discretionary categories, vehicles and restaurants, have been on the climb. Auto sales, based on a jump in unit sales, are expected to be a positive in June making for less strength in the ex-auto consensus, at a 0.4 percent gain. Ex-auto ex-gas sales are seen rising 0.5 percent with control group sales, which also exclude food services and building materials, expected to rise 0.4 percent.

Empire State Index for July

Consensus Forecast: 21.0

Consensus Range: 17.0 to 26.0

Order data were very strong in the June Empire State report which points to general strength for the July edition. Econoday's consensus for July is 21.0 vs June's 25.0.

Business Inventories for May

Consensus Forecast,  Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.4%

A healthy 0.4 percent increase is the consensus for business inventories in May, a constructive build that would nevertheless be too low given the strength of underlying sales.

Tuesday

Industrial Production for June

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.4% to 0.9%         

Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.7%

Consensus Range: 0.6% to 1.0%

Capacity Utilization Rate

Consensus Forecast: 78.3%

Consensus Range: 78.0% to 78.4%

A big bounce back is expected for industrial production, at a consensus gain of 0.6 percent in June vs May's 0.1 percent downtick. The manufacturing component is expected to produce an even greater rebound, at a consensus 0.7 percent gain vs a 0.7 percent tumble in May that was tied to a one-time disruption in the auto supply chain. Pressures on capacity utilization are expected to tighten 4 tenths to 78.3 percent.

Housing Market Index for July

Consensus Forecast: 69

Consensus Range: 68 to 70 

Home-builder confidence is expected to move a bit higher in July, to a consensus 69 for the housing market index vs 68 in June. Readings in this report have been cooling this year though gains in new home sales have been strong.

Wednesday

Housing Starts for May

Consensus Forecast, Annualized Rate: 1.320 million

Consensus Range: 1.290 to 1.350 million

Building Permits

Consensus Forecast: 1.333 million

Consensus Range: 1.300 to 1.360 million

A step back for housing starts and a move higher for building permits are the expectations for June, at a 1.320 million annualized rate for starts, compared to 1.350 million in May, and 1.333 million for permits vs May's 1.301 million. Monthly results in this report have been uneven but trends very strong with starts up 20.3 percent year-on-year and permits up 8.0 percent.

Beige Book

Prepared for the FOMC meeting on July 31 & August 1

The long refrain of "modest-to-moderate" economic growth was finally broken in the last Beige Book which, citing special strength in manufacturing, threw out "modest" and upgraded the assessment to "moderate" alone. Yet consumer spending was downgraded in the last report but then upgraded at the time of the June FOMC and then ultimately downgraded again following weakness in the subsequent personal income & outlays report. Anecdotes on wage increases and the availability of labor, given the strength in the labor market, could be keys in the July edition.

Thursday

Initial Jobless Claims for July 14 week

Consensus Forecast: 220,000

Consensus Range: 216,000 to 225,000

Initial claims are expected to come in at 220,000 in the July 14 week vs 214,000 in the prior week. All readings in this report are at or near historic lows and consistent with strong demand for labor.

Philadelphia Fed Manufacturing Index for July

Consensus Forecast: 22.0

Consensus Range: 18.0 to 24.5 

Re-acceleration is the consensus for July's Philly Fed report which in June slowed sharply from record strength in May. The consensus for July is 22.0 vs 19.9 in June.

Index of Leading Economic Indicators for June

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.4%

The index of leading economic indicators cooled in June to a 0.2 percent monthly gain. New strength and with it a more upbeat outlook on the second-half economy is the call for July, at an increase of 0.4 percent.