Jerome Powell Pledged Allegiance to Data and Some of It Looks Grim By Bloomberg

© Bloomberg. Jerome Powell Photographer: Andrew Harrer/Bloomberg

(Bloomberg) — Jerome Powell gave the U.S. economy a thumbs-up review last month. Since then, the Federal Reserve chairman has received several reasons to temper his assessment.

On one hand, labor data are coming in strong and consumption figures look fine. On the other, the latest manufacturing, housing and market readings have given the central bank further reason to worry. That means when Powell speaks in Atlanta at 10:30 a.m. on Friday, he could justify a more cautious tone solely on the basis of observing the data-dependent approach he’s said the central bank will follow.

“The message he’s going to try to convey is that we are not on a preset course here,” said Jay Bryson, global economist at Wells Fargo (NYSE:) in Charlotte, North Carolina. He expects the tone could tilt slightly dovish without actually signaling a pause. “They’re going to continue to say: we’ll watch the incoming data, growth is slowing, financial conditions have tightened, and we’ll react accordingly.”

For their part, investors see the next move being a cut, according to pricing in interest rate futures contracts. That would be the first such move in a decade.

Here’s a run-down of the data that have — and haven’t — changed since the Fed chief briefed the media on Dec. 19 after policy makers raised rates and signaled two more hikes in 2019.

Factory Pain

If there’s one place where the data are souring decisively, it’s manufacturing. The Institute for Supply Management’s factory index dropped by the most since 2008 last month and touched a two-year low. While the ISM gauge remains in expansionary territory at 54.1, just 11 of 18 industries reported growth in December. That’s the fewest in two years.

Production problems are far-reaching. JPMorgan Chase & Co (NYSE:). and IHS Markit’s global manufacturing index fell in December to the lowest level since September 2016 as measures of orders and hiring weakened, data showed this week.

Trade uncertainty and concerns about global growth seem to be an important factor in the recent U.S. weakness: tariff worries have surfaced repeatedly in Fed surveys. Apple Inc (NASDAQ:). cut its revenue outlook this week for the first time in nearly two decades thanks to weaker demand in China.

Housing Wobbles

Fed officials watch the housing market because it’s an interest-rate sensitive sector, and it’s been showing signs of cooling for months. That hasn’t abated since the Fed last met: the pending home sales index dropped 0.7 percent on a monthly basis in November, compared to an analyst expectation for a 1 percent gain. Home prices are still rising, but the latest S&P CoreLogic Case-Shiller index showed that gains continue to moderate.

Market Souring

While it’s not a real-economy measure, the Fed closely watches market volatility because it can feed through to consumer and business sentiment and the real economy. Stocks saw the worst December rout since the Great Depression and a few near-term Treasury security yields have crept above their longer-term counterparts since Powell’s December press conference, a sign that investors were pessimistic about the outlook for growth.

That’s enough to make Powell’s colleague in Texas, Dallas Fed President Robert Kaplan, argue for putting rate increases on hold for the first couple of quarters of 2019.

“This is a very critical time. We need to be very vigilant. We need to be on our toes. And I think patience is a critical tool we should be using during this period. We can get this right,’’ Kaplan told Bloomberg Television in an interview on Thursday.

Inflation Mixed

Inflation hasn’t taken a decisive step lower, but the headline index eased to 1.8 percent in November from 2 percent the prior month. That means that both the headline and the less-volatile core index are coming in below the Fed’s goal, a possible argument for not raising rates, all else equal.

Chaser: the Job Market

Still, with unemployment at 3.7 percent, some economists caution that inflation could move higher if labor shortages begin to bite — that’s partly why the Fed hiked rate four times last year.

The labor market has remained relatively impervious to the recent weakness in other data. Initial jobless claims, a key leading indicator of recession, remain very low. The U.S. probably added 180,000 jobs in December, based on the median projection in a Bloomberg survey of economists. That’s well above the level Fed officials think is necessary to keep the unemployment rate steady, a figure that hovers somewhere below or around 100,000.

The monthly U.S. employment report will be released at 8:30 a.m. in Washington on Friday — giving Powell two hours to digest the figures before his big appearance.

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