This email subject certainly stood out when it in our inbox a little while ago:
Bam! Factory run rate at all-time record highs; Fed rate hikes on the radar
That’s from economist Chris Rupkey at Mitsubishi Financial responding to this morning’s industrial production data.
May Industrial Production jumped 0.6% (vs. expectations of 0.5%) and there were nice upward revisions to previous months.
According Rupkey, the US is now officially firing on all cylinders: “Slack, what slack? This isn’t a recovery anymore, it is a full-on economic expansion. The old peak before the recession in this timely monthly measure of factory output was 100.8 in November 2007, now today it is up 0.6% in May to 103.7.”
And if you think the economy is still generally weak, you don’t know what you’re talking about says Rupkey, “You think the economy is running at a sluggish 2% pace? Think again. Consumer goods up 3.1% the last year, business equipment production up 5.3%, construction up 4.4%, materials up 5.1%.”
The upshot is that with no, to little, slack in the economy, it’s only a matter of time before the Fed feels compelled to act to hike interest rates and cool things down. “Fed policy is behind the curve if industrial production was the one desert-island statistic on the Fed’s dashboard guiding monetary policy,” Rupkey writes.
That the economy is starting to hum, and that it’s only a matter of time before the Fed taps on the breaks is a growing meme on Wall Street.
Last week, Goldman’s top economist Jan Hatzius said the economy is finally growing at an above-trend pace.
And last Friday, BoE chief Mark Carney warned that rate hikes in England could come sooner than the market expects. And many started wondering whether what happens in England is a preview of what happens in the US.
Some observers, like Jan Hatzius, would like to see a little more data to feel confident that the breakout is here (and some observers, like Tim Duy aren’t really buying it at all). But the story that the economy is hot and the Fed will soon eye the exits is a hot one that people are passing around.