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Dazed and Confused

12:00 AM, Aug 2, 2014 • By IRWIN M. STELZER
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·     Consumers remain cheerful enough to continue snapping up new vehicles. A prominent Los Angeles dealer told me his only problem is that he can’t get enough of GM’s giant Suburbans to satisfy his customers’ demand.

·     The manufacturing sector expanded in July for the 14th consecutive month.

Add to this plethora of data what we learned about the job market at week’s end. Some 209,000 new jobs were created in July, extending the streak of above-200,000 new jobs to six months, the longest such run since 1997. The unemployment and labor-force participation rates, and the number of long-term unemployed were little changed from levels at the beginning of the summer. Most observers characterized the news on the jobs front as not so hot as to force the Federal Reserve Board to bring forward its plan to raise interest rates in mid-to-late 2015, and not so cold as to compel it to end the gradual reduction of its bond-buying stimulus. A Goldilocks report in the jargon of Wall Street. 

The central bank’s monetary policy committee is now concentrating on selecting from among the many tools in its kit which ones will push interest rates up without aborting the recovery. Investors know an increase is inevitable, but are hoping that with nineteen million Americans either un- or underemployed, the labor force participation rate at historically low levels and wages more or less stuck, Fed chairwoman Janet Yellen, who is extremely sensitive to the social consequences of joblessness, will not bring forward the inevitable tightening. My guess is that the Fed will stick with its mid- or late-2015 date rather than heed the calls of those Fed governors who are arguing that the economy has already achieved lift-off and that the bank should push rates up earlier, perhaps very early in 2015. These dissidents believe Yellen is wrong to believe that faster growth will bring millions back into the labor force, reducing upward pressure on wages and therefore inflation. Instead, the inflation hawks fear that by waiting too long to raise interest rates, the Fed is repeating past errors, and storing up inflationary pressures.

So here is where matters stand after a confusing, mind-boggling, data-rich week. The economy is neither as strong as the headline 4 percent growth rate suggests, nor as weak as the first-quarter 2.1 percent shrinkage of the economy indicated. The jobs market continues to recover, but at a rate not so rapid as to force the Fed to raise interest rates sooner than it has planned. Some day Yellen will enter a policy meeting humming, “The party’s over, now you must wake up, all dreams must end.” But not for another year.  

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