More worrisome is the core data on shipments in April, which declined after two consecutive monthly increases. This suggests that business investment could be even weaker than forecast in the second quarter, unless some of the orders we saw in April can be converted to shipments quickly.

Separately, defense orders picked up, but mostly for aircraft, which take a long time to build and are at risk given defense cuts embedded in the sequester. Indeed, defense shipments remain on a downward trajectory.

Bottom Line: The auto sector remains the bright spot in the manufacturing data. What we need next is to turn overtime into new plants and expansions. We are also still waiting to tip the scales in favor of more housing investment. It is the waiting that is slowing momentum.

Separately, new home sales rose to a 454,000 unit pace in April, up 2.3% from March, and almost 30% ahead from a year ago. The supply of new homes on the market remains constrained, with the inventory levels hovering near four months, almost half the backlog of two years ago. This is despite a pickup in construction over the last year, and suggests more construction in the months to come.

Gains were uneven, with strong increases in the West and South (which include some of those hardest hit by the subprime crisis), tempered by a drop in new home sales in the Midwest and Northeast. There was a pickup during the month in more expensive homes, which probably reflects the uneven healing of balance sheets in recent months. Wealthy households have benefited more from the recent run up in stock prices than the population as a whole.

Bottom Line: The housing market continues to heal, which is critical for a more broad-based improvement in the labor market. Single-family home construction is a large job generator. We are still recovering from a low level of activity, however, which will keep the Fed buying assets at its current pace ($85B per month) for the next couple of meetings. Only then will they consider tapering, and even then, the Fed will still be providing considerable support for the economy.

An unusually large number of investors remain in the market, buying to flip. These are cash buyers, who are circumventing the mortgage market, and buying multiple properties at a time. They are pushing up the prices of starter properties. First-time home buyers continue to fall as a share of the market, despite record affordability. Tight mortgage market conditions and an overhang of student debt are limiting their access to credit.

Sales were up in all regions but the Midwest. Investors are concentrating on those areas that were hardest hit by the subprime crisis, which were heavily concentrated in the sand states – Arizona, California, Florida and Nevada.

Bottom Line: Housing is on the mend, but remains weak relative to demand and long-term demographic trends. Chairman Bernanke made clear he will continue to provide support for the broader economy and the housing market today. Construction, in particular, needs to pick up. Separately, there is concern about the inflow or lack thereof, of first time buyers for the medium term.

On the surface this data appears promising:
1. Consumer credit expanding for 19 months in a row
2. The expansion being carried mainly by Nonrevolving Credit
3. Revolving credit growing modestly after consumers were forced to deleverage after the crisis.

The issues arise once you delve deeper into the data and consider the composition of growth (see chart below).

The chart above breaks down total consumer credit into 7 categories, one for revolving credit and 6 for the components that make-up nonrevolving. As seen by tracking the dark blue portion of the data at the bottom of the chart, over the last 4 years most of the growth in total credit, let alone nonrevolving credit has been driven almost exclusively by student loans backed by the federal government (see chart below). Since the onset of the financial crisis student loans have buoyed overall credit contraction and is now making overall growth appear higher than it would be without the explosion in student loans. Total consumer credit is up 6.0%, in March, compared to last year, but if you strip out student loans growth is posting a much more moderate 2.2% over last year.

Add to that, student loans continue to grow at a pace much faster than any other component. Currently federally back student loans make up 20.3% of all of consumer credit outstanding – in December 2007 it made up a mere 3.7% of the total (see chart below).

This explosion in easy credit, backed by the federal government needs to be monitored. There is potential that these sorts of debt loads will dampen consumer spending for years to come, for those who have the ability to repay, or worse adversely affect the federal government’s deficit and debt when borrowers default on these loans due to their inability to make payments based on the poor jobs market and stagnant wages.

Expectations about the future also improved to 74.8 in May from 67.8 in April. This is good news, but still recovering from a low base.

Shopping plans, particularly for big-ticket durable goods, were encouraging. Refinancing picked up in late 2012 and early 2013; in the context of rising home prices, that is allowing consumers to redeploy  savings on home remodeling, repairs and vehicle purchases. The pent-up demand in all those areas is substantial.

Bottom Line: Those who doubt the efficacy of the Federal Reserve’s quantitative easing just need to look at the resilience of the U.S. consumer. The recoveries in both equity and home values are having an impact on the real economy.

A better measure of inflation is the personal consumption deflator (PCE); it includes more services and is weighted by how consumers shift spending across sectors in more accurate measures of the change in price levels the consumer is actually paying; the PCE is currently running even cooler than the CPI.

Separately, the Cleveland and Dallas Federal Reserve Banks produce trimmed price measures in which they try to get at the best, underlying inflation trends. The Dallas Fed excludes two extremes in any given month’s price measures; that is, statisticians pull out the largest increase and the largest decrease from the data. For example, one month in the mid-2000s, the Dallas Fed found the largest increase in prices occurred in coffins while the largest decrease occurred in guns; the Director of Research surmised there might be a correlation.

No matter how the price data is cut, all indicators of inflation show a disturbing trend toward decelerating price inflation. Moreover, all price measures suggest we are getting dangerously close to losing any buffer zone on inflation, which is extremely costly. (Japan offers the  best example of these dangers, with its two “lost decades.”)

Separately, it is extremely important to delineate between inflation or the change in price levels and actual prices. Gasoline prices remain elevated, for instance, despite recent declines. (Chicago is one of the few markets not to experience big declines.)

The government data is far from perfect, but it is better than data elsewhere. Mistakes are easier than manipulation, given how the statistical system is set up. It executed by people who have been in their jobs through multiple administrations on both sides of the aisle. They are stat nerds, who care deeply about doing the best they can, and their debates are at the most minutia level of mind numbing detail, but I am glad they are there. The data is also gathered across agencies, which makes it even more difficult to “manipulate.”

(I have spent a lot of hours with our nation’s statisticians; they are a remarkably competent, politically deaf, and thankfully boring group.)

The Consumer Price Index (CPI) fell 0.4% in April, largely in response to a sharp drop in prices at the pump. We also saw some discounting in apparel as retailers pushed to clear the shelves of spring merchandise after a chilly March. More encouraging for the federal deficit, which is now shrinking, was a decline in medical care services last month. The moderation in medical costs has been one of the pleasant surprises for both consumers and deficit hawks in recent years. The jury is still out over whether the moderation is cyclical (because people out of work don’t have insurance) or structural (efficiency gains in the medical industry); it is probably some combination of both, which means the decisions we have to make about entitlement spending are not as dire. The narrowing of the deficit and slowdown in medical inflation, however, seem to have fed complacency on the federal budget instead of opening the door for compromise. A true opportunity lost if it persists.

Separately, real wages jumped 0.5%. The drop in prices at the pump acted like a tax cut and helped support wage and spending growth during the month.

Finally, jobless claims moved back above the 350,000 threshold to 360,000 during the week of May 11. The report said that there were few signs of sequester cuts, which have been delayed most notably at the Department of Defense. Also, the seasonally unadjusted claims actually declined during the week, which may be more a reflection of problems with the seasonal adjustment than renewed weakness in the private sector. One week does not make a trend.

Bottom Line: The economy is moderating but not falling off a cliff. Unfortunately, the worst of the headwinds associated with the sequester are still ahead of us, which means more speed bumps over the summer, especially in light of ongoing gridlock in Washington.

We are also seeing weakness in equipment production, which is a partial reflection of the late spring and inability to get crops planted. Investment in new equipment also remains lackluster.

Separately, the effects from sequestration and the pullback in Iraq and Afghanistan are beginning to show up in defense production. The bulk of the direct cuts associated with sequestration have been delayed until summer. The Department of Defense couldn’t believe Congress would allow such broad-based and sensitive cuts to occur, so officials dragged their heels on implementing them. Indeed, it appears the private sector is well ahead of the government sector in dealing with the cuts, which should not be a surprise. It will be interesting to see how strong the resolve of Congress remains as key districts absorb a disproportionate amount of cuts. One can only hope some pragmatism seeps into Washington.

Bottom Line: Industrial production is just another in a series of data points suggesting the economy has weakened but is not collapsing in the second quarter. Along with subdued inflation, however, it will mean steady-as-she-goes on monetary policy come the June Federal Open Market Committee (FOMC) meeting. We do not see the Fed being able to taper yet.

The only major increase in the index for finished goods in April was pharmaceuticals, which rose 0.6%. Pipeline inflation, which shows intermediate and crude materials, was also down for the month. The other outlier was a sharp 15.5% jump in natural gas prices, which is not likely to persist given production in the energy sector and efforts to free up natural gas markets south of the U.S. border in Mexico.

Bottom Line: Inflationary pressures continue to abate amid signs that the economy is once again slowing. The risk is that prices abate further given the lack of interest in curbing cuts from sequestration over the summer. Look for a delayed hit to medical care costs in the broader consumer price indices this summer, which will limit reimbursements to doctors and hospitals. Recent reductions in the deficit seem to have relieved pressure on our elected officials to compromise but could ultimately increase the burden on the Federal Reserve to do more, whether that helps or not.