We’ll stay with the economy theme for this week’s update. As we’ve explored here, a thoughtful look at markets and the economy takes one way beyond the media commentators who are chosen for their ability to strike a nerve and to produce a provocative headline. Speaking of headlines, a quick Google search gave me these from the past few weeks:

Fannie Mae at Risk of Needing a Bailout

Fed Eyes Increased Risks for U.S. Economy

Europe’s Recovery Plan Fails to Impress

Yellen’s Bias Toward Higher Interest Rates

G-20 Says Economic Risks Have Risen Globally

Economists Lower Growth Estimates Amid Rising Recession Risk

U.S. Consumers Face Quickening Inflation

Here’s a glass-half-full one:

U.S. Economy Starting 2016 on Solid Footing

And here are my two favorites:

U.S. Retail Investors Dump Global Stocks (that’s a buy signal!)

Obama Seeks to Brighten Economic Mood (I wonder if he’d go there if he were a candidate)

The first of my two favorites is a favorite because the individual investor is forever on the wrong side of the trade. My parenthetical quip following the second speaks to a gloominess that forever seeps into election years as presidential hopefuls paint a picture of a desperate country in need of a savior. Not that things are all rosy in the good ole US of A, but are we truly living the desperation that some suggest??

So here, in a nutshell, is what last week’s data releases had to say:

Of the 16 major indicators with published economist estimates, 9 came in either above (8) or in line (1) with expectations. 7 missed.

Of particular note for me were durable goods: Orders for January surprised measurably to the upside. While one month does not a trend make, the report, following a better than expected industrial production read the week before, got my attention. The core capital goods improvement, should it continue, could be a huge positive for the economy going forward. Again, a one month rebound for a manufacturing sector that has been so stuck in the mud does not warrant celebrating. I.e., don’t hold your breath. Here’s Econoday:

The factory sector bounced back strongly in January, indicated first by last week’s industrial production report and now by durable goods orders which are up a very strong 4.9 percent. Aircraft did add to the gain but when excluding transportation equipment, durable orders still rose 1.8 percent. And core capital goods orders, which had been weakening, bounced back strongly with a 3.9 percent gain.

Personal Income and Outlays, and the PCE Core Price Index (the Fed’s preferred measure): The following from Econoday speaks to what I’ve been preaching for months and, while it’s very good (and comforting) news, it virtually has to make for some market anxiety over the course of interest rates going forward:

There’s plenty of life in the consumer. Personal income jumped 0.5 percent in January as did consumer spending, both readings higher than expected. Also higher than expected are the report’s inflation readings especially the core PCE which rose 0.3 percent for a year-on-year plus 1.7 percent.

Details are solidly positive with components on the income side led by wages & salaries, up a very strong 0.6 percent for the third large gain of the last four months. And consumers didn’t draw from savings on their January shopping spree, with the savings rate unchanged at a very solid 5.2 percent.

Components on the spending side are led by durable goods which jumped 1.2 percent and reflect strong vehicle sales in the month. Spending on services rose 0.6 percent in the month.

But the big story of the report is the core PCE, especially the year-on-year rate which is up from 1.4 percent to 1.7 percent and is pointing confidently toward the Fed’s 2 percent line. Total prices, which include food and energy, rose only 1 percent but the year-on-year rate for this reading has been on a tear, moving from about zero late last year to plus 1.3 percent in January.

Economic news outside of the consumer has been soft but today’s report is a reminder that the nation’s most important supporter is alert and in the driver’s seat. A strong consumer, who is benefitting from a strong labor market, together with the upward pivot for inflation will not make policy makers comfortable at next month’s FOMC where a rate hike, though long dismissed, may be a serious topic of discussion.

And, on the flip side, the PMI Flash Survey for Services: The service sector represents the bulk of the U.S. economy and has been the engine during this entire expansion. The preliminary read (negative) this report produced for February has to be a big red flag, and should to some degree offset market concerns over the Fed engendered by the recent readings on the consumer. Here’s Econoday:

In what could be a chilling indication of trouble ahead, the February flash for the service PMI slipped below breakeven 50 to 49.8 for the weakest reading since the government shutdown of October 2013.

New orders are still growing but at the slowest pace in nearly six years with contraction in backlog orders the most severe since early 2014. The 12-month outlook, though still positive, is the least positive in 5-1/2 years. Employment in the sample is still growing but for how long is a question. Price data are not favorable, with inputs down and growth in selling prices at a 5-month low.

The breakdown in the service sector, a breakdown however still isolated to this report, would leave the economy without a central point of strength. The declines here do suggest that domestic demand could be on the downswing and falling in line with sinking demand overseas.

Bottom line, despite some smart prognostications—and financial market signals—to the contrary, in my view the economic risk remains tilted to the upside… for now.

As for the markets, I’ll offer up my thoughts while we run through some charts: