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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | Vehicle Sales Soar in February |
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| Posted Under: Autos |
Sales of autos and light trucks soared in February to a 15.1 million annual rate, up 6.5% from January and 13.7% from a year ago. The results easily beat the consensus expected a pace of 14 million and were the highest since early 2008.
Some of the surge was part of the recovery from last year's multiple disasters in Japan: imports were up 8.6% in February and up 17.9% from a year ago. In addition, warm weather may have encouraged some buyers to purchase a vehicle now, rather than waiting. But the bottom line is that consumers would not be buying vehicles if they lacked confidence about the future.
As a result of the strong figures on auto sales as well as robust chain-store sales, reported earlier today, we are forecasting that overall retail sales were up about 1.9% in February. Moreover, with dealer inventories already very low, automakers will continue to ramp up production. This is good news for the economy and means the Federal Reserve has no justification for another round of quantitative easing.
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| | Fed Done: So Is Gold |
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| Posted Under: Gold • Government • Inflation • Research Reports • Fed Reserve • Interest Rates |
By Brian S. Wesbury
It was a Fed-watchers delight when Ben Bernanke told the US Congress that there would be no QE3 and that the next move by the Fed would be to tighten monetary policy.
Oops! That's not what he said. There were no quotable quotes to that effect. In fact, lots of people thought he said the opposite. A Wall Street Journal headline read Recovery Worries Weigh on Stocks, as "Bernanke took a cautious view of the U.S. recovery." The Washington Post said "Bernanke Strikes Cautious Tone...." If you take these headlines at face value, Bernanke was dour and his testimony was about a weak economy and the potential for more ease.
But the gold market did not miss the message – gold futures fell $77 yesterday. And stocks were down on disappointment about the potential for more quantitative easing (QE3). We agree with gold and read the testimony in the opposite way of the popular press.
Bernanke's testimony actually showed incredulity at the strength of the economy. He explained that job growth has been strong, but then said that the "decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected." The Fed is still stuck in the potential GDP trap. It believes the economy is well below its potential and not growing at its trend. As a result, the Fed is surprised that inflation remains above its forecasts, and it is incredulous that job growth has been strong.
Many look to the Fed for the final word on the economy and, therefore, this incredulity is interpreted as a dour outlook. In fact, the Fed, along with many forecasters, has been way too pessimistic on the US economy. But the data keeps coming in more strongly than the Fed thinks it should and it can no longer deny it.
What this means is that Bernanke cannot possibly justify QE3. He wants to justify it, but he can't. This can be understood clearly by analyzing an answer to a question in the House Financial Services Committee, when Bernanke said "it is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero."
What he is talking about here is that some Taylor Rule-type-estimates say that the federal funds rate should be negative. These models use GDP relative to potential, unemployment relative to the natural rate and a target inflation rate, to estimate the correct target for short-term interest rates. But because rates can't go below zero, the Fed wants to do more quantitative easing.
This raises an important dilemma for anyone who does not view the world through models alone. If the necessary interest rate really is negative, but rates cannot go below zero, then how is the economy growing? The Fed says it is growing because of QE1 and QE2. We seriously doubt this proposition because there has been no QE3 and the economy and stock market are both doing better. Moreover, even though the Fed's balance sheet has grown, M2 has not accelerated. Please see charts above, which show the monetary base and M2 relative to a 6% growth line. We borrow these charts from our good friend Scott Grannis, the Calafia Beach Pundit. They show that QE, which has boosted the monetary base, has not created a surge in M2. The monetary base has exploded, but M2 has not, and if M2 is not rapidly expanding, then QE has not boosted the money supply.
The bottom line is that even though Bernanke wants to make the case for QE3, he can't. In fact, better news on the economy has cut the Fed off from doing more massive easing projects. In the end, we believe the Fed has finally run out of justification for its excessively easy monetary policy. As the quarters ahead unfold, the prospects of more ease will continue to wane. This is good news for stocks – which do not do well with accelerating inflation – but, it is bad news for gold. Gold is done....and so is the Fed.
Click here for a printable version.
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| | The ISM manufacturing index fell to 52.4 in February from 54.1 in January |
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| Posted Under: Data Watch • ISM |
Implications: Manufacturing came in softer than expected in February, but remains solidly above 50, signaling continued expansion in the factory sector. The ISM manufacturing index has now remained above 50 for 31 straight months and just in case you still think a double-dip is possible, the new orders index, although lower than last month, came in at a healthy 54.9 suggesting more growth in manufacturing ahead. The employment index moved down slightly to 53.2 but remains solidly above 50, confirming other positive news on the labor market. The one sub-index that remains weak is inventories. The reluctance of manufacturers to accumulate inventories may hold back GDP in the short term, but we view this reluctance as temporary and indicative of better future growth. On the inflation front, the prices paid index rose to 61.5 in February, the highest level since June 2011. Monetary policy is very loose. As a result, this index will move higher in the months ahead. In other news this morning, construction declined 0.1% in January, but was up 1.3% including upward revisions for prior months. The slight dip in January itself was due to commercial construction, led down by power plants and manufacturing facilities. Still, these two categories are up in the past year by 28% and 38%, respectively. Home building was up 1.8% in January, the sixth straight monthly gain. Single-family home building is up eight months in a row, and all without the temporary support of a homebuyer tax credit, like back in 2009-10.
Click here for a printable version.
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| | Personal income increased 0.3% in January while personal consumption rose 0.2% |
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| Posted Under: Data Watch • PIC |
Implications: Personal income and spending were up modestly in January itself, with both rising but moving up less than the consensus expected. However, consistent with yesterday's update on quarterly GDP and income, prior months were revised up. As a result, income was 1% higher than we previously thought, while spending was 0.4% higher. "Real" (inflation-adjusted) consumer spending was unchanged in January, just like November and December. But this recent trend is unlikely to last. Excluding transfer payments, "real" (inflation–adjusted) personal income was up 0.2% in January and up 1.9% from a year ago. Meanwhile, in the past year, real private-sector wages and salaries plus real small business profits are up 3.2% - that means this income is rising 3.2% faster than inflation. In addition to these income gains, consumer spending will be supported by the large reduction in households' financial obligations the past few years. Recurring payments like mortgages, rent, car loans/leases, as well as other debt service, are now the smallest share of after-tax income since 1993. On the inflation front, overall consumption prices are up 2.4% in the past year, above the Fed's supposed target of 2%. "Core" prices are up 1.9% from a year ago, the most since 2008. Given the loose stance of monetary policy, we expect inflation to accelerate in the year ahead, both overall and for the core. In other news this morning, new claims for unemployment insurance declined 2,000 last week to 351,000. The four-week average dropped to 354,000, the lowest since March 2008. Continuing claims dipped 2,000 to 3.40 million, the lowest since August 2008. These data suggest we had another month of robust payroll growth in February.
Click here for a printable version.
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| | Real GDP was revised up to a 3.0% annual growth rate in Q4 from a prior estimate of 2.8% |
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| Posted Under: Data Watch • GDP |
Implications: Real GDP growth in the fourth quarter was revised up, coming in at a 3% annual rate versus a consensus expected and prior estimate of a 2.8% rate. Most major categories were only revised slightly. Commercial construction was better than first thought and so was personal consumption. There were very slight downward revisions to inventories, which means the composition of growth was also more promising for the economy going forward. The biggest drag on growth in Q4 was government purchases, driven by a wind-down of operations in Iraq and continued state and local spending cuts. Excluding government, real GDP grew at a robust 4.7% and was revised up to 2.7% for 2011. Nominal GDP (real growth plus inflation) grew at a 3.9% annual rate in Q4, up from the original estimate of 3.2%, and is up at a 3.8% rate in the past year. The Federal Reserve faces an uphill battle trying to justify another round of quantitative easing based on the growth rate of nominal GDP. Zero percent interest rates are inappropriate when nominal GDP growth is this high. The most newsworthy part of today's report is that there was a large 1.6% upward revision to wages and salaries. Better growth in personal income is a great sign for the economy moving into the new year. In other news this morning the Chicago PMI, a measure of manufacturing in that region, increased to 64.0 in February, easily beating the consensus expectations of 61.0 and is now at the highest level since April 2011.
Click here for a printable version.
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| | New orders for durable goods dropped 4.0% in January |
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| Posted Under: Data Watch • Durable Goods |
Implications: New orders for durable goods slumped 4% in January, coming in well below consensus expectations. However, the drop follows two steep gains in November and December. Even with the drop in January, orders are up at a robust 13.6% annual rate in the past three months. Two major factors were behind the drop in January. First, orders for civilian aircraft fell 19% after a gain of 21% in December. It is not unusual for these orders to be extremely volatile from month to month. The second reason for the drop is that they are often the weakest in the first month of every quarter and this is particularly true in January. Then, orders tend to rebound in the second and third months of each quarter. Given this pattern, we think the underlying trend in business investment is still upward. It is unlikely that the drop in January is due to the end of full expensing for tax purposes. To get full expensing, equipment had to already be in place by last year, so the order had to be placed at least a few months ago. Monetary policy is loose, interest rates are extremely low, and businesses are reaping record profits while they already have record amounts of cash on their balance sheets. Moreover, capacity utilization at US factories is approaching its long-term norm, meaning companies have an increasing incentive to update their equipment. Supporting this trend, unfilled orders for durable goods hit another all-time record high in January and are up 9.4% versus a year ago. In other news today on the factory sector, the Richmond Fed index, which measures manufacturing activity in mid-Atlantic states, increased to +20 in February from +12 in January. The gain easily beat consensus expectations of +14 and was the highest since Feb 2011. On the housing front, pending home sales, which are contracts on existing homes, were up 2% in January and up 10% from a year ago, suggesting future gains in existing home sales. The Case-Shiller index, a measure of home prices in the 20 largest metro areas around the country, declined 0.5% in December (seasonally-adjusted) and is down 4% versus a year ago. The index is now the lowest in almost 10 years, but we anticipate a modest gain in 2012.
Click here for a printable version.
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| | Don’t Bet on a Correction |
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| Posted Under: Monday Morning Outlook |
The US stock market has defied all but its most bullish friends. Last Friday, the S&P 500 closed at a 1365, its highest close since May 2008. It's up 8.6% so far in 2012 and 24% from its low of 1099 on October 3, 2011. The NASDAQ Composite Index has performed even better – up 13.8% so far this year and 26% from the October lows.
None of this has deterred those involved in the three main branches of bearishness. The first branch is the long-term bears, who still believe that the 2008 financial crisis changed everything. It signaled a new normal of slower economic growth, deleveraging and reduced expectations.
These long-term bears think that problems in Greece, and Europe, are just the continuation of the 2008 financial crisis. Some even blame the US for causing Europe's problems.
The long-term bears think economic problems have been papered over by government stimulus, Federal Reserve accommodation and the European bail-out. They fret that all of these economic mistakes cannot and will not cover up the crisis for much longer and that a relapse into crisis could occur.
The second branch of bearishness is a medium-term series of fears about a double-dip. These bears fret about high oil prices, inflation, deflation, weak consumer confidence, foreclosures, uncertainty about Obamacare, Dodd-Frank, the expiration of the Bush tax cuts, low interest rates, the labor force participation rate, and the list goes on and on. These bears think the economy is vulnerable to a relapse of weakness caused by just about anything.
The third branch is all about short-term trading. Many traders think the market has overdone it. They follow technical measures – valuation tools based on how far, how fast, how lopsided, how volatile a market has been. Many traders think the market is over-valued.
What is interesting is that these technically-driven traders will often argue their points by borrowing from the other branches of bearishness. For example, traders will say that the market is over-valued and high oil prices will be the catalyst to knock the economy and markets back down. They are trying to back up their technical analysis with some fundamental fear.
Nonetheless, with so many clamoring for a correction, should investors expect one? And, if so, should they trade it?
Our advice to investors is that they should ignore all this talk about a correction. Last August and September is the perfect example. The stock market was getting slammed. All three branches of the bears were standing on their hind legs, growling loudly and beating their chests. Short-sellers made tremendous profits.
But then the stock market turned around on a dime when no one expected it to. Even though the bears have remained bears, the market had a huge October and then continued on its merry way to new post-crisis highs. Investors who sold in August or September have paid a huge price.
There may be a trader who can capture all of this, but in the end, the history of America is clear. Bears make money every once in a while, but it's the long-term bulls, who believe in the steady progress of technology and wealth creation, that make money most consistently. Don't bet on a correction.
Click here for a printable version.
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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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