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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | Industrial production was unchanged in February |
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| Posted Under: Data Watch • Industrial Production - Cap Utilization |
Implications: Today's report on the factory sector was very deceptive. Industrial production was unchanged in February, much less than the consensus expected, but prior months were revised up by 0.3%. Strength in the factory sector was obscured by a 1.1% drop in mining output. In addition utility output, because of warmer weather, was unchanged. Taking out utilities and mining leaves just the manufacturing sector, which rose 0.2% in February and 0.7% including upward revisions for prior months. Higher production is making factories use higher levels of capacity. Utilization in manufacturing is now at 77.4%, the highest since March 2008 and near the 20-year average of 77.7%. As capacity use moves higher, firms have an increasing incentive to invest in more plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments.
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| | The Consumer Price Index (CPI) increased 0.4% in February |
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| Posted Under: CPI • Data Watch |
Implications: Consumer prices rose 0.4 percent in February, matching consensus expectations and the most in ten months. Energy led the way as the big jump in gas prices accounted for about 80% of the increase in February's report. In the past three months, energy prices have risen at a 8.1% annual rate while overall consumer prices are up at a 2.5% annual rate. This is a stark contrast to the same three months a year ago, when energy prices were rising at a 32.8% annual rate and consumer prices were rising at a 4.8% rate. As a result, year-ago price comparisons have been decelerating. Back in October, consumer prices were up 3.6% from a year ago; now prices are up 2.9% from a year ago. This deceleration is likely to continue into the Spring, which means prices will still be rising, but not as quickly as they were the same time a year ago. However, do not expect the respite from higher inflation to last. Monetary policy is very loose and we are already seeing oil and gas prices continue to move higher. In addition, housing costs (which are measured by rents, not asset values) are rising as well. Owners' equivalent rent, was up 0.1% in February and is up at a 2.0% annual rate in the past six months. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. Meanwhile, "core" inflation, at 2.2% in the past year, is above the Federal Reserve's target. With loose monetary policy and housing costs accelerating, it's hard to see core inflation getting back down to the Fed's 2% target anytime soon. On the earnings front, "real" (inflation-adjusted) wages per hour were down 0.3% in February. Although these earnings are down 1.1% from a year ago, the number of hours worked is up 2.7%, giving consumers more purchasing power. No justification here for a third round of quantitative easing.
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| | The Producer Price Index (PPI) rose 0.4% in February |
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| Posted Under: Data Watch • PPI |
Implications: Forget about producer prices for a second. New claims for unemployment insurance dropped 14,000 last week to 351,000, the lowest level since March 2008. The four-week average remained at 356,000. Continuing claims fell 81,000 to 3.34 million, the lowest since August 2008. These figures suggest continued robust gains in payrolls for March. Back to inflation,...what is the Fed thinking? The PPI was up 0.4% in February, the largest increase in five months, with most of the gain largely due to energy prices. And there's obviously more of that coming in March. "Core" prices, which exclude food and energy, and which the Fed focuses more attention on, were still up 0.2% in February. They're also up 3% from last year and an even faster 3.6% rate over the last three months. Overall producer prices are up 3.3% from a year ago. We continue to believe the Fed has no room to implement another round of quantitative easing. In other recent inflation news, import prices were up 0.4% in February. All of the gain was due to oil. Ex-petroleum prices dipped 0.2%. In the past year, overall import prices are up 5.5% while ex-petroleum prices are up only 1.6%. Export prices increased 0.4% in February and are up 1.5% in the past year. Ex-agriculture, export prices were up 0.5% in February and are up 2.6% in the past year. Due to loose monetary policy, we think these inflation measures will head upward later this year. In other news today, the Empire State index, a measure of manufacturing activity in New York, increased to +20.2 from +19.5 in February. The Philly Fed index, a measure of activity in that region, increased to +12.5 in March from +10.2. Both indices beat consensus expectations.
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| | No Sign of QE3 |
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| Posted Under: Gold • Government • Inflation • Research Reports • Fed Reserve • Interest Rates |
Absolutely no sign of a third round of quantitative easing. That was the big news from today's statement from the Federal Reserve. The stance of monetary policy remains unchanged.
The only alterations to the Fed's statement, compared to what it released after the last meeting on January 25, indicated somewhat faster economic growth and higher inflation.
The Fed said unemployment "has declined notably," growth in coming quarters should be "moderate" (last time it said "modest"), and that strains in global financial markets have eased. On inflation, the Fed acknowledged that crude oil and gas prices have risen lately, but says these increases will only keep inflation up "temporarily."
Otherwise, the Fed made no changes to interest rates, the size of its balance sheet, or its policy of paying interest on excess reserves. In other words, no third round of quantitative easing. Given the re-acceleration in the economy we continue to think QE3 is a ship that will never sail.
Once again, the only dissent came from Richmond Bank President Jeffrey Lacker, who believes economic conditions will warrant raising rates before late 2014.
Click here to view the entire report.
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| | Retail sales grew 1.1% in February |
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| Posted Under: Data Watch • Retail Sales |
Implications: Great report on retail sales today. Sales grew a strong 1.1% in February, the fastest pace in five months. Sales are up in 19 of the last 20 months and 6.5% above where they were a year ago, easily outstripping retail inflation. Auto sales were strong and higher gas prices were a factor as well, but the gains were widespread across most sectors. For example, spending on building materials rose 1.4% in and is accelerating, up 13.8% from a year ago, but up at an even faster 26.8% annual rate over the past three months. Some of this is probably due to warm winter weather. Also important were the upward revisions for prior months. Including those revisions, overall sales were up 1.6%. And "core" sales, which exclude autos, gas, and building materials, were up 1%. Assuming that the level of retail sales for March is unchanged from February, sales will be up 6.7% at an annualized rate in the first quarter from the fourth quarter, a great sign for nominal growth. Between increasing incomes and smaller debt repayments, the US consumer is able to ramp up spending. We expect all of these trends to continue.
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| | The Bears' Five Stages of Grief |
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| Posted Under: Monday Morning Outlook |
The economic bears have had it rough the past few years. They keep bashing the economy, but it keeps recovering. Watching them fight through the five stages of grief is educational. First there was denial, then anger (some are still in this stage), now it's bargaining.
The bears say, yes, the jobs numbers were good in February: nearly 300,000 private payrolls (with revisions) while the household survey showed 428,000. The unemployment rate stayed at 8.3% due to an increase in the labor force of 476,000. That gain undermined the bears' denial about the recent drop in the jobless rate, where they were saying it was all due to a shrinking labor force, with fewer people looking for jobs.
The bargaining has now begun and the bears are saying "job growth might be OK, and the labor force may be growing, but the jobs are inferior, low paying and of low quality." This is actually an old argument, the same one liberals used in the 1980s to denigrate the huge job creation in the Reagan expansion, calling them "McJobs."
It's true that temporary jobs, which make up only 2.2% of all private sector positions, have accounted for almost 13% of job growth in the past two years. But this is not unusual. Temp jobs are always more cyclical than the rest of the economy, falling more when the economy shrinks and rising faster when it recovers. At 2.2% of all private sector jobs, the share is still lower than the peak in 2000, as well as where it was in 2005-07.
It's true, as well, that health care jobs are expanding. But, in the past two years, health care jobs have held steady at just below 13% of all private-sector jobs. No increase in their share of the workforce. In other words, the growth in this sector mirrors job growth overall.
It's also true that jobs at bars and restaurants are growing faster than the rest of payrolls. But that's part of a long-term trend. In the past two years, 13.5% of all private payroll gains have been at bars and restaurants. But these same positions accounted for 15% of private payroll gains in 2003-07.
None of this is to say that that the job market could not be better, even much better. The expansion in the size of government over the past several years has resulted in slower job creation and slower wage growth than would otherwise be the case. The bigger the government, the smaller the private sector becomes and the less dynamic the economy. This undermines opportunity and interferes with free market growth. If you want to understand this, think jobs not created by the Keystone project, and the bankruptcy and job loss at Solyndra.
Shrinking the size of government over the next decade would accelerate payroll gains and raise living standards at a faster pace. But even these mistakes can't stop an amazingly resilient economy. The bears need to move toward acceptance. It could be better, but it ain't as bad as they think.
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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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