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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | Personal income increased 0.2% in February, personal consumption rose 0.8% |
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| Posted Under: Data Watch • PIC |
Implications: The American consumer keeps buying. "Real" (inflation-adjusted) personal consumption increased 0.5% in February and 0.7% including upward revisions to prior months. Even if real spending is unchanged in March, which is a pessimistic assumption, it will be up at a 2.1% annual rate in Q1 compared to the Q4 average. Some analysts may question how this can keep going. Spending is up faster than income in the past year. What these analysts are missing is that households' financial obligations – recurring payments like mortgages, rent, car loans/leases, as well as other debt service – are now the smallest share of income since 1984. As a result, consumers can lift their spending faster than their income. Meanwhile, government transfers have become only a minor factor behind consumption growth. Private sector wages and salaries are up 5.4% in the past year, while transfer payments are up only 1%. Continued job gains and wage increases should support further gains in consumer spending from here. On the inflation front, overall consumption prices are up 2.3% in the past year, above the Fed's supposed target of 2%. "Core" prices are up 1.9% from a year ago and have risen at a 2% rate in the past three months. Given healthy spending patterns and inflation already at their target, the Federal Reserve has no justification for another round of quantitative easing. In other news this morning, the Chicago PMI, a measure of manufacturing activity in that region, slipped to a still high 62.2 in March from 64.0 in February.
Click here for a printable version.
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| | Growth Grade B+: Paul Ryan’s Path to Prosperity Plan |
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| Posted Under: Government |
Brian Wesbury has been named a Fellow with the George W. Bush Presidential Center. This is quite an honor. In this role he will act as the growth judge for a new website for the George W. Bush Presidential Center called "4% Growth." As the growth judge he will look at news events and studies through the economic growth lens asking questions like: how does this idea or event stack up in terms of growth it generates? Can it bring growth to 4%, or only 2%? Then he will give it a grade. Here is his most recent growth grade for Paul Ryan's Path to Prosperity Plan.
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| | Real GDP growth in Q4 was unrevised at a 3.0% annual rate |
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| Posted Under: Data Watch • GDP |
Implications: Real GDP growth in the fourth quarter was not revised at all from the prior estimate of a 3% annual rate. However, the mix of growth was more favorable, with business investment revised up and inventories revised down. More business investment means more productive capacity for the future; lower inventories means more room on shelves to fill in future quarters. The new information in today's report was that corporate profits increased at a 3.5% annual rate in Q4 and are up 7% from a year ago. The gain was all due to domestic activity; profits from abroad fell in Q4. Overall profits, as well as profits from domestic non-financial companies, are both at a record high. Gains in profits and worker income suggest the economy is growing faster than the GDP numbers show. What we produce adds up to GDP, which is the report most analysts focus on. But the government also calculates gross domestic income (GDI), which is supposed to equal GDP. When there is a discrepancy, the government tends to later revise GDP toward GDI. Real GDI grew at a 4.3% annual rate in Q4 and was up 2.4% in the past year, easily beating real GDP of 1.6% in 2011. This suggests growth in 2011 was probably better than 1.6%. It would also help explain why the unemployment rate has been dropping faster than one would expect given modest GDP growth. Meanwhile, nominal GDP was up at a 3.8% rate in Q4 and up 3.8% in the past year, which means that a zero percent federal funds rate is too loose and quantitative easing is not needed. In other news this morning, new claims for jobless benefits declined 5,000 last week to 359,000. Continuing claims for regular state benefits fell 41,000 to 3.34 million. These figures are consistent with a gain of about 200,000 in March payrolls.
Click here for a printable version.
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| | New orders for durable goods increased 2.2% in February |
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| Posted Under: Data Watch • Durable Goods |
Implications: New orders for durable goods were up a solid 2.2% in February, showing broad gains across many categories. Orders are up 12.2% in the past year, 8.5% excluding transportation. And remember, this is all in the very early stages of a home building recovery. As housing picks up steam, orders for durables should pick up as well. As a result, we expect more gains in the year ahead. Orders for "core" capital goods, which exclude aircraft and defense, have been running consistently above shipments for the past two years. Unfilled orders for core capital goods are at a new all-time record high and up 9.5% from a year ago. Meanwhile, 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. In other recent news on the factory sector, the Richmond Fed index, which measures manufacturing activity in the mid-Atlantic states, declined to +7 in March from +20 in February. The index has been in positive territory, signaling growth, for the past four months. On the housing front, pending home sales, which are contracts on existing homes, slipped 0.5% in February but are up 13.9% versus a year ago. The Case-Shiller index, which measures home prices in the 20 largest metro areas, was unchanged in January (seasonally-adjusted). Nine of the twenty metro areas had price increases. Home prices in Phoenix, which led the pack in January with a 2% increase, are up at a 17.6% annual rate in the past three months. Nationwide, home prices are down 3.8% from a year ago, but we expect a slight increase over the full course of 2012.
Click here for a printable version.
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| | Heard the One About a "Fiscal Cliff"? |
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| Posted Under: Monday Morning Outlook |
For three years the market has suffered from a severe case of economic hypochondria. Headline after headline proclaimed that this time, for sure, the recession would return. Remember Dubai and Tunisia? What about deleveraging, re-setting adjustable rate mortgages, credit-default-swaps, foreclosures, Greece, state and local budget cuts, rising energy prices, the debt ceiling, unemployment, the Super Committee, or the S&P downgrade? All of these have come and gone...and yet the recovery is three years old.
Now, some doomsayers are pointing ahead to a "fiscal cliff" in 2013. The supposed cliff is a combination of possible policy changes all happening next year. These include the sunset of the "Bush tax cuts" (on regular income, dividends, capital gains, and estates), the end of the payroll tax cut, and the planned cuts to federal spending.
The theory is that the combination of higher taxes and lower spending will push our economy right back into recession. We don't think this is going to happen and investors should not waste time worrying about it. First, regardless of the outcome of the presidential election, we think the most likely policy result is a continuation of most, if not all, of the Bush tax rates, at least through the end of 2014.
If a Republican wins the White House, they are also likely to control the House and Senate. This would allow them to keep those lower tax rates (or cut them even further!) with simple majorities, through the budget reconciliation process. In other words, they would not need Democrat votes.
If President Obama wins re-election, he may want to end the lower tax rates on regular income, dividends, and capital gains for high-income taxpayers. But the Republicans would likely retain the House, and so Obama could not extend the tax cuts for the middle class unless he capitulated on extending them for everyone. His advisors, with their eyes then moving toward the 2014 elections, will tell him to extend those tax cuts one more time, just like they did back in 2010.
Worst case scenario: we go back to the tax rates we had under President Clinton. This would hurt the economy, but for many reasons investors should ignore this unlikely scenario for now.
By contrast, the end of the payroll tax cut is likely. Neither side really likes this policy. Conservatives argue that it's temporary and it's not really a cut at the margin. Liberals worry that cutting payroll taxes severs the link between worker "contributions" and future benefits, which could ultimately undermine political support for the Social Security program.
From an economic point of view, ending the break will not significantly alter the course of the economy. Personal saving is now running at an annual rate of about $540 billion. Returning the tax rate to 6.2% would cost workers about $120 billion per year. Given that personal saving hovered around $270 billion per year from the early 1980s through 2007, the loss of the tax cut can be more than made up for by reduced savings. History suggests the economy will survive.
The least of our worries is the scheduled slowdown in federal spending. We don't see how the economy gets on a truly sustainable growth path without a significant decline in federal spending relative to GDP. What would worry us more is if politicians found a way to wiggle out of their promises and spending continued on its unsustainable growth trend.
Bottom line: expect to hear more about the "fiscal cliff" for the next several months. Then, when it doesn't cause a recession, you'll never hear about it again.
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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