|
|
 |
|
|
|
|
Brian Wesbury
Chief Economist
|
|
Bob Stein
Deputy Chief Economist
|
|
 | Housing starts rose 2.6% in April to 717,000 units at an annual rate, well above consensus |
|
| Posted Under: Data Watch • Home Starts • Housing |
Implications: The recovery in home building is definitely underway. Housing starts rose 2.6% in April to 717,000 units at an annual rate and are up 29.9% from a year ago. In addition, March housing starts were revised substantially higher from 654,000 to 699,000 units at an annual rate. The total number of homes under construction (started, but not yet finished) increased for the eighth straight month, the first time this has happened since 2004-05. Permits to build homes, although declining 7.0% in April, are up 23.7% from a year ago. Some people may see the April decline as a sign of weakness, but this weakness was all focused in multi-family permits which fell 20.8% in April after a 32.3% rise in March. Single-family permits actually rose 1.9% in April and are at the second highest level in two years, signaling continued gains in home building in the coming year. It looks like the second quarter of 2012 will be the fifth straight quarter where home building boosts real GDP. Multi-family activity – both starts and permits – has been leading the way and we expect that to continue, particularly now that a legal settlement means more foreclosures can move forward. Some people occupying homes they have not been paying for will now have to go elsewhere and rent. Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year (probably by 2016), which means the recovery in home building is still very young. For more on the housing market, please see our research report (link).
Click here for a PDF version.
|
|
| | Industrial production increased 1.1% in April, easily beating consensus expected gain of 0.6% |
|
| Posted Under: Data Watch • Industrial Production - Cap Utilization |
Implications: A great report today on the factory sector. Industrial production rose 1.1% in April, easily beating the consensus expected gain of 0.6%, as both mining and utilities bounced back in April. The manufacturing sector also gained 0.5% in April, and was up 0.2% including downward revisions to prior months. The data we watch most closely is manufacturing production ex-autos. This figure rose 0.3% in April, and has risen in 8 of the last 9 months. That's a very good track record, given that manufacturing ex-autos usually falls three or four times a year even during normal economic expansions. The fact that it hasn't over the past few years is a testament to the current strength in the manufacturing sector. Higher production is making factories use higher levels of capacity. Utilization in manufacturing is now at 77.9%, which is higher than the 20-year average of 77.7%. Overall utilization in the factory sector rose to 79.2%, the highest level since April 2008. 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.
Click here for a PDF version.
|
|
| | April Consumer Price Index (CPI) unchanged in April, up 2.3% versus a year ago |
|
| Posted Under: CPI • Data Watch |
Implications: Consumer prices were unchanged in April, exactly as the consensus expected. However, the lack of change in overall prices masked more worrisome details in the report. Energy prices fell 1.7% in April, reflecting what we all saw when we went to gas stations last month. But excluding energy, prices were up across the board. "Core" inflation, which excludes food and energy, was up 0.2% in April and is up 2.3% from a year ago, the largest gain since September 2008. This is already above the Federal Reserve's target of 2%. Meanwhile, monetary policy is very loose and housing costs (which are measured by rents, not asset values) are rising. Owners' equivalent rent was up 0.2% in April and is up 2.1% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. 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 flat in April. Although these earnings are down 0.5% from a year ago, the number of hours worked is up 2.1%, giving consumers more purchasing power. In other news this morning, the Empire State index, a measure of manufacturing in New York, increased to +17.1 in May from +6.6 in April, easily beating the consensus expected gain to +9.0. In other words, the factory sector continues to grow.
Click here for a PDF version.
|
|
| | Retail sales increased 0.1% in April, up 6.4% versus a year ago |
|
| Posted Under: Data Watch • Retail Sales |
Implications: The headline numbers for retail sales in April were tepid, with overall sales and sales excluding autos up only 0.1% each. However, the details of the report were much stronger than the headlines. Stripping out the most volatile parts of the report – autos, building materials, and gas – sales were up 0.4% in April and 0.5% including upward revisions for prior months. Even including those volatile categories, sales increased for the 21st time in the past 22 months, a remarkably consistent upward trend. Compared to a year ago, retail sales are up 6.4%, but the growth has accelerated lately, up at a 7.7% annual rate in the past three months. Notice that all these gains continue to outstrip inflation. Adjusted for the consumer price index, retail sales are up a robust 4% in the past year. Upward revisions to retail sales for prior months suggest real consumer spending (including services) increased at a 3% annual rate in Q1. With two more months to go, it looks like real consumer spending is growing at about a 2.5% rate in Q2. Mixing this data with today's report on inventories suggests later this month Q1 real GDP will show a downward revision to a growth rate of 1.8%. The original report for Q1 had a growth rate of 2.2%, but, since then, inventories have been revised downward. Although these negative revisions will probably grab some headlines, it's important to remember that lower inventories today mean faster production growth in future quarters. In other news this morning, the NAHB Homebuilders index, a measure of confidence, increased to 29 in May from 24 in April. Confidence among homebuilders is now the highest in five years, another sign that the recovery in housing is gaining traction.
Click here for a PDF version.
|
|
| | Let's Stress Test Governments |
|
| Posted Under: Government • Monday Morning Outlook |
Several years ago, Treasury Secretary John Snow was testifying to Congress about the federal budget. He worked for President Bush and, after a long career of opposing deficits, was trying to justify a deficit of about 3% of GDP.
Representative Barney Frank was incredulous. He asked Snow how he could now justify deficits. Frank then came up with a theory: He said Snow was opposed to deficits when the president was a Democrat, but didn't care about them when the president was a Republican.
Frank was being sarcastic, but he had a good point. Nonetheless, his theory is also true when the roles are reversed.
It now seems that deficits don't matter all over again. Paul Krugman, a leading apostle of fiscal liberalism, consistently denounced President Bush for deficits. Now he is aggressively arguing against austerity around the world and asking for a substantial boost in federal spending despite the largest peacetime deficits in US history. He doesn't just say "deficits don't matter," he suggests that "deficits are necessary."
If you can't see the political nature of all this, you are not looking. Barney Frank was certainly right – it depends on which side is in power.
No matter who is in office, our view has been consistent. Deficits themselves don't matter. Ultimately, what matters is how much of the nation's resources are being spent by the government. Spending is the key...it is what crowds out the private sector.
The deficit itself is huge, but interest rates are very low today, emerging market countries have a huge appetite for US debt to back their own expanding currencies, the US has a massive asset base ($150 trillion in the private sector alone), and a budget which freezes spending could eradicate the deficit in five or six years.
In other words, right now the deficit itself is not the problem. It is, however, indicative of the problem – that leaders (of both political parties) cannot control their spending habits. This is not about the economy. If spending created wealth, Greece, Italy, Spain, or even California, would be booming. But they aren't. They are falling apart.
California recently announced it's looking at a $16 billion deficit, not the $9 billion it forecasted in January. The new projected deficit is about 18% of revenues. California already has some of the highest tax rates in the country. It's not taxes or the deficit that matters, it's the spending.
And the problems go deeper than just money. Big government tends to erode the character traits – motivation, thrift, self-reliance – that make progress and economic growth possible. The bottom line is that the last thing the economy needs now is more government spending.
In light of these budget issues, it's interesting that a recent series of bad trades at JP Morgan generated a current loss of $2 billion for a company that earned about $5 billion last quarter. The stress tests forced on big banks suggested that losses like this could be absorbed and they were right.
But the federal government is running a deficit of more than $3 billion per day, European countries are going bankrupt and California is falling apart financially.
Instead of arguing about deficits, why don't we stress test governments? And then get spending down to fix the problem.
Click here for a PDF version.
|
|
|
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.
|
|
Archive
Search by Topic
|
|
|
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.
|