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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | The ISM manufacturing index declined to 53.5 in May from 54.8 in April |
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| Posted Under: Bullish • Data Watch • ISM |
Implications: The ISM manufacturing survey came in a little below consensus expectations for May, but at a healthy 53.5, has now been above 50 for 34 straight months. It's important to keep in mind that when financial strains, like recent news out of Europe, push down consumer confidence, it also often pushes down the ISM index as well. In other words, today's ISM index probably underestimates actual business activity in the factory sector. Regardless, the new orders index came in at 60.1, the highest in over a year, suggesting faster growth in production ahead. The employment index fell to 56.9 but still remains at elevated levels, a good sign for future manufacturing job gains. The index for inventories dropped once again to 48.7. 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 dropped to 47.5 in May – which reflects rapidly falling energy and commodity prices, not general deflation. Given the loose stance of monetary policy, we don't expect this slowdown to last. In other news this morning, the Census Bureau reported construction spending increased 0.3% in April and an even stronger 1.6% including upward revisions to prior months. The gain in April itself was a combination of a 2.8% surge in home building partially offset by a 1.4% drop in government projects. Upward revisions for construction in February/March suggest real GDP growth in Q1 will be revised back up to the original estimate of 2.2%.
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| | Personal income increased 0.2% in April |
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| Posted Under: Data Watch • PIC |
Implications: The American consumer keeps buying. In fact, spending has accelerated of late. Personal consumption is up 4% from a year ago, but up at a 5.9% annual rate in the past three months. Most of these gains are supported by higher incomes, up 2.8% versus a year ago and at a 4% annual rate in the past three months. In addition, spending is getting a boost from a drop in households' financial obligations – recurring payments like mortgages, rent, car loans/leases, as well as other debt service – which are now the smallest share of income since 1984. Meanwhile, government transfers have become only a minor factor behind consumption growth. Private sector wages and salaries are up 4.1% in the past year, while transfer payments are up only 0.4%. On the inflation front, overall consumption prices are up 1.8% in the past year, but have accelerated over the past three months to 2.2% at an annual rate, slightly above the Fed's supposed target of 2%. The Fed's favorite gauge of inflation – core PCE, which excludes food and energy – is up 1.9% from a year ago, just ever so slightly still below their target. Given healthy spending patterns and inflation already close to their target, the Federal Reserve still has no justification for another round of quantitative easing.
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| | Non-farm payrolls increased 69,000 in May and were up only 20,000 including revisions to March/April |
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| Posted Under: Data Watch • Employment |
Implications: Improvement in the labor market slowed noticeably in May. Including downward revisions for prior months, payrolls – both overall and for the private sector – expanded only 20,000. In addition, the total number of hours worked declined 0.2% in May while average hourly earnings increased only 0.1%. Total cash wages are still up a hardy 3.5% from a year ago, but they've been essentially unchanged over the past three months. In addition, the duration of unemployment increased and the share of the unemployed who quit their prior job dropped for the second straight month. However, not all the data in today's report was negative; in fact, some of it was actually quite strong. Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 422,000 in May. In the past year, civilian employment is up at a 190,000 monthly rate versus a 149,000 pace for nonfarm payrolls. Although the unemployment rate ticked up to 8.2% in May, this was due to a 642,000 increase in the labor force. In the past year, the labor force is up 1.1 million, while the unemployment rate has dropped 0.8 percentage points. Another piece of good news was that the diffusion index, the share of private companies that are adding jobs versus cutting jobs, increased to 59.4% in May. One plausible explanation for the relative weakness of recent payroll numbers is the unusually mild winter. In the past six months (December – May), nonfarm payrolls are up an average of 174,000. December through February was above average and now we've had three months below. Supporting the case for a weather affect, construction jobs were up an average of 14,000 in December to February but down an average of 16,000 the past three months. Another possibility is that some firms are waiting for the outcome of the health care ruling and election to see whether the coast is clear for more hiring. At this point, there is no clear sign that problems in Europe are the source of slower job creation in the US.
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| | Real GDP revised down to a 1.9% annual growth rate in Q1, exactly as consensus expected |
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| Posted Under: Data Watch • GDP |
Implications: Real GDP growth in Q1 was revised down slightly, but we would take the new report over the last one, anytime. A downward revision to inventories subtracted 0.4 percentage points from growth - this leaves more room for future production. Meanwhile, government continues to be a drag on GDP growth, which is a longer-term positive for the private sector. Real final sales in the private sector (GDP excluding inventories and government) increased at a solid 3% annual rate. This growth was buttressed by a large upward revision to business investment, from a decline of 2.1% in the original report to a 1.9% annual growth rate. (Nice!) Meanwhile, corporate profits hit a new record high and are up 6.5% from a year ago. All of the increase in profits in Q1 came from domestic earnings, not earnings from the rest of the world. Today's report also included the first reading on gross domestic income, an alternative measure of the overall strength of the economy. That grew at a 2.7% annual rate in Q1, suggesting future benchmark revisions to Q1 are likely to be upward. With nominal GDP (real growth plus inflation) up at a 3.6% annual rate in Q1 and up 3.9% from a year ago, there is no reason for further Fed easing. In other news this morning, new claims for jobless benefits increased 10,000 last week to 383,000. Continuing claims dropped 36,000 to 3.24 million. The ADP Employment index, which measures private sector payrolls, increased 133,000 in May. This is consistent with our forecast that tomorrow morning's jobs report will show a 145,000 increase in private payrolls. The bad news was that the Chicago PMI, a measure of manufacturing in that region, fell to 52.7 in May from 56.2 in April. This still indicates growth, just slower growth than last month. But the Milwaukee ISM factory index rose to 57.7 from 52.9. On the housing front, pending home sales, which are contracts on existing homes, were down in April, but the Case-Shiller index, a measure of home prices in the 20 largest metro areas, was up 0.1% (seasonally-adjusted) in March.
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| | Is Obama a Big Spender? |
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| Posted Under: Government • Monday Morning Outlook • Spending |
Last week, Rex Nutting, a reporter for MarketWatch, became famous when the White House used his analysis of government spending. He wrote that "there has been no huge increase in spending under the current president."
We like Rex Nutting. He seems like a fair-minded analyst. But we emphatically disagree. This is not personal, heck, it's not even political. Data from the Congressional Budget Office (CBO) shows President Obama has been a huge spender.
Three times a year, the CBO releases a "budget baseline" – a ten-year estimate of federal revenue and spending, assuming no changes to tax or spending laws. Every time it releases a new baseline, CBO explains how much it has changed due to laws that were not in effect at the time of the old baseline. It also estimates the impact of any change in the economy or interest rates, as well as changes due to technical factors, like how fast banks repaid TARP.
In January 2009, just before President Obama took office, CBO said federal spending would be $3.388 trillion in FY 2012. Now, CBO says we're going to spend $3.627 trillion this year. That's an increase of $239 billion.
But that increase can be broken down into two factors. Going through every budget report since January 2009, economic and technical changes have actually reduced spending by $95 billion! Meanwhile, "legislative changes" – laws passed under President Obama – have added $334 billion.
Those legislative changes represent a 9.9% increase in spending, with 93% of the increase coming in President Obama's first two years in office. In other words, on top of all the spending increases under President Bush (including wars in Afghanistan and Iraq) as well as the "automatic stabilizers" that kick in when unemployment is high – record-high Food Stamps and Medicaid – President Obama has directly layered on an additional $334 billion.
As a result, we think our method underestimates the surge in spending under President Obama. Moreover, economic models show that more government spending reduces economic growth, which, in turn, boosts spending and reduces tax revenue. In other words, if we added dynamic effects, the President's impact on spending would be greater.
Back in January 2009, CBO thought this year's spending would be 21.8% of GDP and the deficit would be $274 billion. Instead, it is 23.4% of GDP, with an expected deficit of $1.17 trillion. And this is after a new Congress fought to cut spending and came under vicious attack for doing so.
Outside a full mobilization war, our government has never spent so much. Excluding defense and interest, before 2009, spending was never higher than 15% of GDP. Now, at 17.6%, Obama's own budgets show us never getting back below 15% again. We wish Nutting were right, but spending under President Obama has soared.
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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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