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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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 | The Trade Deficit in Goods and Services came in at $50.1 Billion in April |
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| Posted Under: Data Watch • Trade |
Implications: Imports and exports both declined in April, but, with imports declining faster, the trade deficit got smaller. Despite the decline in the overall volume of trade, both imports and exports remain near record highs. Some reduction in imports was expected for April given that the increase in March was the largest for any month on record. The trade deficit is still caught between two powerful opposing forces. On the one side, the large depreciation in the foreign exchange value of the dollar in the past decade means the US is a much more attractive place from which to export. That's why many foreign automakers are increasingly using the US as an export hub and companies that had previously placed operations abroad are now moving back home. The level of productivity is high, so unit labor costs are low in the US relative to other advanced economies. However, the reviving US consumer still likes imported goods, which will boost imports. Today's trade report included revisions going back several years. In particular, a larger trade deficit in the last quarter of 2011 could mean a downgrade of the real GDP growth rate in that quarter, below the 3% level now on the books. But it might also mean a large upward revision for growth in Q1 when that "final" report comes out in three weeks. Given upward revisions to construction and trade, real GDP growth might have been in the 2.5% to 3% range in Q1, which would leave a much better impression than the current official estimate of 1.9%. In other recent news, new claims for unemployment insurance dipped 12,000 last week to 377,000. Continuing claims for regular state benefits increased 34,000 to 3.29 million. These figures suggest continued moderate payroll growth in June.
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| | Nonfarm productivity (output per hour) declined at a 0.9% annual rate in the first quarter |
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| Posted Under: Data Watch • Productivity |
Implications: Productivity was revised down slightly for the first quarter, consistent with last week's slight downward revision for real GDP growth. Output was revised down while the number of hours worked were revised up, which means less output per hour. Productivity is up only 0.4% in the past year, versus an average annual growth rate of about 2% over the past couple of decades. However, we do not think this means the productivity revolution has come to an end. It is not unusual for productivity to surge at the very beginning of a recovery (productivity grew 6.1% in the year ending in Q1 2010) and then temporarily slow down as hours worked increase more sharply. Including both the surge early in the recovery and the tepid growth in productivity since then, it is still up at a 2.5% annual rate in the past three years. Manufacturing continues to be the bright spot of the economy and today's report shows why. Output in the manufacturing sector grew at a 10% annual rate in Q1. Even with hours rising at a 4.6% rate, manufacturing productivity boomed growing at a 5.2% annual rate. We believe the long-term trend in productivity growth will remain strong, due to a technological revolution centered in computer and communications advances.
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| | ISM non-manufacturing index rose to 53.7 in May |
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| Posted Under: Data Watch • ISM Non-Manufacturing |
Implications: The service sector accelerated slightly in May, narrowly beating consensus expectations. A small increase in the index is usually not much to get excited about. But, given the awful financial news coming out of Europe, which is creating dour sentiment holding down the index, it's great news that it beat the consensus. The ISM services index has now remained above 50 for 29 straight months signaling continued growth. The business activity index, which has an even stronger correlation with real GDP growth than the overall index, rose to a solid 55.6, nowhere close to recession territory. The employment index fell once again to 50.8, consistent with the slower growth in payrolls we saw in last week's Labor Department report. On the inflation front, the prices paid index fell to 49.8. This is consistent with other indicators showing a temporary moderation in inflation. However, given the loose stance of monetary policy, we don't expect the lull to last. In other recent news, US consumers bought cars and light trucks at a 13.7 million annual rate in May. This was less than the 14.5 million pace the consensus expected and down 4.5% from April. However, it was still up 17.4% from a year ago, when sales were affected by the aftermath of the tsunami in Japan. Medium & heavy trucks were bought at a 391,000 annual rate in May, up 16.4% from April and 25.3% from a year ago. The gain signals continued growth in the business sector.
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| | Speeding Up the Plow Horse |
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| Posted Under: Government • Markets • Monday Morning Outlook • Spending • Stocks |
We call it a Plow Horse Economy...it ain't gonna win the Belmont, but it ain't gonna keel over and die, either. And there is nothing in the latest data or market action that changes our mind; the economy is not in recession and we highly doubt it will fall into one anytime soon.
The Pouting Pundits of Pessimism are hyperventilating over the weaker-than-expected 69,000 increase in May payrolls, a downward revision in first quarter real GDP growth to 1.9%, a 10-year Treasury yield of 1.5%, and a stock market that has given up its gains for the year.
Back in the winter months, when the payroll numbers were relatively robust, the pessimists complained about a declining labor force. But now they ignore that the labor force rose by 642,000, while the participation rate rose to 63.8% from 63.6% in April. Not very consistent of them, eh?
That wasn't the only area of the jobs report that defied the pessimists. The household survey (which captures small businesses) reported 422,000 new jobs. This was not enough to overcome the huge gain in the labor force, so the unemployment rate ticked up to 8.2%. But the acceleration in the household number suggests the job market is not as bad as it was made out to be.
We also heard that 70% of the time an economy slows to below 2% real GDP growth a recession follows. We aren't quite sure what this is supposed to mean. If someone can show us an economy that didn't fall through 2% growth on the way to recession we will give them a million new Drachma. Regardless, recent revisions to construction data suggest real GDP growth gets revised back up above 2% for Q1.
So why do we have a Plow Horse economy and not a Race Horse economy? The answers are simple...they're the same reasons Europe had slow growth and a high unemployment rate for the past three decades: government spending, taxes, and regulation have been a huge burden. Think of a race horse carrying a 250 lb. jockey or a plow horse dragging the plow through stumps and roots in a field. Government is a burden which slows growth and reduces job opportunities. The only way to get a permanent acceleration – in real GDP, incomes, and job growth – is to lighten the load. The good news for the US is that there is a four step plan to make this happen and we're going to face all of them this year.
First is the recall election on Tuesday for Scott Walker as Governor of Wisconsin. Democrats in Massachusetts and Rhode Island – even Rahm Emanuel in Chicago – have also carried out reforms for government workers, but Walker's efforts created a massive political backlash. A Walker victory would set the stage for more reforms in other states.
Second is the late June Supreme Court ruling on Obamacare. Health insurance is an important issue and many reasonable people disagree about inequities in that market, but a government takeover would signal further growth in government spending and regulation, which would dampen the entrepreneurial spirit and increase uncertainty.
Third is the November 7th presidential election, when voters across the country get the chance to signal a desire to roll back the size and scope of government. "Core" government spending – outside of defense, TARP, interest and entitlements – has hit a record high in recent years. A change in leadership would mean a chance to greatly reduce the share of GDP controlled by Washington. Finally, the scheduled tax hike on income, capital gains, and dividends in 2013 has become a wall of uncertainty for business to overcome. If the first three steps happen, this one will too.
These steps will decide whether the US heads toward a European-like future or remains a bastion of free market capitalism. As each step unfolds, the momentum of the decisions will also become more visible. We remain confident America is a "center-right" country that respects its Constitution. If so, look out. The Plow Horse may turn into a thoroughbred.
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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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