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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  The Consumer Price Index Increased 0.1% in April
Posted Under: CPI • Data Watch • Inflation

Implications: The CPI told a tale of two prices in April; prices for energy and prices for everything else. Overall consumer prices rose 0.1% in April but have remained flat to slightly negative on a year-over-year basis through the first four months of 2015. This is due to energy prices, which fell 1.3% in April and are down 19.4% from a year ago. However “core” prices, which exclude food and energy, increased 0.3% in April, the largest monthly gain in two years, and are up 1.8% in the past twelve months, 1.9% annualized in the last six months, and 2.6% annualized since January; the fastest 3-month pace since August 2011. In other words, underlying inflation trends are accelerating. With core prices so close to the Fed’s two percent inflation target, policymakers should remain concerned about future increases in inflation, even with overall consumer prices near zero. “Core” consumer prices in April were led higher by housing. Owners’ equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in April, is up 2.8% in the past year, and will be a key source of higher inflation in the year ahead. One surprise in today’s report was a 0.7% increase in prices for medical care, the largest monthly gain since 2007. This rise was almost entirely due to an increase in the prices for hospital services. Some analysts will use the fact that overall prices are down slightly from a year ago to warn about “Deflation.” But true deflation – of the kind we ought to be concerned about – is caused by overly tight monetary policy and price declines that are widespread, not isolated to one sector of the economy. Think of the Great Depression. Meanwhile, food prices were unchanged in April, but are still up 2% in the past 12 months, so if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and “true” inflation is higher. On the earnings front, “real” (inflation-adjusted) average hourly earnings were flat in April, but are up a healthy 2.3% in the past year and have been growing at a faster 3.9% over the past six months, signaling that consumer purchasing power continues to grow. The bottom line is that if it weren’t for the decline in energy prices, inflation would be very close to the Fed’s two percent target. The Fed knows that the decline in energy prices is a temporary factor, and the continued rise in core prices should keep a June rate hike on the table.

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Posted on Friday, May 22, 2015 @ 10:58 AM • Post Link Share: 
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  Existing Home Sales Declined 3.3% in April
Posted Under: Data Watch • Home Sales • Housing

Implications: Let's hold off on housing for a moment. The most exciting news today was that initial claims for unemployment insurance came in at 274,000, bringing the four-week moving average to 266,000, the lowest level since April 2000. This, paired with a decline in continuing claims to the lowest level since November 2000, signals greater strength in the labor market and further supports the Fed raising rates sooner rather than later. Sales of existing homes took a breather in April; however this marks the second consecutive month of sales above an annual rate of 5 million units. Sales have now increased year over year for seven months, showing that demand continues to grow. Sales are up 6.1% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 15% a year ago. All-cash buyers are down to 24% of sales from 32% a year ago. As a result, while total sales are up a moderate 6.1% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 18.6%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. The inventory of existing homes increased 10% in April, however it remains 0.9% lower than a year ago. Lack of supply is one of the main drivers behind continuing price increases and houses on the market selling faster in April (39 days) than at any time since July 2013 (32 days). The median sales price of an existing home rose to $219,400 in April, up 8.9% from a year ago. In other news this morning, the Philadelphia Fed index, a measure of strength in East Coast manufacturing, declined to 6.7 in May versus 7.5 in April, signaling continued Plow Horse growth in that sector.

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Posted on Thursday, May 21, 2015 @ 11:47 AM • Post Link Share: 
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  Brian Wesbury on Fox Business: Taxes to Blame for Consumers Not Spending
Posted Under: Government • Retail Sales • Video • Fed Reserve • Interest Rates • Taxes • TV • Fox Business
Posted on Thursday, May 21, 2015 @ 10:53 AM • Post Link Share: 
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  QE Did Not Build the iWatch
Posted Under: Bullish • Employment • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Bonds • Stocks • Wesbury 101
Posted on Tuesday, May 19, 2015 @ 12:33 PM • Post Link Share: 
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  Housing Starts Surged 20.2% in April
Posted Under: Data Watch • Home Starts • Housing

Implications: Boom! Great news on home building. After a weather-related soft patch in February and March, housing starts soared in April, coming in much higher than the consensus expected and at the fastest pace since 2007. And there’s more where that came from: housing permits increased 10.1% and are now the highest since 2008. These figures support our view that concerns about the economy based on the first quarter are misplaced; the economy is set to rebound quickly, just like last year. In turn, this means the Federal Reserve still has enough ammunition to start raising short-term interest rates in June. Obviously, one month doesn’t make a trend. Starts can be volatile from month to month, so to find the underlying trend we look at the 12-month moving average, which is at the highest level since September 2008. The total number of homes under construction, (started, but not yet finished) increased 1.5% in April and are up 14.8% versus a year ago. One interesting note is that we seem to have passed “peak multi-family” construction, at least as a share of overall home building. In the twelve months ending in September, 35.8% of all housing starts were multi-family units, the highest since the mid-1980s. Now that share is down to 34.9%. That’s significant because the construction of a single-family home usually adds more to real GDP growth than a multi-family unit. Based on population growth and “scrappage,” overall housing starts should rise to about 1.5 million units per year over the next couple of years, so a great deal of the recovery in home building is still ahead of us. In other recent housing news, the NAHB index, which measures confidence among home builders, declined two points to 54 in August, but the six-month sales outlook improved to 64, the highest so far this year. Readings greater than 50 mean more respondents report good market conditions. Just one year ago, the overall index was at 45. Expect further gains in housing in the coming months and years.

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Posted on Tuesday, May 19, 2015 @ 10:03 AM • Post Link Share: 
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  Taxes Culprit Behind Slow Sales
Posted Under: Bullish • GDP • Monday Morning Outlook • Retail Sales
Last week’s report on retail sales in April came in weaker than most economists expected, with no change from the pace of sales in March. As a result, the chorus calling for the Federal Reserve to postpone the start of rate hikes beyond June, already loud, grew even louder.

The fretting was a little misplaced. “Core” sales, which strip out the most volatile items like autos, building materials, and gas, rose a respectable 0.2% - the 13th gain in the last 15 months - in an environment with low inflation. Meanwhile, sales in March were revised up to a gain of 1.1%, the largest increase in a year. In other words, the news wasn’t all bad.

But, with gas prices down, the weaker than expected top-line reading was a little bit of a surprise. So, what happened? We think we know, and it makes us even more confident that sales will accelerate in the months ahead.

The afternoon before the announcement on retail sales the US Treasury Department reported an all-time monthly record for individual income tax payments, which hit $288 billion in April, $50 billion, or 21% higher than just one year ago!

Most of the increase compared to last year came in the form of “non-withheld” income tax payments, which rose $40 billion from a year ago. We can surmise that most of this was because taxpayers didn’t withhold enough from their paychecks in the previous year and had to make additional payments on April 15th. This can happen for lots of reasons, capital gains, over-estimating deductions, or just underpaying as incomes, bonuses or other income rise during better economic times.

Compared to a GDP of about $17.7 trillion, an increase in tax payments of $50 billion may not sound like much, but it could certainly make a big difference in a monthly report like retail sales. Here’s how:

Let’s say that workers had already anticipated about half of the $40 billion increase in final tax payments. So $20 billion came as an unpleasant surprise. And let’s also assume taxpayers decided they’d make up for this shortfall by cutting spending over a full year. This means, assuming these taxpayers or their accountants did the calculations at the start of the month, that they’d want to reduce their spending by about $1.7 billion per month.

In turn, $1.7 billion is 0.4% of monthly retail sales, more than enough to turn a report that could have been better than the consensus expected to one that was worse. We’d also anticipate that having to pay the IRS more than expected would put a bigger dent in big-ticket purchases. This could be why April saw a drop in the sales of cars and light trucks.

The good news is that once taxpayers decide to cut spending by a certain amount per month, the growth rate of sales is only affected in the first month. After that, sales growth should revert back to normal, but from a smaller base. In other words, after the April lull, retail sales are probably already growing again in May. In addition, our supposition that taxpayers spread the extra taxes over a full year of spending is probably underestimating the impact on April sales.

What this all means is that when the May retail sales report comes out, in mid-June, it will be just a few days before the Fed meets to discuss changing short-term interest rates. If we are right, and a bigger than expected number is released, a rate hike in June is still a distinct possibility.

In terms of the overall fiscal picture, the budget deficit looks like it’ll come in at about $440 billion in the fiscal year that ends in September, or about 2.5% of GDP, the smallest relative to GDP since 2007.

But we’re much more focused on long-term government spending projections than what the federal deficit is in any particular year and the long-term outlook remains bleak, with entitlement spending – Medicare, Medicaid, Social Security, and Obamacare – set to push federal spending up substantially over the next generation if left unreformed.

But that’s why they have elections. And we have faith that sooner or later the American voter, in contrast to the Greek voter, will choose dynamism and freedom over stasis and dependence. When it does, we need politicians willing to tackle the big budget issues, cut tax rates, and rollback the welfare state rather than accept the status quo.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

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Posted on Monday, May 18, 2015 @ 11:47 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

Source: St. Louis Federal Reserve FRED Database
Posted on Monday, May 18, 2015 @ 9:08 AM • Post Link Share: 
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  Industrial Production Declined 0.3% in April
Posted Under: Data Watch • Industrial Production - Cap Utilization

Implications: Outside the auto sector, industrial production was soft in April, with overall production declining 0.3%, the fifth consecutive monthly decline. However, the weakness in April was largely due to temporary factors. Due to milder temperatures, utility output declined 1.3%, on the back of a large 5.4% decline in March. Meanwhile, the rapid decline in oil prices and the commensurate drop in oil production caused the index for “oil & gas drilling and servicing” to decline 14.5% in April. This measure is now down 46.5% from a year ago and pulled down the mining component of industrial production, which fell by 0.8% in April. The good news is that energy prices look to have stabilized, so mining production should soon bottom out. And if energy prices bounce at all, mining will bounce as well. Taking out mining and utilities gives us manufacturing, which was unchanged in April as auto output rose 1.3% while the rest of manufacturing fell about 0.1%. Lingering parts shortages due to the West Coast port strikes that ended in late February may have hampered manufacturing outside the auto sector again in April. If so, that's another reason to expect a bounce in production in the months ahead as supply channels improve. The fundamentals for production growth remain in place. Companies are sitting on huge cash reserves and profits are close to record highs. In addition, at 78.2%, capacity utilization remains close to the average of 78.6% over the past twenty years, so further gains in production will give companies an incentive to build out plants and buy equipment. In other manufacturing news today, the Empire State index, a measure of manufacturing sentiment in New York, came in at 3.1 in May versus -1.2 in April.

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Posted on Friday, May 15, 2015 @ 12:05 PM • Post Link Share: 
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  The Producer Price Index Declined 0.4% in April
Posted Under: Data Watch • Inflation • PPI

Implications: Forget about producer prices for a minute. The most important economic news today was new claims for unemployment insurance dropping 1,000 last week to 264,000. The four week average declined to 272,000, the lowest level in 15 years. Continuing unemployment claims were unchanged at 2.23 million, also the lowest since 2000. These data point to another solid payroll number in May. On the inflation front, as Milton Friedman used to say, the relationship between monetary policy and inflation is long and variable. And in this cycle, it’s longer than usual. After several years of loose monetary policy, inflation is still not a problem for producers. The producer price index declined 0.4% in April, falling for the fifth time in the past six months. Food and energy prices, which are volatile, fell 0.9% and 2.9% respectively, in April. Energy prices are now down 24% versus a year ago, so it shouldn’t be any surprise that overall producer prices are down 1.3% from last year. But even prices outside the food and energy sectors remain relatively quiet for now. Service prices have increased 0.9% in the past year while “core” goods, which exclude food and energy, are up 0.4%. Given the extended period of loose monetary policy and the recent (partial) rebound in oil prices, we expect producer price inflation to be more of an issue in the year ahead. Other factors may play a role as well. For example, April price declines were also seen in trade, transportation and warehousing, which might be a temporary hangover from the West Coast port strikes. As a result, we expect inflation to pick up in the year ahead and should do so more quickly than most investors expect. In turn, this likely means higher bond yields and a more aggressive Fed than is right now priced into market expectations.

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Posted on Thursday, May 14, 2015 @ 11:29 AM • Post Link Share: 
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  Retail Sales Were Unchanged in April
Posted Under: Data Watch • Retail Sales

Implications: Please feel free to discount the importance of the weak headline for April retail sales, which were unchanged from March, falling short of the consensus expected gain of 0.2%. Sales in March were revised up to a 1.1% gain, the largest monthly increase in a year, and “core” sales rose in April for the 13th time in the last 15 months. We follow core sales because it excludes the most volatile portions of the report (autos, building materials, and gas station sales). Plugging core sales into our models suggests “real” (inflation-adjusted) consumer spending, on goods and services combined, will be up at about a 2% annual rate in Q2, very close to the pace in Q1. However, growth in consumer spending should be stronger in the second half the year. Every one cent decline in the gas prices saves consumers about $3.7 million per day. So, right now, consumers are spending $370 million less a day on gas versus a year ago. Look for those savings to generate higher sales in other sectors in the months ahead. In other news this morning, business inventories increased 0.1% in March, which was less than the consensus expected. Comparing the inventory report to what the government assumed when it released its first report for Q1 real GDP growth, it now looks like real GDP contracted at a 0.9% annual rate in Q1 versus a report two weeks ago that it grew at a 0.2% rate. This is NOT a reason to worry about the economy, though. Due to unusually bad weather, real GDP shrank at a 2.1% rate in the first quarter of 2014 and then bounced back rapidly over the next two quarters. This year, we had not only bad weather in Q1 but also port strikes and a drop in drilling activity, all temporary factors, and expect another rapid rebound in 2015. Meanwhile, on the inflation front, no sign of a problem in the trade sector. Import prices declined 0.3% in April and are down 10.7% from a year ago. The drop is mostly oil, but not all of it; import prices are down 2.7% from a year ago even excluding oil. Export prices declined 0.7% in April, both including and excluding farm products. Export prices are down 6.3% from a year ago.

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Posted on Wednesday, May 13, 2015 @ 11:04 AM • Post Link Share: 
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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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