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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  End of an Era
Posted Under: Europe • Government • Monday Morning Outlook • Spending
Over this past Fourth of July weekend, in Chicago, the Grateful Dead, or at least what’s left of it, played its last concert. It’s the end of an era, one that epitomized the liberal political earthquake of the 1960s and 70s – VW vans, flower power, tie-dyed tee shirts, drugs, protests, and social justice.

From an economic perspective, the individual freedom expressed by “Dead-Heads” is refreshing, and in its positive form leads to entrepreneurial thinking. However, the politics of the era supported Keynesian stimulus-spending and redistribution. Non-defense government spending soared in the U.S. and, especially in Europe, during the 1960s and 1970s.

This experiment failed. Economies deteriorated and it took the elections of Margaret Thatcher and Ronald Reagan to turn the tide in the 1980s. But like the Grateful Dead, after the death of lead singer-songwriter Jerry Garcia, it never really disappeared. So, in many places around the world economic mayhem has returned.

Exhibit A, is Greece, where the liberal logic prevailed, helped along by academic intellectuals like Joseph Stiglitz and Paul Krugman, who have argued that as long as a country can borrow and spend, there will be positive economic multipliers that create jobs, wealth and growth. We would laugh out loud if there weren’t so many people actually suffering.

When Greece joined the Eurozone back in 2001, it had the chance of a century to right its fiscal ship. Interest rates fell on Greek debt even as the economy performed relatively well. Lawmakers could have used the windfall to de-regulate the economy, privatize, and reduce its long-term spending commitments. Instead, the government used the windfall to pass out more “free” treats to voters all the while receiving intellectual and political cover for this bad behavior from leading academics around the world.

But, eventually, you run out of other people’s money when you don’t grow or pay it back. Now the bill is coming due and yet, the “Debt-Heads” in Greece who grew dependent on the treats of that bygone era, defiantly told the IMF, the ECB, and other European governments – the only ones left crazy enough to lend to them – that they wouldn’t downsize the bloated Greek government and they expected more money anyway.

But this isn’t just about Greece. The same era came to an end in Detroit over the past several years and now Puerto Rico. High taxes, regulation and redistribution designed to buy votes, led to a private sector too small to generate the revenue required to keep the system going. Puerto Rico applies the same minimum wage rules that the U.S. uses. These wages are way too high and the results are catastrophic. These liberal policies are from an era gone by, and the results are the same. Reality wins and Puerto Rico faces painful restructuring or bankruptcy, too.

In the end, political models that work by siphoning money from the more productive to buy the votes of the less productive often end up “going over the edge.” This system only works when the benefits for the productive of being part of a society exceed the costs and in some cases governments find the right balance. But it’s hard for politicians who get a taste for redistribution to stop.

So, the big question is: will the problems in Greece, Detroit and Puerto Rico be seen as a sign that this era needs to come to an end? Or, will politicians and voters ignore them and stay tied to the failed policies of the past?

Clearly, in the U.S. the recent Supreme Court decision over health care suggests that we have not learned. SCOTUS let the government grow larger by twisting the meaning of words in legislation enacted by Congress.

In essence, in its ruling on the health law, the Supreme Court allowed supporters of the Affordable Care Act (aka Obamacare) an open field to end run around the election of Scott Brown to the Senate in January 2010. His election meant Obamacare’s supporters no longer had a filibuster-proof majority. The House had to either pass a Senate bill that was not ready for prime time or go completely back to the drawing board and try to compromise with the president’s opponents. But now Obamacare’s supporters get to implement a version of the law that was never enacted, for which they never had 60 votes.

For the U.S. economy this means, for now, big government. And, what that means is that entrepreneurs have a big burden to carry. And a heavier jockey means a slower horse – a Plow Horse!

The good news is that Obamacare was already here, and the economy was still growing. So, while we can see in Detroit and Greece, the eventual results of big government, we also know that three things are true. First, American entrepreneurs have been able to grow in spite of all this. Second, there is ample evidence the liberal ideology has failed. And, third, that Americans have shown throughout history that they can change course when faced with the reality of failure.

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

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Posted on Monday, July 06, 2015 @ 11:35 AM • Post Link Share: 
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  The ISM Non-Manufacturing Index Increased to 56.0 in June
Posted Under: Data Watch • ISM Non-Manufacturing

 
Implications: Service sector activity in 2015 has shown the fastest growth to start a year going back to 2005. While the ISM service sector report came in slightly below expectations for June, it showed accelerating growth from May and represents expansion for a 65th consecutive month. Of the eighteen industries reporting, fifteen showed growth in June, led by arts, entertainment & recreation as well as real estate, rental, & leasing. The business activity index, which has a stronger correlation with economic growth than the overall index, rose to a robust 61.5, while the new orders index, the most forward looking measure of service sector activity, increased to 58.3. Both the business activity and new orders indexes accelerated from the first quarter of the year, signaling a rebound from the impacts of an unusually cold winter and West Coast port strikes that slowed orders. Expect activity to remain strong over the coming months as companies move to fill the steady flow of new orders coming in. The employment index dipped in June to 52.7, as declines in mining, “other”, and information services offset rising employment in thirteen of the remaining fifteen industries. Remember, levels above 50 represent growth, so this still-elevated level represents continued improvement in the job market, just at a slightly slower pace than in recent months. On the inflation front, the prices paid index fell 2.9 points in June to 53.0, as agriculture and fuel prices continue to rise, but at a slower pace than last month. Over the coming months, rising fuel costs will likely continue to be a key driver pushing prices higher. As a whole, today’s report suggests continued growth in the months ahead and an uptick in activity for the second half of 2015.

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Posted on Monday, July 06, 2015 @ 11:07 AM • Post Link Share: 
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  Happy 4th of July
Posted Under: Bullish • Europe • Government • Video • Spending • Wesbury 101
 
Posted on Monday, July 06, 2015 @ 10:14 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, July 06, 2015 @ 8:12 AM • Post Link Share: 
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  The Best Era America Has Ever Seen
Posted Under: Bullish
In 1852, Karl Marx said “Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past.”

Obviously Marx had never ventured to the United States, or he would have seen a country of entrepreneurs that had freedom and property rights along with a constitution so well thought out that it has only been amended 27 times in 227 years. No one puts it better than Ronald Regan and the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

“This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers -- 56 men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.

They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.

This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days -- maybe on leap years we could have an intermission -- [laughter] -- this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”


America has proved that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. As we approach July 4th it’s important to take a step back and realize just how fortunate we are to live in the best era America has ever seen. Happy 4th of July to you all.

Posted on Thursday, July 02, 2015 @ 10:04 AM • Post Link Share: 
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  Nonfarm Payrolls Increased 223,000 in June
Posted Under: Data Watch • Employment

 
Implications: Today’s report on the labor market shows continued improvement, but not quite as much as the consensus expected. Nonfarm payrolls increased a solid 223,000 in June, close to the average of 245,000 in the past year. Meanwhile, the jobless rate fell to 5.3%, the lowest since early 2008 and very close to the roughly 5.1% the Federal Reserve thinks is the long-run average. However, the details of the report were weaker than the headlines. The drop in the unemployment rate was due to a 432,000 decline in the labor force as the participation rate fell to 62.6%, the lowest since 1977. Civilian employment, an alternative measure of jobs that includes small business start-ups, declined 56,000. Although certainly not good news, don’t overreact to this month’s negative news on civilian employment or the size of the labor force. These figures are volatile from month to month, have both been trending up in the past year, and may have been influenced in June by the timing of the end of the school year. In other words, don’t lose sight of the fact that this is the 64th month in a row with growth in private payrolls, the longest streak since at least the late 1930s. Other details in today’s report were mixed. The good news was that the median duration of unemployment fell to 11.3 weeks, the lowest so far in the recovery. To put this in perspective, the median duration was 17.0 weeks at the end of 2013, which shows what a difference it made when Congress ended extended unemployment benefits at the beginning of 2014. The weak news was that average hourly earnings were unchanged in June and are up a tepid 2.0% in the past year. However, combined with increases in hours worked, workers’ total cash earnings are up 4.4% versus a year ago, more than enough for consumers to increase their spending. In other news this morning, new claims for unemployment benefits increased 10,000 to 281,000, the 17th straight week below 300,000. Continuing claims rose 15,000 to 2.26 million. These figures are consistent with continued payroll growth north of 200,000 per month. Also, late yesterday automakers reported sales at a 17.2 million annual rate in June, down 3.5% from May’s torrid pace, but still up 1.5% from a year ago. Putting this all together, the economic recovery has been a Plow Horse and remains a Plow Horse. It’s not the boom of the 1980s or 1990s – not even close – but it continues to move forward.

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Posted on Thursday, July 02, 2015 @ 10:01 AM • Post Link Share: 
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  The ISM Manufacturing Index Rose to 53.5 in June
Posted Under: Data Watch • ISM

 
Implications: A slumping oil and gas industry couldn’t hold back manufacturing activity in June, as the ISM manufacturing index, which measures factory sentiment around the country, beat consensus estimates to tie the highest reading of 2015. The index has now remained above 50 (levels higher than 50 signal expansion) for a 30th consecutive month. In addition, the most forward-looking index, new orders, rose for a third consecutive month and now stands at the highest level so far this year. The production index fell slightly to a still robust 54.0 in June, showing continued solid gains in output. With new orders continuing to rise, expect sustained strength in production in the months ahead. While the index remains below the high of 58.1 seen in August 2014, we don’t believe this is anything to worry about. Remember that the economy was unusually strong in the summer of last year as it recovered from bad weather in the first quarter of 2014. The biggest jump in the June report came from the employment index, which rose 3.8 points to 55.5. This move higher is supported by the continued strength in initial and continuing claims reports. On the inflation front, the prices paid index was unchanged in June at 49.5. After significant declines starting in late 2014, prices have now begun to stabilize and should remain steady to slightly higher in the months ahead. Taken as a whole, this month’s ISM report bolsters the case for a quick rebound after a weak Q1. In other news today, ADP reported an increase of 237,000 in private-sector payrolls in June. Plugging this into our models suggests tomorrow’s official report will show an increase of 240,000 in nonfarm payrolls, slightly above the consensus expected 230,000. In other news this morning, construction spending increased 0.8% in May and was revised up for the past several months. The gain in May was led by chemical manufacturing facilities. On the housing front, pending home sales, which are contracts on existing homes, increased 0.9% in May, suggesting another gain in existing home sales in June. Meanwhile, the national Case-Shiller index, which measures home prices, was unchanged in April and up 4.2% in the past year. Compared to a year ago, the largest price increases have been in Denver, San Francisco, Dallas, and Miami. We expect national average home prices to increase around 3% in the year ahead, a little shy of increases in rents.

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Posted on Wednesday, July 01, 2015 @ 11:27 AM • Post Link Share: 
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  Ignore Greece
Posted Under: Double Dip • Europe • Government • Spending
Don’t let anyone tell you Greece is sticking up for its "dignity" by fighting “austerity.” The current Greek government is sticking up for socialism by fighting reality.

After several years of working toward some very minor market-friendly reforms, and finally starting to see a glimmer of economic growth, Greece elected a far left government back in January. Its economic and financial situation has gotten worse ever since. Instead of trying to boost growth and pay its debts, by trimming government spending and reducing regulation, the government is saying it won't cut retirement benefits and wants to raise taxes on what little private sector it has left.

Since Greece no longer has its own currency, it can’t just devalue and cut pension benefits by sleight-of-hand. Instead, politicians have to make tough choices. Greece finally ran out of other peoples’ money. And, since private investors will no longer buy Greek bonds, it has to count on government entities. Fortunately, so far at least, the IMF, the EU, and the ECB have refused to support the status quo.

So what does the new government do? It blames the only groups willing to lend it money and refuses to cut spending. Then, it decides to have a vote, scheduled for July 5th, on the lenders’ latest offer, which would combine higher taxes with pension cuts and some other market reforms. This referendum is all about politicians running scared. They don't want to make the choice themselves, so they put it to a vote, again.

But Greece has debt payments to make this week, before the vote, on which it’s likely to default. Worse, the government is urging citizens to vote against the lenders’ offer.

Meanwhile, Greek banks have seen massive outflows of deposits. To meet the demand for liquidity, Greek banks have been getting Euros from the Bank of Greece (their central bank), which prints them with permission from the ECB. But now that a debt default is a serious concern, the ECB has withdrawn its permission for the Bank of Greece to print more Euros.

So, the Greek government has declared a “bank holiday” until July 6, during which depositors can only withdraw 60 euros per day. Greece also imposed capital controls to try to keep Euros in the country. This is a travesty, and Greece is headed for a double-dip Depression.

Fortunately, Greece is not Lehman Brothers. It's like Detroit. When Detroit defaulted, the U.S., and even Michigan, survived just fine. Detroit had already wasted the money it had borrowed, and so has Greece. The only thing left is recognizing the loss. That does not damage the economy; it will be absorbed by the IMF, EU, and ECB.

What Europe wouldn’t be able to absorb is if it caved to the Greek government, if it let them rollover their debts without insisting on reforms that will help Greece eventually repay its obligations. That would bring more Euro leftists into government and lead to even more stagnation and default in the future.

Regardless of how this turns out, it's getting way more press than it deserves. Any sell-off in US equities is a buying opportunity. Stay the course.

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

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Posted on Monday, June 29, 2015 @ 10:55 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, June 29, 2015 @ 7:40 AM • Post Link Share: 
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  Personal Income Increased 0.5% in May
Posted Under: Data Watch • PIC

 
Implications: Whatever happened to the theory that consumers would just pocket the savings from lower energy prices instead of spending it? Instead, consumer spending came back with a vengeance in May, rising 0.9%, the fastest pace for any month since 2009. And that was back when the government was using “cash-for-clunkers” to pass out checks to car buyers. Skipping that program, we’d have to go back to 2006. “Real” (inflation-adjusted) consumer spending is up 3.4% from a year ago, also the fastest growth since 2006. Expect more of this in the year ahead. Payrolls are growing about three million per year and wage growth is accelerating as well. Private-sector wages & salaries are up a robust 5.7% in the past year. Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.5% in May and is up 4.4% in the past year, faster than the 3.6% gain in consumer spending. This is why consumers have enough income growth to keep on lifting their spending without getting into financial trouble. One part of the report we keep a close eye on is government redistribution. In the past year, government transfers to persons are up 5%, largely driven by Obamacare. However, outside Medicaid, government transfers are up a slower 4.3% in the past year and unemployment compensation is the lowest since 2007. The bad news is that overall government transfer payments – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp. – aren’t falling back to where they were before the Panic of 2008, when they were roughly 14% of income. In early 2010, they peaked at 18%. Now they are down to around 17%, but not falling any further. Redistribution hurts growth because it shifts resources away from productive ventures. This is why we have a Plow Horse economy instead of a Race Horse economy. The PCE deflator, the Fed’s favorite measure of inflation, increased 0.3% in May. Although it’s only up 0.2% from a year ago, it’s been held down by falling energy prices. The “core” PCE deflator, which excludes food and energy, is up 1.2% from a year ago. That’s still below the Fed’s 2% inflation target, but it’s up at a 1.7% annualized rate in the past three months. Now that energy prices have leveled off, look for overall inflation to move up toward “core” inflation over the rest of the year. In other news this morning, initial claims for unemployment insurance rose 3,000 last week to 271,000, the 16th straight week below 300,000. Continuing claims for regular state benefits increased 22,000 to 2.25 million. These claims numbers are at rock bottom levels and are about as good as it gets.

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Posted on Thursday, June 25, 2015 @ 10:24 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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