Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow First Trust: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  Existing Home Sales Declined 6.1% in November
Posted Under: Data Watch • Home Sales • Housing

 
Implications: After hitting the highest level of the year in October, existing home sales fell 6.1% in November, the weakest reading since May. Given the month-to-month volatility in existing home sales over the past several years, it’s important to focus on the underlying trend, which remains upward. Overall sales are up a modest 2.1% from a year ago and the underlying trend is improving more rapidly. Distressed homes (foreclosures and short sales) now account for only 9% of sales, down from 14% a year ago, while all-cash buyers are now 25% of sales versus 32% a year ago. As a result, non-cash sales (where the buyer uses a mortgage loan) are up 12.6% since last November. So, even though tight credit continues to suppress sales, we are seeing signs of an easing in mortgage credit, which suggests overall sales will continue to climb in the year ahead. Another reason for the tepid recovery in overall existing home sales is a lack of inventory. Inventories are up a mere 2% from a year ago and down over the past four months. In the year ahead, we expect higher home prices to bring more homes on the market, which should help generate additional sales. Either way, whether existing home sales are up or down, it’s important to remember these data, by themselves, should not change anyone’s impression about the overall economy. Existing home sales contribute almost zero to GDP. Look for better sales in the year ahead. But, unless lenders dramatically loosen standards, the increases in sales will remain tame by historical standards.

Click here for PDF version
Posted on Monday, December 22, 2014 @ 10:45 AM • Post Link Share: 
Print this post Printer Friendly
  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 
 
Posted on Monday, December 22, 2014 @ 9:32 AM • Post Link Share: 
Print this post Printer Friendly
  Greedy Innkeeper or Generous Capitalist?
Posted Under: Monday Morning Outlook
The Bible story of the virgin birth is at the center of much of the holiday cheer at this time of year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was “no room for them in the inn.”

Some people believe Mary and Joseph were mistreated by a greedy innkeeper, who only cared about profits and decided the couple was not “worth” his normal accommodations. This version of the story (narrative) has been repeated many times in plays, skits, and sermons. It fits an anti-capitalist mentality that paints business owners as greedy, or even evil.

It persists even though the Bible records no complaints and there was apparently no charge for the stable. It may be the stable was the only place available. Bethlehem was over-crowded with people forced to return to their ancestral home for a census – ordered by the Romans – for the purpose of levying taxes. If there was a problem, it was due to unintended consequences of government policy. In this narrative, the government caused the problem.

The innkeeper was generous to a fault – a hero even. He was over-booked, but he charitably offered his stable, a facility he built with unknowing foresight. The innkeeper was willing and able to offer this facility even as government officials, who ordered and administered the census, slept in their own beds with little care for the well-being of those who had to travel regardless of their difficult life circumstances.

If you must find “evil” in either of these narratives, remember that evil is ultimately perpetrated by individuals, not the institutions in which they operate. And this is why it’s important to favor economic and political systems that limit the use and abuse of power over others. In the story of baby Jesus, a government law that requires innkeepers to always have extra rooms, or to take in anyone who asks, would “fix” the problem.

But these laws would also have unintended consequences. Fewer investors would back hotels because the cost of these regulations would reduce returns on investment. A hotel big enough to handle the rare census would be way too big in normal times. Even a bed and breakfast would face the potential of being sued. There would be fewer hotel rooms, prices would rise, and innkeepers would once again be called greedy. And if history is our guide, government would chastise them for price-gouging and then try to regulate prices.

This does not mean free markets are perfect or create utopia; they aren’t and they don’t. But businesses can’t force you to buy a service or product. You have a choice – even if it’s not exactly what you want. And good business people try to make you happy in creative and industrious ways.

Government doesn’t always care. In fact, if you happen to live in North Korea or Cuba, and are not happy about the way things are going, you can’t leave. And just in case you try, armed guards will help you think things through.

This is why the framers of the US Constitution made sure there were “checks and balances” in our system of government. These checks and balances don’t always lead to good outcomes; we can think of many times when some wanted to ignore these safeguards. But, over time, the checks and balances help prevent the kinds of despotism we’ve seen develop elsewhere.

Neither free market capitalism, nor the checks and balances of the Constitution are the equivalent of having a true Savior. But they should give us all hope that things won’t be as bad as so many seem to think they will be.

(We have published a version of this same Monday Morning Outlook during Christmas week, each year, since 2009.)

Click here for PDF version
Posted on Monday, December 22, 2014 @ 9:23 AM • Post Link Share: 
Print this post Printer Friendly
  Rate Hikes To Start in 2015
Posted Under: Government • Research Reports • Fed Reserve • Interest Rates

 
Unlike most meetings, today’s actions by the Federal Reserve were chock full of implications for the future course of monetary policy. At long last, the Fed finally removed the language in its statement that short-term interest rates will remain at essentially zero for a “considerable time” and replaced it with language that the Fed will be “patient” before starting to increase rates.

Several months ago, Fed Chair Janet Yellen let it slip that she thinks a “considerable time” means about six months. As a result, we are increasingly confident in our forecast that the first rate hike will come by June 2015, six months from now.

What’s striking about the rest of the Fed’s policy statement is how focused it is on the labor market, altering the wording of its statement as well as its economic projections slightly here and there to signal its own increased confidence in job creation and declining unemployment.

The obsession with the labor market helps explain why the Fed was willing to look past the recent oil-induced drop in overall inflation. Remember, the Fed doesn’t care as much about where inflation is today as where its own models are projecting inflation to go over the next few years. And while it expects inflation to remain low for the time being, it sees this as temporary and that one of the reasons inflation will rebound is improvement in the labor market. The Fed may be the most ardent advocate of the Keynesian Phillips Curve in the world.

When the Fed starts raising rates it is unlikely to raise rates at every meeting, as was done in the past two prolonged rate hike cycles under Alan Greenspan in the late 1990s and Ben Bernanke in the middle of the prior decade. Yellen cautioned against this view at the press conference following the meeting. In addition, the “dot matrix” showing where policymakers think interest rates will go over the next few years suggests the Fed will, for the first year of rate hikes, alternate between raising short-term rates at one meeting and then pausing at the next, making for one rate hike of 25 basis points per quarter through mid-2016.

The “median” dot may suggest a slightly faster pace of rate hikes, but we’re guessing that, as the leader of the Fed, Yellen will ultimately get her way and she is probably on the dovish side of the dot matrix. With the highest dot being the most hawkish, Yellen is probably around dot number 12, give or take, and that dot shows three rate hikes in 2015 and six in 2016.

Another issue is when the Fed’s balance sheet will go back to normal. We’re still forecasting that the Fed will keep reinvesting principal payments from its asset holdings to maintain the balance sheet at roughly $4.4 trillion through at least late 2015.

Notably, this last meeting for 2014 must have been a contentious one. Three members dissented. Once again, Minneapolis Fed president Narayana Kocherlakota disagreed from the dovish side, saying inflation was too low. The two other dissents were from hawks. Dallas President Richard Fisher thought rate hikes should come earlier and Philadelphia President Charles Plosser thought the statement was too focused on the timing of rate hikes rather than the economic conditions that would generate rate hikes. In addition, Plosser thought the statement was not optimistic enough.

The bottom line is that while the Fed is still behind the curve, it’s at least finally pointed in the right direction, and, barring some major shift in its outlook for the economy, the clock is ticking on rate hikes. Nominal GDP – real GDP growth plus inflation – is up 4.0% in the past year and up at a 3.9% annual rate in the past two years. A federal funds target rate of nearly zero is too low given this growth. It’s also too low given well-tailored policy tools like the Taylor Rule.

In the meantime, hyperinflation is not in the cards; the Fed will keep paying banks enough to keep the money multiplier depressed. But, given loose policy, we expect gradually faster growth in nominal GDP for the next couple of years. In turn, the bull market in equities will continue and the bond market is due for a fall.

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

Click here for PDF version
Posted on Wednesday, December 17, 2014 @ 4:25 PM • Post Link Share: 
Print this post Printer Friendly
  The Consumer Price Index Declined 0.3% in November
Posted Under: CPI • Data Watch • Inflation

 
Implications: Due to plummeting oil prices, overall consumer prices declined in November at the fastest pace since the Panic back in late 2008. Despite the drop in prices, we still expect the Federal Reserve to remove the “considerable time” language in its statement this afternoon, which is a reference to how long they expect to keep short-term interest rates near zero. In the past, Fed Chief Janet Yellen has said short term movements in overall prices are sometimes little more than “noise,” and we anticipate the Fed will view today’s CPI report the same way. In turn, removing the language from the statement and replacing it with a word like “patient,” means the first rate hike should come in June 2015. Energy prices are the key reason for the “noise” we’ve seen lately in the CPI. They fell for a fifth straight month in November and are down at a 22.7% annual rate over the past three months. Gas is now below $3 per gallon in every one of the lower 48 states. One of the key reasons for the drop in energy prices is America’s booming energy production. (For more on oil, see our Monday Morning Outlook from two days ago.) As a result, consumer prices are up a modest 1.3% in the past year. Given the continued drop in oil prices in the first half of December, look for another tame reading on overall price gains in next month’s report. However, there are sectors where inflation is moving higher. Food and beverage prices are up at a 2.7% annual rate in the past six months and up 3.1% in the past year. So if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and that “true” inflation is higher. In addition, housing costs are going up. Owners’ equivalent rent, which makes up about ¼ of the overall CPI, rose 0.2% in November, is up 2.7% in the past year, and will be a key source of any acceleration in inflation in the year ahead. In other words, there is no broad, tight-money-induced deflation out there, but increasing prices remain subdued - for now. One of the best pieces of news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 0.6% in November. These earnings are up 0.8% from a year ago and should continue to provide a boost to real consumer spending, which we now forecast should grow at a 3%+ annual rate in Q4, consistent with real GDP growth of around 2.5%.

Click here for PDF version
Posted on Wednesday, December 17, 2014 @ 10:10 AM • Post Link Share: 
Print this post Printer Friendly
  Housing Starts Declined 1.6% in November
Posted Under: Data Watch • Home Starts • Housing

 
Implications: Another Plow Horse report on housing. Housing starts fell 1.6% in November but exceeded the 1 million pace for the third consecutive month, the first time since 2008. November’s drop of 1.6% for home building was all due to single-family units, which were down 5.4% in November. To smooth out the monthly volatility we look at the 12-month moving average for overall housing starts, which besides last month, is at the highest level since September 2008. The underlying trend remains upward and we expect that to continue. The total number of homes under construction, (started, but not yet finished) increased 1.2% in November and are up 18.3% versus a year ago. No wonder residential construction jobs are up 123,000 in the past year. Multi-family construction rose 6.7% in November and has taken the clear lead in the housing recovery. Single-family starts have been in a tight range for the past two years, while the trend in multi-family units has been up steeply. In the past year, 35% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will rise to about 1.5 million units per year over the next couple of years. In other housing news, yesterday, the NAHB index, which measures confidence among home builders, declined to 57 in December from 58 in November. Readings greater than 50 mean more respondents said conditions were good. Expect more Plow Horse-like gains in housing in the year ahead.

Click here for PDF version
Posted on Tuesday, December 16, 2014 @ 11:51 AM • Post Link Share: 
Print this post Printer Friendly
  Oil Price: Looks Reasonable
Posted Under: Bullish • CPI • Gold • Monday Morning Outlook • Productivity
A former economic colleague, and mentor, used to say: “In the Bible, it says an ounce of gold will buy a fine suit of clothing.” We have read the Bible, and we haven’t found this, although there could be some high-powered math, using talents, cubits, frankincense and myrrh that make it true.

Nonetheless, the point stands – over long periods of time, relative value remains somewhat constant. Gold is trading at $1,210/oz. today and that’s about the cost of a fine suit. There are suits that cost more, and less, but, well, you get the point.

The reason we bring this up, is that the same “relative price relationship” should hold true for other commodities over time. The gold-oil ratio (using West Texas Intermediate crude prices) has averaged 15.8 over the past 30 years – meaning one ounce of gold would buy 15.8 barrels of oil.

In 2005, the ratio reached a low of 6.7; in 1986, it hit a high of 30.1. From 1990-1999 oil prices averaged $19.70/bbl and gold prices averaged $351/oz – a ratio of 17.8. Today, oil is $57/bbl and gold is $1,210/oz., meaning an ounce of gold will buy 21.2 barrels of oil.

In other words, relative to history, either oil is cheap or gold is expensive. Looking at other commodity price relationships, like silver, shows the same thing. One interesting fact is that in the past 30 years, the CPI is up 126%, while oil is up 116%, showing that, right now, with oil prices down almost $50 from their recent peak, oil has risen about the same as a broad basket of consumer goods.

This doesn’t mean that oil prices can’t fall further. After all, markets do what markets do. What it does mean is that the recent collapse in oil prices is not a sign of broad deflation. It is result of a shift in the “oil supply curve” to the right, due to new technologies in energy – horizontal drilling and hydraulic fracturing. Remember, the supply curve slopes upward from the lower left to the upper right. When a new technology increases supply at any price, like the invention of the tractor did with crops, the entire supply curve shifts. When this happens, output rises and prices fall, unless there is a shift in demand.

These days, two things are happening to keep a lid on demand. First, developing economies, like China and Russia are experiencing slower growth. Second, new technologies – like LED lighting, more efficient computer chips and less waste in office buildings, homes and manufacturing – are reducing energy consumption. For example, an iPad uses $1.36 of electricity every year, while a desktop computer uses $30 of electricity per year.

So, a right-ward shift in the supply curve is occurring at the same time demand is falling short of what was previously expected. In other words, the decline in oil prices is due to macro-economic forces, and those forces are mostly good, not bad. As a result, the drop in oil prices is a good sign, not one that indicates economic problems. The drop in stock prices last week, if it was based on the idea that falling oil prices are a negative thing, is temporary.

More importantly, most relative price indicators suggest the oil price decline has gone too far. Using the current price of gold, a barrel of oil is fairly valued near $77. Alternatively, comparing oil to multiple different prices, including a fine suit of clothing, oil is fairly valued somewhere between $55 and $70/bbl.

Bottom line: stocks and oil have fallen too much. Stocks should rebound soon and, barring a collapse in gold, we look for stability and then rising prices for oil in the years ahead.

Click here for PDF version
Posted on Monday, December 15, 2014 @ 12:26 PM • Post Link Share: 
Print this post Printer Friendly
  Industrial Production Rose 1.3% in November
Posted Under: Data Watch • Industrial Production - Cap Utilization

 
Implications: Looks like the Plow Horse is carrying some Christmas gifts! After last week’s report that retail sales were strong, today we got news that industrial production skyrocketed up 1.3% in November, the largest monthly gain since 2010. Auto production and utilities led the way, both up 5.1%. These are two of the most volatile parts of the report. The third is mining, which was down 0.1% (due to a 0.5% drop in oil and gas well drilling). But even stripping out these three volatile sectors and only looking at manufacturing outside of autos, production was up a very robust 0.9% in November and is up 4.6% versus a year ago. In the past 16 months, this key measure has only declined once, and that was last January during the worst of an unusually brutal winter. We expect continued growth in the industrial sector in the year ahead. The housing recovery has further to go and both businesses and consumers are in a financial position to ramp up investment and the consumption of big-ticket items, like appliances. No wonder the production of consumer goods, led by cars, electronics, and energy boomed 2.5% in November, the largest gain since August 1998. As a result of the increases in production, capacity utilization hit 80.1% in November, the highest so far in the recovery and higher than the average of 78.9% in the past twenty years. Further gains in production in the year ahead will push capacity use higher, which means companies will have an increasing incentive to build out plants and equipment. In other news this morning, the Empire State index, a measure of manufacturing sentiment in New York, declined to -3.6 in December versus 10.2 in November. We’re guessing this is a lagged effect of the deep snowfall in some parts of upstate New York and is an outlier relative to the other generally robust manufacturing data. Expect the report to show a solid rebound next month.

Click here for PDF version
Posted on Monday, December 15, 2014 @ 11:23 AM • Post Link Share: 
Print this post Printer Friendly
  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 
 
Posted on Monday, December 15, 2014 @ 9:32 AM • Post Link Share: 
Print this post Printer Friendly
  The Producer Price Index (PPI) declined 0.2% in November
Posted Under: Data Watch • PPI

 
Implications:  Still no sign of inflation in producer prices. After a surprise to the upside in October, producer prices declined 0.2% in November coming in slightly lower than the consensus expected. The decline in overall producer prices was all due to the goods sector, where prices fell 0.7%, primarily due to energy. Energy prices fell 3.1% in November and are down 6.7% in the past three months (-24% at an annual rate), a testament to fracking and horizontal drilling. Although energy prices have dropped further in December and may decline into early 2015, that trend won’t last forever. As a result, our forecast is that the US suffers neither hyperinflation nor deflation for the next few years. Instead, it’s going to be a slow slog upward for inflation. Prices further back in the production pipeline (intermediate demand) show that it will take a while for inflation to move up. Prices for intermediate processed goods are down 0.3% in the past year while prices for unprocessed goods are down 1.7%. Regardless, with the labor market improving rapidly now that extended unemployment benefits are done, the Fed is still on track to start raising rates around the middle of next year. These rate hikes will not hurt the economy; monetary policy will still be loose and will likely remain that way for the first couple of years of higher short-term rates. Counterintuitively, higher short term rates may boost lending as potential borrowers hurry up their plans to avoid even higher interest rates further down the road. In other words, the Plow Horse economy won’t stop when the Fed shifts gears.

Click here for the full report.
Posted on Friday, December 12, 2014 @ 10:27 AM • Post Link Share: 
Print this post Printer Friendly

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.
Search Posts
 PREVIOUS POSTS
Retail Sales Increased 0.7% in November
The Myth of QE: Why Rates Are Headed Higher
M2 and C&I Loan Growth
The Trade Deficit in Goods and Services Came in at $43.4 Billion in October
Nonfarm Payrolls Increased 321,000 in November
The ISM Non-Manufacturing Index Increased to 59.3 in November
Nonfarm Productivity Increased at a 2.3% Annual Rate in the Third Quarter
US Economy - Less Fragile Than You Think
The ISM Manufacturing Index Declined to 58.7 in November
Oil - Just Another Price
Archive
Skip Navigation Links.
Tags
 
First Trust Portfolios L.P.  Member SIPC and FINRA.
First Trust Advisors L.P.
Home |  Important Legal Information |  Privacy Policy |  Business Continuity Plan
Copyright © 2014 All rights reserved.