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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 $43.4 Billion in December
Posted Under: Data Watch • Trade

 
Implications: The trade deficit widened in December as exports fell to the lowest level in four years. Slower growth abroad, along with a stronger dollar have slowed exports. For example goods exports to Canada and China are down 13.4% and 16.8% respectively from a year ago. Exports of goods to Africa are down 33.2% while exports to South & Central America are down 20.9%. This will not last forever, but may continue to be a factor for the coming year. Meanwhile, while increasing $0.6 billion in December, imports are also below year-ago levels. The largest contributor to the decline in the past year has been petroleum, which is now down 48.7% from a year ago. Yes, crude prices are down in the past year, impacting the value of crude imports, but the quantity of crude imports also fell in 2015, down 1.4% after dropping 4.0% in 2014. Back in 2005 US petroleum and petroleum product imports were eleven times exports. In December, these imports were only 1.8 times exports. Ever wondered why, with all the turmoil out of the Middle East, oil prices have continued to decline, not spike higher, like we had usually seen in the past? It's because the US is becoming more and more important in the energy space as a producer, bringing a stabilizing effect to the world. You can thank fracking and horizontal drilling for that. In fact, after years of running a trade deficit, the US ran a trade surplus in goods with OPEC in 2015! Plugging today's figures into our GDP models suggests trade will be a non-factor, either up or down, in the first quarter of the 2016 while the overall economy grows at a about a 1% annual rate. Although tepid, we think the government is still having problems seasonally-adjusting its data and so we then expect much faster growth in the middle two quarters of the year.

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Posted on Friday, February 05, 2016 @ 11:08 AM • Post Link Share: 
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  Nonfarm Payrolls Increased 151,000 in January
Posted Under: Data Watch • Employment

 
Implications: Today's report on the labor market suggests that a rate hike in the first half of 2016 is still likely and could even come as early as March. Payrolls increased 151,000 in January, below consensus expectations. But, other than that, today's report on the labor market was red hot, with a big spike in the other key measure of jobs, higher wages, and more hours. Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 615,000 in January. That's the reason the unemployment rate went down to 4.9% despite a 502,000 increase in the labor force. Remember, the consensus at the Fed is that a jobless rate of 4.9% is the long-term norm, and now we're already there with further declines in the pipeline for at least the next year due to the loose stance of monetary policy. Notably, the participation rate, while still very low by historical standards, hit 62.7% in January, the highest in eight months. It looks like faster wage growth is finally getting more people interested in working again. Average hourly earnings, which don't even include fringe benefits like health care or irregular bonuses/commissions, spiked 0.5% in January and are up 2.5% from a year ago. In the past six months, these wages are up at a 2.9% annual rate, the fastest pace for any six-month period since the recession. Meanwhile, the number of hours worked is up 2.1% versus last year. Combined with the gain in wages, workers' total earnings are up 4.7% in the past year, which is why consumer spending should continue to grow. If you're one of the traditional Keynesians at the Fed, who think lower unemployment leads to faster wage growth and then, eventually, broader inflation, today's report suggests your model accurately describes current conditions. Unemployment came down and now wages are growing faster. That's why investors who have steeply discounted the possibility of more rate hikes this year need to change their outlook. A modest series of rate hikes will not kill economic growth; it will help prevent mal-investment (like in the housing bubble in the prior decade) and future inflation. Although the labor market could be doing even better with a better set of policies, like less government spending, lower marginal tax rates, and less regulation, it continues to improve and is likely to keep getting better in 2016.

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Posted on Friday, February 05, 2016 @ 10:40 AM • Post Link Share: 
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  Nonfarm Productivity Declined at a 3.0% Annual Rate in the Fourth Quarter
Posted Under: Data Watch • Employment • Productivity

 
Implications: Taken at face value, today's productivity numbers were not good, with output per hour falling at a 3% annual rate in the fourth quarter and up only 0.3% from a year ago. The meager gain of 0.3% in 2015 was no different than the average for the past five years, which is the weakest 5-year period since the late-1970s and early 1980s. However, we think it's important to take the government's productivity numbers with a huge grain of salt. We don't think the official productivity figures are capturing the dynamism of the US economy. We strongly suspect the government is underestimating output in the increasingly important service sector, which means growth and productivity are higher than the official data show. As the economy becomes more and more friction-free due to new apps and technologies, productivity rises, but it does not get fully picked up in statistics because many of these benefits are free for consumers. The figures from the government miss much of the value of these improvements, which means our standard of living is improving faster than the official reports show. Note that on the manufacturing side, where it's easier to measure output per hour, productivity is up 1.5% in the past year and up at a 1.4% annual rate in the past five years. In spite of the problems with measurement, we anticipate faster productivity growth over the next few years as new technology increases output in all areas of the economy. The declining unemployment rate, decline in labor force participation, and faster growth in wages should generate more pressure for efficiency gains, while the technological revolution continues to provide the inventions that make those gains possible. In other news this morning, new claims for unemployment insurance increased 8,000 last week to 285,000. Continuing claims for regular state benefits declined 18,000 to 2.26 million. Plugging these figures into our models makes our final forecast for tomorrow a nonfarm payroll gain of 190,000 with the unemployment rate remaining at 5.0%. More Plow Horse growth.

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Posted on Thursday, February 04, 2016 @ 1:29 PM • Post Link Share: 
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  The ISM Non-Manufacturing Index Declined to 53.5 in January
Posted Under: Data Watch • ISM Non-Manufacturing

 
Implications: Activity in the service sector grew for a 72nd consecutive month in January. Let that sink in for a second. The largest sector of the U.S. economy has been reporting steady growth every month for the past six years. This marks a stark contrast from the manufacturing sector, where recent readings have indicated contraction. The ISM Services number came in 53.5 for January, short of consensus expectations, and represents a slight slowdown in the pace of growth (remember, levels above 50 signal expansion, so January's reading represents continued growth, but at a slower rate than in recent months). However, every year from 2010 through 2014, in all of which the economy kept growing, included months with at least one lower reading than 53.5. In other words, today's report doesn't indicate that the US economy is headed for a recession. The underlying details of the report show activity remains resilient. The new orders index, a signal of how business activity and employment are likely to move in coming months to fill demand, came in at 56.5 in January. In other words, it looks like service sector growth should continue in the months ahead. And while business activity and employment showed a slower pace of growth to start 2016, the majority of comments from survey respondents were positive about the business outlook. On the inflation front, the prices paid index dipped back below 50, with respondents citing continued declines in energy prices and a strong dollar pushing down meat prices. In sum, steady growth from the service sector, paired with positive trends in employment, earnings, and home building, keep the plow horse economy plodding forward. In other news this morning, ADP says private-sector increased payrolls 205,000 in January. Plugging this into our models suggests Friday's official report will show a nonfarm gain of 192,000, although our forecast may change based on tomorrow's data on unemployment claims. Yesterday, automakers reported they sold cars and light trucks at a 17.6 million annual rate in January, an increase of 1.4% versus December and up 5.2% from a year ago. What's remarkable is that sales rose despite a massive late-month snowstorm on the East Coast, which suggests auto sales will be even stronger in February. Look for auto sales to hit a new record high in 2016.

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Posted on Wednesday, February 03, 2016 @ 1:16 PM • Post Link Share: 
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  The ISM Manufacturing Index Rose to 48.2 in January
Posted Under: Data Watch • ISM

 
Implications: It was a real mixed bag report today from the ISM, with the headline index remaining in contraction territory (remember, levels above 50 signal expansion while levels below 50 signal contraction, so a move higher to 48.2 means continued contraction, but at a slower pace than last month), while the major sub-indexes were mostly positive. However, the two most forward looking measures, new orders and production, both returned to levels above 50, signaling growth. Employment was the major drag in January, as the petroleum and coal industry led ten of eighteen manufacturing industries to report declining employment. This comes in contrast to the continued strength in other employment indicators (such as initial claims, which have remained below 300K since February of last year). It's also important to remember that manufacturing represents a relatively small piece of overall employment. In 2015, manufacturing added an average of 2,500 jobs a month, while the private sector as a whole grew by more than 210,000 jobs monthly. In other words, today's report does little to change our outlook on Friday's employment report, where we expect to see significant gains. The modest readings from the ISM manufacturing report since peaking at 58.1 in August 2014, have given some pessimists reason to cheer, but we see no broad-based evidence of a significant slowdown. And remember, the ISM is a survey which can reflect sentiment as much as actual economic activity. As a whole, today's data continues to highlight a stark contrast in two broad sectors of the economy: services, where the economy is expanding briskly and prices are rising, versus goods, where both growth and inflation are soft to non-existent. Overall activity isn't booming, but it does continue to plow forward at a modest pace. In other news this morning, construction increased 0.1% in December (-0.5% including downward revisions for October/November). The slight gain in December itself was the by-product of a surge in government projects (paving roads and building bridges) and new home construction, and a large drop in commercial construction, particularly chemical manufacturing facilities, probably related to a drop in oil output.

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Posted on Monday, February 01, 2016 @ 11:20 AM • Post Link Share: 
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  Personal income increased 0.3% in December
Posted Under: Data Watch • PIC

 
Implications: These are not recessionary numbers. Household spending cooled in December, but incomes continued to grow, meaning consumers are in a position to increase spending over the next few months. Personal income rose 0.3% in December, beating consensus expectations, and is up 4.2% in the past year. The increase in income was led by wages and salaries in private service-providing industries. Meanwhile, wages and salaries declined in private goods-producing companies as pay went back to normal in December after a large one-time bonus to unionized auto workers in November due to recent contract ratification. Although consumer spending was unchanged in December, it's up 3.2% in the past year. That increase is not due to an unsustainable credit binge. Instead, it reflects higher purchasing power by American workers. The main driver of the income gains in the past year has been overall private-sector wages and salaries, which are up 4.8% from a year ago. The only bad news in this report was the continued failure to make progress against government redistribution. Although unemployment compensation is hovering around the lowest levels since 2007, overall government transfers to persons were up 0.7% in December and are up 5.4% in the past year, largely driven by the Obamacare-related expansion of Medicaid. Before the Panic of 2008, government transfers – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp – were roughly 14% of income. In early 2010, they peaked at 18.5%. Now they're around 17%, but not falling any further. Redistribution hurts growth because it shifts resources away from productive ventures and, among those getting the transfers, weakens the incentive to produce. This is why we have a Plow Horse economy, not a Race Horse economy. On the inflation front, the PCE deflator, the Fed's favorite measure, was down 0.1% in December. Although it's only up 0.6% from a year ago, it continues to be held down by falling energy prices. The "core" PCE deflator, which excludes food and energy, is up 1.4% from a year ago. That's also below the Fed's 2% inflation target, but we expect some acceleration in the coming year. As soon as energy prices stop falling, inflation is going to pick up. Together with continued employment gains, these data support the case for slow and steady rate hikes (think 0.25% at every other Fed meeting) in 2016.

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Posted on Monday, February 01, 2016 @ 10:24 AM • Post Link Share: 
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  Fed Not Going Away
Posted Under: Bullish • GDP • Government • Monday Morning Outlook • Fed Reserve • Interest Rates
Close your eyes (well, not literally). Imagine a huge manufacturing economy, in Asia, growing very rapidly. It became the second largest economy in the world, from ruin, in just a few short decades and produced 14% of global output. Now imagine it collapses.

If you had your eyes closed, you would think – China! But, you would be wrong. We are describing Japan. It collapsed in 1990 and hasn't risen since, but the global economy did just fine, while the US roared ahead. It's true that the US had a short 9-month recession starting in July 1990. But Japan had little to do with that. The Fed hiked the federal funds rate to 9¾% in 1989, when inflation was 5¼%. Iraq invaded Kuwait and oil prices shot up.

If anything, the economic problems in Japan that started back in 1990 should have hit the US harder than today's problems in China. Back in 1990, the US goods exports to Japan were 0.8% of US GDP; today, goods exports to China are 0.7% of GDP. And, China is about the same size as Japan in relative terms to the global economy, especially if it continues to devalue its currency.

What's interesting is that Japan is still trying to induce growth, announcing last week its central bank will use negative short-term interest rates for banks as an incentive for them to lend. Japan's 10-year Treasury security now yields 0.05% (to be clear, that zero to the right of the decimal point is not a typo). But, Japan started quantitative easing in 2001 without success. If it really wants to grow again, it needs to roll back tax hikes, cut government spending, and reduce regulations.

Regardless, when Japan announced negative rates, US markets responded. Odds of Federal Reserve rate hikes in 2016 fell, bond yields fell, and equities soared. Federal funds futures markets now put the odds of a March rate hike at only 18% and are indicating only one quarter-point rate hike in 2016.

We think this is overdoing it. Between today and the next Fed meeting in mid-March the US gets two more jobs reports and two more inflation reports. If those reports show what we expect – continued solid job growth, core inflation running near 2%, and the overall inflation rate heading back toward 2% – don't be surprised to see Fed officials use speeches and press comments to put a March rate hike back on the radar.

Don't view this as a negative. Fears about China's impact on the US are already overblown in markets and a Fed rate hike will signal the US economy is still growing, while entrepreneurial profits head higher.

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


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Posted on Monday, February 01, 2016 @ 9:50 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, February 01, 2016 @ 7:55 AM • Post Link Share: 
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  The First Estimate for Q4 Real GDP growth is 0.7% at an Annual Rate
Posted Under: Data Watch • GDP

 
Implications: Today's GDP report should dispel any doubt that the economy remains a Plow Horse. Real GDP grew at a tepid 0.7% annual rate in the fourth quarter, almost exactly as expected. In turn, that means real GDP grew only 1.8% in 2015, the least since 2012. However, it's not much different than the average annualized growth rate of 2.1% since the recovery started in mid-2009. Also, as we forecast in a recent Monday Morning Outlook (link), the details of the report were a bit stronger than the headline. One of the biggest drags on growth in Q4 was inventories, which should leave more room for future production. We like to focus on what we call "core" GDP growth, which excludes inventories, government, and trade. Core GDP grew at a 1.8% rate in Q4 and is up 2.7% from a year ago. The gain in Q4 was led by a 2.2% increase in consumer spending and an 8.2% increase in home building. That's why we're sticking to our forecast that the economy will grow around 2.5% in 2016, the unemployment rate will continue to decline, and the Federal Reserve will keep gradually lifting short-term interest rates. Nominal GDP – real GDP growth plus inflation – rose at a 1.5% rate in Q4, is up 2.9% in the past year, and is up at a 3.4% annual rate in the past two years. Historically, any of these figures is consistent with higher short-term interest rates than the Fed is now targeting. Yes, Plow Horse economic growth is soft by historical standards, but loose monetary policy is not the cure. Instead, the economy needs lower marginal tax rates, less regulation, and entitlement reform, which require action by the President and Congress. In other news this morning, the Chicago PMI, a measure of Midwest manufacturing sentiment, rebounded sharply to 55.6 in January from 42.9 in December. That's the highest level in a year and the largest gain for any single month on record, going back to the 1960s. This is a sign that the manufacturing sector is starting to rebound from the sudden and rapid drop in fracking activity. In other recent news, pending home sales, which are contracts on existing homes, increased 0.1% in December, suggesting a further slight gain in existing home sales in the months ahead.

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Posted on Friday, January 29, 2016 @ 10:55 AM • Post Link Share: 
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  New Orders for Durable Goods Declined 5.1% in December
Posted Under: Data Watch • Durable Goods

 
Implications: Durable goods ended the year on a sour note, with the largest monthly decline for 2015. However, the decline was led by aircraft orders, which are extremely volatile from month to month, as well as machinery orders, which next week's factory orders report is very likely to show was once again held down by the energy sector. In addition, companies continue to pare back inventories after overbuilding them earlier in 2015. But inventories are a volatile and temporary factor. A large rise in inventories provides a temporary boost in one quarter, but we pay it back in future quarters. Exactly like what we are seeing now. Don't fret too much about the soft headline on orders for durable goods in December. Although orders came in lower than almost anyone expected, this is a very volatile series and it's not unusual for it to decline five to six months a year. Expect further gains in the coming months as inventories stabilize and companies restock. Consumer purchasing power is growing with more jobs and higher incomes, while debt ratios remain very low, leaving room for an upswing in big-ticket spending. Meanwhile, profit margins are high, corporate balance sheets are loaded with cash, and capacity utilization is breaching long-term norms, leaving more room (and need) for business investment. In other news this morning, new claims for jobless benefits fell 16,000 last week to 278,000. Continuing claims rose 49,000 to 2.27 million. Plugging these figures into our models suggests nonfarm payrolls were up about 190,000 in January.

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Posted on Thursday, January 28, 2016 @ 10:48 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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