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   Brian Wesbury
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   Bob Stein
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  Real GDP was Revised Up to a 0.8% Annual Rate in Q1
Posted Under: Data Watch • GDP • Government • Fed Reserve

 

Implications: It doesn't get much more Plow Horse than this. The good news is that real GDP growth in the first quarter was revised up to a 0.8% annual rate from a previous estimate of 0.5%. However, almost all of the upward revision was due to inventories and net exports, neither of which can be relied on for consistent long-term economic growth. Since the economic recovery started in mid-2009, real GDP has been growing at an average annual rate of 2.1%. Look for faster economic growth over the next couple of years, but not much faster. We like to follow "core" GDP, which is real GDP excluding inventories, trade, and government purchases. In the past two years, core GDP is up at a 3.1% annual rate. Meanwhile, real GDI (gross domestic income), which tends to track real GDP, is up at a 2.7% rate in the past two years. The brightest spot in the economy remains home building, which soared at a 17.2% annual rate in the first quarter and has grown in every quarter for the past two years. Today we also got an initial look at corporate profits in Q1, which rose 0.3% versus Q4 but are down 5.7% from a year ago. The gain in profits in Q1 itself was due to domestic nonfinancial industries where profits grew 4%. Slower growth in advanced economies abroad and the stronger dollar, pushed down profits earned abroad by 9.9%. We think profits were held down by relatively slow economic growth in the first quarter and will rebound more sharply later this year. In terms of monetary policy, nothing in today's report should prevent the Federal Reserve from raising rates in June. Nominal GDP (real growth plus inflation) was revised up to a 1.4% annual growth rate in Q1 from a prior estimate of 1.2%. Nominal GDP is up 3.3% from a year ago and up at a 3.6% annual rate in the past two years. These figures show the Fed's target for short-term interest rates is too low and monetary policy is too loose.

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Posted on Friday, May 27, 2016 @ 11:26 AM • Post Link Share: 
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  Big Government Slams the Middle Class
Posted Under: Government • Video • Spending • Taxes • Wesbury 101
Posted on Thursday, May 26, 2016 @ 3:45 PM • Post Link Share: 
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  New Orders for Durable Goods Rose 3.4% in April
Posted Under: Data Watch • Durable Goods • GDP

 

Implications: Durable goods orders rose for the third time in four months, easily beating consensus expectations as commercial aircraft and motor vehicles led new orders 3.4% higher in April. Even excluding the volatile transportation sector, orders rose 0.4% in April, narrowly beating consensus expectations. Shipments of "core" capital goods - non-defense, excluding aircraft – rose 0.3% in April, but were unchanged including revisions to prior months. These shipments are what the government uses in its calculation of the business equipment investment component of GDP, so the downward revisions to prior months will have a slightly downward impact on tomorrow's Q1 GDP report. But, given better data on consumer spending, inventories, and international trade, we still expect tomorrow's report to show Q1 GDP grew at around a 0.8% annual rate, an upward revision from the initial reading of 0.5%. The biggest drag on orders in the past year has been machinery, but that should end soon given the rebound in energy prices. In other words, business investment should pick up in the months ahead. In addition, 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. In other news this morning, new claims for unemployment benefits declined 10,000 last week to 268,000, marking 64 consecutive weeks below 300,000, the longest stretch in more than forty years. Continuing claims rose 10,000 to 2.16 million. Plugging these figures into our models suggests payrolls are up close to 200,000 in May. In housing new this morning, pending home sales, which are contracts on existing homes, rose 5.1% in April, the largest increase for any month in more than five years. Following a 1.6% gain in March, pending sales suggest a large increase in existing home sales in May (counted at closing). In other recent housing news, the FHFA index which measures prices for homes financed with conforming mortgages, increased 0.7% in March and was up 6.1% from a year ago. Put this all together and the odds of a June rate hike from the Fed keep rising.

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Posted on Thursday, May 26, 2016 @ 12:02 PM • Post Link Share: 
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  New Single-Family Home Sales Rose 16.6% in April to a 619,000 Annual Rate
Posted Under: Data Watch • Home Sales • Housing

 

Implications: New home sales soared in April to the fastest pace in eight years, while annual revisions pushed up numbers for the first three months of 2016 as well. To say that the April number came in higher than expected is an understatement; it beat even the most optimistic forecast by more than 80,000. It's important to remember that home sales data are very volatile from month to month, so while April saw a blowout number, it's important not to get too carried away and to keep focusing on the trend, which remains positive. We think there are a couple reasons to expect housing to remain a positive factor for the economy in the months ahead. First, employment gains and the beginning of a thaw in mortgage financing. Second, wage growth seems to be picking up, putting the prospect of buying a home in reach for more people. Third, the homeownership rate remains depressed as a larger share of the population is renting, leaving plenty of potential buyers as conditions continue to improve. And remember that, unlike single-family homes which are counted in the new home sales data, multi-family homes (think condos in cities) are not counted in this report. So a shift back towards single family units will also serve to push reported sales higher. The inventory of new homes fell 1,000 in April and remains very low by historical standards (see chart to right). Moreover, the recent recovery in inventories has been led by homes where construction is still in progress, or has yet to begin. As a result, homebuilders still have plenty of room to increase both construction and inventories. Prices also surged in April, with median sales prices now up 9.7% in the past twelve months, consistent with the gains reflected in other recent home price measures. In other news this morning, the Richmond Fed index, which measures mid-Atlantic factory sentiment, fell to -1 in May from +14 in April, signaling a pullback in activity. Despite the slowdown, survey respondents continued to report a positive outlook on business conditions in the months to come.

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Posted on Tuesday, May 24, 2016 @ 12:05 PM • Post Link Share: 
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  Fed Teeing Up Rate Hike
Posted Under: Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates

Just a couple of weeks ago the odds of the FederalReserve raising rates in June were slim to none. The federal funds futuresmarket put the odds of a rate hike around 4%.

Then, last week, we got the minutes from the Fed meeting back in April, whichshowed that as long as the economy continued to make progress the Fed was verycomfortable with a June rate hike. Now, the futures market is putting the oddsof a 0.625 percent interest rate on fed funds at about 30%.

We think those odds will move higher over the next few weeks and a rate hike inJune is more likely than not, say about 60%. Not definite, not 100%, just muchhigher than most investors now expect.

But none of this should concern equity investors. Monetary policy will still beloose and remain that way for an extended period of time. Consumer prices areup 1.1% in the past year while "core" consumer prices are up 2.1%.So, either way, the federal funds rate will remain well below inflation,meaning the "real" (inflation-adjusted) federal funds rate staysnegative.

Meanwhile, the banking system is still chock full of $2.3 trillion in excessreserves (reserves in excess of what banks are legally required to hold to meetreserve requirements). Raising rates is not going to change that. It will,however, mean the Fed pays banks more to hold these reserves, a plus forfinancial firms and, in turn, money growth. M2 has grown 9.4% at an annual ratein the past three months, while commercial and industrial loans have grown16.1%.

Raising rates should help the Fed get in a position where it can eventuallystart drawing down those excess reserves. But, until it does, the chance ofsharply accelerating money growth exists. This will bring more inflation.Normally, higher short-term rates tend to flatten the yield curve, withlong-term rates moving up, too, but not as much as short-term rates.

But this time really is completely and totally different. Raising rates makesmoney growth accelerate because of all the excess reserves out there.

One reason some analysts and investors still think the Fed won't raise rates inJune is that it hasn't clearly telegraphed that it wants to raise rates. But wethink the absence of a clear signal is because the Fed is rethinking itsposition on transparency.

Time and again over the last several years, the Fed has indicated a shift inpolicy was imminent only to reverse course when short-term gyrations infinancial markets scared the snot out of everyone. People still talk about thetaper tantrum. We always said this was an over-reaction on everyone's part.

In the end, the Fed eventually tapered, ended quantitative easing and thenraised rates as well, without negative economic consequences. So the Fed maynow think that if the economy deserves slightly higher rates, the best thing todo is
not make it clear it will raise rates beforehand (because marketsmight throw a fit), and just pull the trigger. Tapering, ending QE, and raisingrates in December didn't hurt growth, so why not raise rates again withoutgenerating any hysteria before the action takes place?

There is still time for the data to get worse before the Fed makes its decisionin mid-June. We just don't think that's going to happen. Instead, look forreports on durable goods, consumer spending, inflation, and the job market togive the Fed the confidence it needs to get back on track toward a more normalmonetary policy.

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Posted on Monday, May 23, 2016 @ 11:10 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted on Monday, May 23, 2016 @ 9:26 AM • Post Link Share: 
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  Existing home sales increased 1.7% in April to a 5.45 million annual rate

 

Implications:  Existing home sales moved higher in April, rising to a three-month high and beating consensus expectations.  Sales of previously owned homes rose 1.7% in April to a 5.45 million annual rate, and are up 6% from a year ago. This is encouraging, and we think the broader trend will continue to be upward, but there are still some headwinds. Tight supply and rising prices continue to be the main factors holding back sales. While inventories rose 9.2%, or 18,000 units in April they are still down 3.6% from a year ago.  The months' supply of existing homes – how long it would take to sell the current inventory at the most recent selling pace – is only 4.7 months.  According to the National Association of Realtors®, anything less than 5.0 months is considered tight supply.  The good news is that demand was so strong in April that properties typically only stayed on the market for 39 days, the shortest duration since June 2015.  In fact, 45% of properties in April sold in less than a month, pointing to further interest from buyers in the months ahead. The median price for an existing home is up 6.3% versus a year ago, marking the 50th consecutive month of year-over-year price gains. While this may be pricing some lower-end buyers out of the market, it should help alleviate some of the supply constraints as "on the fence" sellers take advantage of higher prices and trade-up to a new home, bringing more existing properties onto the market.  In other recent news, the Philadelphia Fed index, a measure of sentiment among East Coast manufacturers, came in at -1.8 in May versus -1.6 in April.  More broadly, new claims for unemployment benefits declined 16,000 last week to 278,000, marking 63 consecutive weeks below 300,000, the longest stretch in more than forty years.  Continuing claims declined 13,000 to 2.15 million.  These figures are consistent with a payroll increase of about 200,000 in May, which should help boost the odds of the Fed raising rates in June.

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Posted on Friday, May 20, 2016 @ 2:00 PM • Post Link Share: 
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  Housing Regulation Hurdles
Posted Under: Home Sales • Housing

Housing, the economic sector that started its crash in late 2005, and which is often cited as the driver of the financial market collapse that followed, has seen a steady if unspectacular recovery. The pace of housing starts, as well as sales of new and existing homes, continue to climb higher. It's had to, because the US needs new homes, and employment growth and income gains have continued while household financial obligations (recurring monthly payments as a percent of after-tax income) remain near multi-decade lows. However, tight lending markets have held back the pace of recovery. So have low inventories of houses available for sale. But there is another, often overlooked factor – rising regulatory costs.   

According to the National Association of Home Builders (NAHB), the average cost of regulatory compliance to home builders for new construction has increased a staggering 30% since 2011. This closely mirrors an increase of 34% over the same time period in the average cost of a new home. In fact, the cost of regulation per home now stands at roughly $85,000 or about 24% of the final sticker price of an average new single-family home. Examples of typical regulations include local impact fees, environmental mitigation, storm-water discharge permits and ever changing construction codes that, on average, builders say add 6.6 months to the development process. This squeezes builders at the margin, and is a driving factor in the movement away from the construction of cheaper starter homes in favor of premium models.

This lack of supply to the lower end of the market has hit first-time buyers the hardest, effectively pricing many people out of the opportunity to own a home. In a recent blog post, Trulia.com's Chief Economist reported that the inventory of "starter" homes (defined as homes with values in the lower third nationally) has fallen 44% since 2012, and median prices in that segment of the market have risen by 32%.  The result is that the share of first-time buyers in the market dropped to a nearly three decade low in 2015, according to the National Association of Realtors®. This has been part of the reason the housing market has been held back post-recovery, people aren't able to get their foot in the door. Once someone owns a home, even at the lower end of the market, they begin to build equity and are able to eventually trade up. Not only does this stimulate sales for more expensive homes, it puts an existing home on the market and helps alleviate the inventory issue as well.

This is an example of the kind of damage over-the-top regulations can cause to an economy. However, don't expect the government to address these problems at the source. More likely they will continue to raise regulatory costs through micromanagement and respond with government programs that make loans easier to obtain. After all, what could go wrong?    

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

Posted on Thursday, May 19, 2016 @ 11:08 AM • Post Link Share: 
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  Industrial Production Increased 0.7% in April
Posted Under: Data Watch • Industrial Production - Cap Utilization

 

Implications:  After two consecutive months of ugly reports, industrial production surged 0.7% in April, easily beating consensus expectations, and posting its strongest advance since November 2014.  The biggest increase in today's report came from utilities, where output spiked 5.8% higher, the largest monthly gain since 2007.  This comes on the heels of an unusually warm winter, which had been a consistent drag on utilities over the past several months.  More important, manufacturing was another bright spot in today's report, increasing 0.3% in April to 0.5% above its year ago level.  This was primarily due to a jump in auto production, which rose 1.3% in April, and is up 4.3% from a year.  Although the production of business equipment is still down 0.4% from a year ago, it rose 0.9% in April and is up 4.4% annualized in the past three months, showing healthy recent demand for U.S. produced capital goods.  Meanwhile, mining output continued its slide in April, falling 2.3%, reflecting a more pronounced 6.8% drop in oil and gas extraction.  While mining (and energy in general) has been a drag on production over the past year, we expect activity in that sector to stabilize in the months ahead as energy prices have started rising again.  Based on other commodity prices, oil prices should average at higher levels over the next several years.  Although we don't expect overall production to boom any time soon – weak overseas economies will continue to be a headwind – we do expect a gradual pick-up in activity in 2016.  One sign of these headwinds is that in other news yesterday, the Empire State index, a measure of manufacturing sentiment in New York, fell unexpectedly to -9.0 in May from +9.6 in April.

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Posted on Tuesday, May 17, 2016 @ 12:36 PM • Post Link Share: 
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  The Consumer Price Index Increased 0.4% in April
Posted Under: CPI • Data Watch • Inflation

 

Implications:  If the Fed is truly "data dependent," a June rate hike is on the table.  The consumer price index rose 0.4% in April, led by rising energy costs.  However, the increase in prices was broad-based, not just confined to energy. "Core" consumer prices, which exclude the volatile food and energy components, rose 0.2% in April and show annualized readings above 2% over the past three, six, and twelve-month periods.  This consistent pace of "core" inflation above 2% – paired with continued employment gains – means a rate hike would certainly be justified in June.  The increase in the core CPI in April was led by housing rents and medical care.  Owners' equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in April, is up 3.1% in the past year, and will be a key source of higher inflation in the year ahead.  Energy prices rose 3.4% in April, as prices for gasoline and fuel oil more than offset declining electricity costs.  And given the continued rise in oil prices through the first half of May, the trend in higher energy costs looks likely to continue into next month's report.  This is a big change from recent years, where energy prices are down. Excluding energy, consumer prices are up 2.0% in the past year.  In other words, as energy prices rise, the headline index will follow at a faster pace than many are expecting.  Food prices rose 0.2% in April as dairy prices rebounded from March.  One negative piece of news in today's report is that the big CPI jump pushed "real" (inflation-adjusted) average hourly earnings down 0.1%.  But this is the first decline in nine months and we still think wages will rise faster than prices in the months ahead as employment keeps growing at a healthy clip. Taken as a whole, and paired with the continued health in the labor market, today's report is a green light for the Fed. The only issue is whether the Fed will have the guts to move forward.

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Posted on Tuesday, May 17, 2016 @ 11:59 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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