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

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
 
  New Orders for Durable Goods Rose 1.8% in January
Posted Under: Data Watch • Durable Goods

 

Implications:  New orders for durable goods rose in January following two months of declines.  The rise in January was due to aircraft orders, but strip out the volatile transportation sector and durable goods orders declined a slight 0.2%.  Non-transportation orders were led lower in January by a decline in computers and electronic products as well as primary metals, which more than offset increases for fabricated metal products and machinery.  Thankfully, orders outside the transportation sector are still trending upward, including a 2.4% increase versus a year ago and a gain at a 7.5% annual rate in the past three months.  The rise in machinery orders – up in each of the last five months - may be, in part, a sign of continued improvements in the energy sector, which had been pulling down machinery investment since oil prices started declining in mid-2014.  Shipments of "core" capital goods - non-defense, excluding aircraft – declined 0.6% in January, but were revised up for December.  If unchanged in February and March, these shipments will be up at a 2.8% annual rate in Q1 versus the Q4 average.  The second estimate of Q4 GDP is released tomorrow, and we expect to see real GDP growth revised up to a 2.2% annual rate from the initial estimate of 1.9%.  Durable goods orders are volatile from month-to-month, but a focus on non-transportation orders shows steady growth that should continue in the months ahead.  On the housing front, pending home sales, which are contracts on existing homes, declined 2.8% in January, suggesting a decline in closings on existing homes in February. 

Click here for PDF version

Posted on Monday, February 27, 2017 @ 11:21 AM • Post Link Share: 
Print this post Printer Friendly
  M2 and C&I Loan Growth

 

Source: St. Louis Federal Reserve FRED Database

Posted on Monday, February 27, 2017 @ 10:08 AM • Post Link Share: 
Print this post Printer Friendly
  Trade Is Not Our Enemy
Posted Under: Monday Morning Outlook • Trade

We think it was Art Laffer who said it best.  Let's say the US invented a cure for cancer and China a cure for heart attacks.  If China decided to ban the cure for cancer, should the US retaliate by banning the cure for heart attacks?

Obviously not!  The US is better off trading with China regardless of what China does.  And although things like computers and toys are not nearly as serious as a heart attack, the same principle applies.  Think about this idea the next time you hear about some other country "killing" the US on trade.

The US has run a merchandise trade deficit every year since 1975.  The US has also run persistent trade deficits with many countries around the world, including Canada and Germany for the past 40 years, China for 35 years, and Mexico for the past 20 years.  And yet it's the US that remains a magnet for immigrants from around the world.  If the US is getting killed economically, wouldn't people be leaving, not trying to get here?  People vote with their feet and the votes clearly suggest there is more economic opportunity in America, enough more that people enter illegally.

Some are concerned that global trade flows for the US have peaked, and it is true that overall imports and exports slowed in late 2014, 2015 and 2016.  But we attribute this to the large drop in oil prices.  We spent less on oil imports and oil exporters (like OPEC) earned fewer dollars to spend back here.

But, "real" (inflation adjusted) US goods exports outside the oil sector rose 5% in 2016 and are up 2.6% per year in the last decade.  The real value of non-oil imports increased 4.2% in 2016 and are up 2.5% per year in the past decade.  All of these figures are outstripping real economic growth in the US.  Trade is an unambiguous positive for growth worldwide.

Although some analysts have spread fear about our trade in services, we see no reason for concern.  US service sector exports ended 2016 at an all-time high.  Service exports did decline 1.1% in 2015, but if that's supposed to be a leading sign of economic weakness, why didn't we have a recession in 2016?  And why are broader measures of the economy still improving?  We think the 2015 drop was a result of fewer dollars flowing through the trade system as oil prices fell.

Some argue that trade deficits must be offset by future trade surpluses.  We beg to differ.  The US finances its trade deficits with a surplus of capital coming in from the rest of the world.  If foreigners were buying US assets that generated a high return on capital, you can make up a story where that could eventually be a problem.  We could find ourselves in a situation where we have to both pay for our trade deficits and give foreign investors a healthy return.

But foreign investors are willing to earn a very low rate of return on their US assets – the price they pay for the safety and security of the US.  That return is so low, in fact, that despite owning considerably more US assets than the amount of assets Americans own in foreign countries, foreigners earn far less on American assets than US investors earn on foreign assets.

Ultimately, free trade is critical to the prosperity of the US.  Policies that seek to protect certain industries or companies are just a way of putting politicians in charge and weakening the inherent resourcefulness of the American people.    

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

Click here for PDF version                 

Posted on Monday, February 27, 2017 @ 9:51 AM • Post Link Share: 
Print this post Printer Friendly
  Executive Order and Presidential Memoranda Watch 2/24
Posted Under: Government
Presidential Executive Order on Enforcing the Regulatory Reform Agenda (2/24/17) – Government agency heads are to appoint a Regulatory Review Officer (RRO) within the next 60 days. The RRO will oversee regulation initiatives for compliance with existing law and policies including the January 30th Executive Order focused on reducing the number of - and costs of complying with – existing regulations.  
Posted on Friday, February 24, 2017 @ 3:17 PM • Post Link Share: 
Print this post Printer Friendly
  New Single-Family Home Sales Increased 3.7% in January
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  New home sales rose in January, although not quite as fast as the consensus expected.  Sales increased 3.7% in January and are now up 5.5% versus a year ago, illustrating the "fits and starts" recovery of the past several years.  Using the 12-month moving average to cut through the volatility shows the upward trend in sales remains intact.  Meanwhile, despite a 9,000 increase in unsold new homes, inventories remain low by historical standards (see chart to right) and are not a headwind to future construction.  Most of this gain in inventories in January was due to homes where construction has yet to start.  Going forward, we expect housing to remain a positive factor for the economy.  First, employment gains continue which should put upward pressure on wage growth.  Second, the mortgage market is starting to thaw.  Third, the homeownership rate remains depressed as a larger share of the population is renting, leaving plenty of potential buyers as economic conditions continue to improve.  Unlike single-family homes which are counted in the new home sales data, multi-family homes (think condos in cities) are not counted.  So a shift back toward single family units will also serve to push reported sales higher.  Look for overall gains in home sales in the year ahead as these factors combine to drive expansion, and any headwind created by an increase in mortgage rates is offset by expectations of faster future economic growth.  In other recent housing news, the FHFA Index, which measures prices for homes financed with conforming mortgages, increased 0.4% in December and was up 6.2% in 2016, the second fastest increase for any calendar year since 2005.  More broadly, new claims for unemployment insurance increased 6,000 last week to 244,000.  Continuing claims fell 17,000 to 2.06 million.  It's still early, but plugging these figures into our models suggests a nonfarm payroll gain of about 195,000 for February, which would boost the odds of a March rate hike.

Click here for PDF version  

Posted on Friday, February 24, 2017 @ 10:58 AM • Post Link Share: 
Print this post Printer Friendly
  Existing Home Sales Increased 3.3% in January
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  Existing homes sales started off 2017 on a strong note, coming in at the fastest sales pace since 2007.  Sales of previously-owned homes rose 3.3% in January to a 5.69 million annual rate, beating the forecast of every economics group surveyed by Bloomberg, and are now up 3.8% from a year ago.  Home sales are volatile from month to month but we expect the general upward trend of the past several years to keep going.  That being said, tight supply and rising prices remain headwinds.  Remarkably, sales climbed to their fastest pace in nearly a decade even though inventories remain very low.  In fact, inventories have now fallen on a year-over-year basis for 20 consecutive months.  The months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – was only 3.6 months in January.  According to the NAR, anything less than 5.0 months is considered tight supply.  Meanwhile, growing demand for housing has driven up median prices, which are now up 7.1% from a year ago. While this may temporarily price some lower-end buyers out of the market, it should ultimately help alleviate some of the supply constraints as "on the fence" sellers take advantage of higher prices and trade-up or trade-down to a new home.  Despite the recent thaw in the lending market, a bigger problem for lower-end buyers may be gaining access to mortgages.  Sales of homes in the 0-$100K range, which represented 13.9% of total sales in January, are the only price bracket where sales are down from a year ago.  Although some analysts may be concerned about the impact of higher mortgage rates, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is eventually going to move higher again.

Click here for PDF version

Posted on Wednesday, February 22, 2017 @ 11:41 AM • Post Link Share: 
Print this post Printer Friendly
  Time for a Rate Hike
Posted Under: CPI • Employment • Government • Inflation • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Bonds

According to the futures market, there is a 38% chance the Federal Reserve raises rates when it meets in mid-March.  If the Fed were to stand by what it has said the past several years, the odds should be much higher.  But the market is used to the Fed finding reasons to put off justified rate hikes.

The Fed has consistently said it wants to see the inflation measure for Personal Consumption Expenditures (also called the PCE deflator) at 2%. We won't get an official PCE number for January until the middle of next week, but based on January's 0.6% increase in the consumer price index (CPI), it looks like the PCE index will be up 0.4% in January and 1.9% compared to a year ago.  And if that's not close enough, all we need in February is a mere 0.1% monthly increase and the PCE will be over the 2% mark.

Meanwhile, the jobless rate is already 4.8%, exactly the level the consensus at the Fed thinks is the long-run average when the economy is neither "too hot" nor "too cold."

And yet the Fed's short-term interest rate target remains in a range between 0.5% and 0.75%.  That's simply too low.  Under normal conditions the Fed's target for short-term rates should be a little lower than the trend growth in nominal GDP – real GDP plus inflation.  But in the past year nominal GDP is up 3.5% and it's up at a 3.2% annual rate in the past two years.

A gap that large between the trend growth in nominal GDP and short-term rates means there is excess liquidity in the financial system and monetary policy is too loose.  No wonder inflation has been heading up and the jobless rate continues to trend down.

Moreover, the yield curve remains unusually steep, with about 180 basis points separating the yield on the 10-year Treasury Note from the Fed's short-term interest rate target, versus an average of 106 basis points since the mid-1950s.  The bond market has been holding the 10-year to 30-year spread tight, because it believes long-run inflation will be contained, but clearly the market is pricing in higher short-term interest rates.

The signposts for higher inflation are already in place.  In January, the M2 measure of money, which includes currency, checking deposits, savings deposits, small CDs, and retail money funds was up 6.7% from a year ago.  By contrast, it was up only 6.2% in the year ending in January 2016 and 6.0% in the year ending in 2015.  Wage growth has accelerated as well, with average hourly earnings up at a 2.5% annual rate in the past two years, the fastest since the recession ended. 
 
One argument for waiting past March is that the Fed needs a chance to see what kinds of budget proposals – taxes and spending – are likely later this year.  But we highly doubt anything President Trump and Congress come up with will be viewed by the Fed as "contractionary."  Instead, they're going to push proposals the Fed views through its Keynesian lenses as "stimulative." 

So why wait?  Raising rates in March doesn't pre-commit the Fed to raise rates more than three times this year.  If circumstances change, there's plenty of time for the Fed to change its mind and skip a rate hike in June, or September, or December.  
 
In addition, raising rates sooner rather than later, gets the Fed closer to dealing with the elephant in the room - its balance sheet.  Quantitative Easing has pushed assets on the Fed's books to more than $4.4 trillion, with over $350 billion in repos and nearly $2 trillion in excess reserves. 

So far, sluggish monetary velocity, including tight regulation of the banking system, has kept a relatively tight lid on the inflationary impact of those reserves.  But, now that the animal spirits are stirring and less burdensome financial regulations are on the way, those reserves pose an increasing inflationary risk.

Fed Chief Yellen's recent congressional testimony left the door open for a rate hike in March.  The economy and markets are ready for the Fed to cross the threshold.                    

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

Click here for PDF version

Posted on Tuesday, February 21, 2017 @ 10:25 AM • Post Link Share: 
Print this post Printer Friendly
  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 

Source: St. Louis Federal Reserve FRED Database

Posted on Tuesday, February 21, 2017 @ 7:53 AM • Post Link Share: 
Print this post Printer Friendly
  Housing Starts Declined 2.6% in January
Posted Under: Home Sales • Home Starts • Housing

 

Implications:  Housing starts took a breather in January, slipping 2.6%, after a surge in December.  However, we think the general upward trend is still intact.  Multi-family starts, which are very volatile from month to month, dropped 10.2% in January and accounted for all decline.  Meanwhile, single-family starts rose 1.9% in January and are now up 6.2% from a year ago.  Permits to build single-family homes, declined 2.7% in January but are up 11.1% from a year ago, supporting the case for a continued increase in the pace of home building.  Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year, so much of the recovery in home building is still ahead of us.  In addition, the "mix" of construction has been generally shifting toward single-family building.  When the housing recovery started, multi-family construction led the way.  But the share of all housing starts that are multi-family appears to have peaked in 2015, when 35.7% of all starts were multi-family, the largest since the mid-1980s, when the last wave of Baby Boomers was growing up and moving to cities.  In 2016, the multi-family share of starts fell to 33.3%.  The shift in the mix of homes toward single-family is a positive sign because, on average, each single-family home contributes to GDP about twice the amount of a multi-family unit.  In other recent housing news, the NAHB index, which measures sentiment among home builders, dropped slightly to a still-high 65 in February.  More jobs, faster wage growth, and, for at least the time being, optimism about more market-friendly policies from a Trump Administration, are encouraging both prospective home buyers and builders.  More broadly, new claims for jobless benefits rose 5,000 last week to 239,000.  Continuing claims slipped 3,000 to 2.08 million.  It's still early, but it looks like nonfarm payrolls will be up close to 200,000 in February.  On the manufacturing front, the Philadelphia Fed index, which measures factory sentiment in that region, soared to 43.3 in February from 23.6 in January.  The reading for February was the highest since the early 1980s and signals optimism about a major positive shift in economic policies.

Click here for PDF version

Posted on Thursday, February 16, 2017 @ 10:24 AM • Post Link Share: 
Print this post Printer Friendly
  Industrial Production Declined 0.3% in January
Posted Under: Data Watch • Industrial Production - Cap Utilization

 

Implications:  Industrial production took a breather in January after surging in December.  However, the key to understanding this month's report is in the details, which were much stronger than the headline decline of 0.3%.  Utilities and auto production, which are very volatile from month to month, were large drags on production.  January was unusually warm in the lower-48 states, resulting in lower demand for heat and causing the largest monthly drop in utility output since 2006.  Meanwhile manufacturing, which excludes mining and utilities, rose 0.3% in January despite a 2.9% drop in auto production.  We like to follow "core" industrial production, which is manufacturing excluding autos, and this measure increased 0.5% in January and has been accelerating lately.  Even though this measure is only up a tepid 0.3% in the past year, it's up at a 3.2% annual rate during the past three months.  We think the acceleration in core production is, in part, a lagged effect of the rebound in oil prices, which adds to the production of machinery used in the energy sector.  The rebound in energy prices is also having a direct effect on mining, which jumped 2.8% in January and posted its first positive year-over-year reading since April 2015.  Further, oil and gas-well drilling posted its eighth consecutive gain in January, jumping 8.5%, and is now up at a massive 144% annual rate in the past three months.  Based on other commodity prices, we think oil prices are in the "fair value" range, which should keep mining in recovery after the problems of the past two years.  Although weak overseas economies will continue to be a headwind for production, we expect solid growth in the year ahead.  In other news this morning, the Empire State index, a measure of manufacturing sentiment in New York, surged to +18.7 in February from +6.5 in January, signaling continued improvement in the factory sector.

Click here for PDF version

Posted on Wednesday, February 15, 2017 @ 11:07 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 Rose 0.4% in January
The Consumer Price Index Increased 0.6% in January
The Producer Price Index Rose 0.6% in January
Brian Wesbury Discusses How NAFTA has affected Canada-U.S. trade on Fox Business
Keep It Simple, Stupid (KISS)
Executive Order and Presidential Memoranda Watch 2/9
M2 and C&I Loan Growth
The 4 Threats to Prosperity - Part 4
The 4 Threats to Prosperity - Part 3
The Trade Deficit in Goods and Services Came in at $44.3 Billion in December
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 |  FINRA BrokerCheck
Copyright © 2017 All rights reserved.