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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Personal Income Increased 0.2% in October
Posted Under: Data Watch • PIC

Implications: Ignore the personal income and spending numbers for a moment, the big news in today’s report is that the core PCE deflator (the Feds preferred measure of inflation) ticked up 0.2% in October and, after stalling for the past five months, is now up 1.6% in the past year. Given loose monetary policy, we expect that figure to rise in the year ahead. But, given tight bank lending standards and the energy production boom, the increase in inflation is going to be gradual. Consumer purchasing power continued to grow in October and we expect that trend to continue. Payrolls are up 2.6 million in the past year and the number of hours per worker are up as well. As a result, private-sector wages & salaries are up a robust 5.0% in the past year. Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.2% in October and is up 4.1% in the past year, which is faster than the 3.6% gain in consumer spending. In other words, higher incomes alone are enough to push spending up. One part of the report we keep a close eye on is government redistribution. In the past year, government transfers to persons are up 5.5%, largely driven by Obamacare. Medicaid spending is up 14.1% versus a year ago. However, outside Medicaid, government transfers are up only 3.5% in the past year and unemployment compensation is at the lowest level since 2007. Taken all together, government transfer payments – like Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp – don’t seem to be falling back to where they were prior to the Panic of 2008, when they were roughly 14% of income. In early 2010, they peaked at 18%. Now they are down to 17% but not falling any further. Redistribution hurts growth because it reallocates resources away from productive ventures. This is why we have a Plow Horse economy instead of a Race Horse economy.

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Posted on Wednesday, November 26, 2014 @ 11:36 AM • Post Link Share: 
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  New Single-Family Home Sales Rose 0.7% in October
Posted Under: Data Watch • Home Sales • Housing

Implications: New single-family home sales rose 0.7% in October, coming in 1.8% higher than a year ago and, besides tying May, the highest level since mid-2008. This comes on the heels of last Thursday’s report, which showed a solid gain in existing home sales. Nonetheless, new home sales still remain at depressed levels relative to where they should be by now in the recovery and we believe there are a few key reasons for this. First, the homeownership rate remains depressed as a larger share of the population is renting. Second, buyers have shifted slightly from single-family homes, which are counted in the new home sales data, to multi-family homes (think condos in cities), which are not counted in the report. Third, although we may be seeing a thaw, financing is still more difficult than it has been in the past. The inventory of new homes rose 2,000 in October, but still remains very low as the chart to the right shows. As a result, homebuilders still have plenty of room to increase both construction and inventories. The median sales price for a new home skyrocketed in October, up 16.5% in October and up 15.4% from a year ago. The gain is due to the “mix” of home sales in that particular month. Sales of homes over $750,000 made up 9% of sales in October, up from 3% last month, and 5% a year ago. Sales of homes over $750,000 made up 9% of sales in October, up from 3% last month, and 5% a year ago. In other news this morning, pending home sales, which are contracts on existing homes, declined 1.1% in October, but remain up 2.2% from a year ago, while the Chicago PMI, which measures manufacturing sentiment in that key region, declined to a still very high 60.8 in November from 66.2 in October.

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Posted on Wednesday, November 26, 2014 @ 11:07 AM • Post Link Share: 
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  New Orders for Durable Goods Rose 0.4% in October
Posted Under: Data Watch • Durable Goods

Implications: New orders for durable goods rose 0.4% in October, coming in better than consensus expected, but the internals of the report were not as good. The positive overall headline number was driven by a 3.4% increase in transportation equipment, specifically a 45% increase in orders for military aircraft. The transportation sector is very volatile from month to month. Taking out transportation, orders for durable goods were down 0.9% in October, the weakest monthly reading of the year, but nothing to fret about. Orders for durables are still up 5.5% from a year ago and up 6.4% excluding the transportation sector. Meanwhile, shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – declined 0.4% in October. Still, these "core" shipments are up 7.5% versus a year ago. Expect a rebound in the coming months. Signaling future gains, unfilled orders for “core” capital goods rose 0.3% in October, hitting a new record high, and are up 9.8% from a year ago. We believe we are nearing a large increase in business investment over the next couple of years. Consumer purchasing power is growing and debt ratios are low, leaving room for an upswing in bigger ticket items. Meanwhile, profit margins are still high, corporate balance sheets are loaded with cash, and capacity utilization is near long-term norms, leaving more room (and need) for business investment. In other news, initial unemployment claims rose 21,000 last week to 313,000, an uptick from recent lows but seasonal factors look to be playing a role. Continuing claims dropped 17,000 to 2.32 million, the lowest level in nearly 14 years. As a result, our payroll models still suggest job growth of about 200,000 in November, if not higher.

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Posted on Wednesday, November 26, 2014 @ 10:27 AM • Post Link Share: 
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  Real GDP Was Revised to a 3.9% Annual Growth Rate in Q3
Posted Under: Bullish • Data Watch • GDP • Government • Fed Reserve • Interest Rates

Implications: The bull market will continue to run. Forget the surprise upward revision to real GDP for a second. The best news in today’s report was that corporate profits grew at an 8.6% annual rate in Q3 and are at a new all-time record high. Ultimately, high profits are why equities are undervalued and today’s data supports further equity gains in the year ahead. The government’s measure of profits fell steeply in Q1, but the sharp rebound in the past couple of quarters suggests the drop was weather-related, just like the temporary drop in real GDP. The economy grew at a 3.9% annual rate in Q3, which is an improvement from the 3.5% rate reported a month ago. In the past year – which includes the weather-related problems in Q1 as well as the rebound – real GDP is up 2.4%. Real GDP is up at a 2.3% annual rate in the past two years, the same exact pace since the recovery started in mid-2009. However, we expect the pace of real GDP growth to pick up for the next couple of years. Nominal GDP (real growth plus inflation) was revised up to a 5.3% annual rate in Q3 from a prior estimate of 4.9%. Nominal GDP is up 4% from a year ago and up at a 3.9% annual rate in the past two years. These figures show the Fed’s target of essentially zero for short-term interest rates is too low and monetary policy is too loose. On the housing front, the national Case-Shiller index, which measures prices across the country, increased 0.7% in September and is up 4.8% from a year ago. The largest gains in the past year have been in Miami, Las Vegas, and San Francisco. The FHFA index, which focuses on homes financed with conforming mortgages, was unchanged in September but up 4.3% versus a year ago. In the year that ended in September 2013, the Case-Shiller was up 10.6% while the FHFA was up 8.3%. In other words, price gains have continued in the past year but at a slower pace. For the year ahead, prices will keep working their way higher but at an even slower pace, more like 3 – 4%. In other news this morning, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, fell to +4 in November from +20 in October. So factory activity is still expanding, just not as quickly.

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Posted on Tuesday, November 25, 2014 @ 10:18 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

Posted on Tuesday, November 25, 2014 @ 7:49 AM • Post Link Share: 
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  Let’s Finally Fix the CBO
Posted Under: Government • Monday Morning Outlook • Spending • Taxes
If they came back today, the Founders of the United States wouldn’t recognize the government they created 225 years ago. They put safeguards in place – separation of powers, a bicameral legislature and reserved powers for the states – to prevent it from growing so large.

Yet, non-defense federal government spending is now 17% of GDP, triple its size in 1954, and will be headed much higher if we don’t reform entitlements. The U.S. is looking more like Europe – something the Founders wanted to avoid.

Many economists and politicians argue the American Dream is gone. They reminisce about the heyday of America in the 1950s and 1960s when the middle class was strong. Their proposals for returning to that supposed nirvana include more government spending and redistribution.

But this version of the 1950s and 1960s, that government made things fair, is a fiction. During the ten years ending in 1959, non-defense federal spending was just 7% of GDP. And during the 1960s, this measure averaged only 9.6% of GDP.

In other words, if you really want to get back to the 1960s, you would argue for less government spending, not more.

But government has a built in problem – what some have called the “Deep State.” To us, this means an entrenched bureaucracy, educated in Keynesian ideology with a big government mindset that constantly pushes for more government solutions, spending and regulation, while attacking those who oppose it. This is why one of our favorite jokes about Washington rings true: “It Doesn’t Matter Who You Vote For, The Government Always Wins.”

Exhibit A is the Congressional Budget Office (CBO). Uniformly, people call it “The Non-Partisan Congressional Budget Office.” While it is true that the CBO uses economic models that are “politically” non-partisan, it is also true that the models it uses favor more spending and higher taxation. They assume government spending boosts economic growth and see few negative economic effects from tax hikes. These models, the people who defend them and the politicians that allow them to be used consistently bias policy toward a bigger government, with less faith in the private sector.

Win or lose, regardless of whom the voters elect, the unelected bureaucracy keeps marching towards a larger, more intrusive government. Partly this occurs because elected officials buckle under the weight of the data produced by the models and complicated analysis that surrounds them, even if it is erroneous. It takes active awareness and a willingness to fight to defend against this. This is especially true after a crisis that gets blamed on the private sector, like The Panic of 2008.

It’s with this in mind that we urge the new Congress to replace the Director of the CBO, Doug Elmendorf. By all accounts, Mr. Elmendorf is a competent and smart man with solid credentials. But the CBO needs to junk their static and Keynesian worldview and start using more dynamic scoring. Changing tax rates can not only shift the time and place of economic activity, which the CBO thankfully includes in its model. But, what the CBO does not account for, is the fact that these changes affect the total amount of activity, as well.

In addition, it is now clear that the CBO, and its models, were manipulated by the White House to pass the Affordable Care Act. It’s also clear that many knew about this. It was the Deep State in action. And, it’s clear only new leadership can change that. If the GOP will not appoint people who are actively aware of the Deep State and are willing to fight it, it will lose the major policy battles even if it wins at the polls.

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Posted on Monday, November 24, 2014 @ 9:47 AM • Post Link Share: 
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  Existing Home Sales Rose 1.5% in October to a 5.26 Million Annual Rate
Posted Under: Data Watch • Home Starts • Housing

Implications: Forget about home sales for a minute. On the manufacturing front, the Philly Fed index, a measure of factory sentiment in that region, rose to +40.8 in November from +20.7 in October, blowing away all consensus expectations and hitting the highest level since 1993. We’ll see how the data for the whole month turn out now that winter weather has started unusually early, but it looks like manufacturing had lots of momentum just before the recent polar plunge. On the housing front, existing home sales look like they’re keeping their recent mojo. Sales increased 1.5% in October, have risen in six of the last seven months, and are now the highest in over a year. Overall sales are up a modest 2.5% from a year ago. However, 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 27% of sales versus 31% a year ago. As a result, non-cash sales (where the buyer uses a mortgage loan) are up 8.5% since last October. 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 so far in existing home sales is a lack of inventory. Inventories are up 5.2% from a year ago, but down over the past three 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 months ahead. But, unless lenders dramatically loosen standards, the increases in sales will remain tame by historical standards.

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Posted on Thursday, November 20, 2014 @ 12:34 PM • Post Link Share: 
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  The Consumer Price Index (CPI) was Unchanged in October
Posted Under: CPI • Data Watch

Implications: Next time you see an energy engineer, remember to give them a hug. They deserve it. Energy prices fell for a fourth straight month in October and continue to mute rising prices elsewhere for consumers. Consumer prices are up a modest 1.7% in the past year and the key reasons is America’s booming energy production and, as a result, lower world oil prices. The gasoline index is down 5% in the past year and now stands at the lowest level since February 2011. Given the continued drop in oil prices in the first half of November, 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 3.1% annual rate in the past six months and up 2.9% 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 October, is up 2.7% in the past year, and will be a key source of any acceleration in inflation in the year ahead. One of the best pieces of news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 0.1% in October. These earnings are up 0.4% from a year ago and workers are also adding to their purchasing power because of more jobs and more hours worked. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, was probably unchanged in October. If so, it would be up 1.4% from a year ago, still below the Fed’s target of 2%. We expect this measure to eventually hit and cross the 2% target, but given the bonanza from fracking and horizontal drilling, not until next year. In other news this morning, new claims for unemployment insurance declined 2,000 last week to 291,000. Continuing claims fell 73,000 to 2.33 million, a new low for the recovery. Plugging these figures into our employment models suggests nonfarm payrolls are growing 200,000 in November, with private payrolls up 191,000.

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Posted on Thursday, November 20, 2014 @ 12:18 PM • Post Link Share: 
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  Housing Starts Declined 2.8% in October
Posted Under: Data Watch • Home Starts • Housing

Implications: Home building has been very volatile over the past few months but the underlying trend remains upward and we expect that to continue. The best news from today’s report was that building permits rose 4.8% in October, as single-family and multi-family permits rose 1.4% and 10% respectively. Permits now stand at the highest level since June 2008, signaling future gains in home building in the months to come. October’s drop of 2.8% for home building was all due to multi-family units, which were down 15.4% in October and have caused large swings in overall housing starts over the past few months. Single-family starts have been steadily rising over the past three months. So, the multi-family volatility over the past few months has masked slow underlying improvement in the housing sector. To smooth out the volatility we look at the 12-month moving average. This is now at the highest level since September 2008. The total number of homes under construction, (started, but not yet finished) increased 1.4% in October and are up 20.1% versus a year ago. No wonder residential construction jobs are up 131,000 in the past year. Although multi-family construction has slowed over the past few months, it has still 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, 36% 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.

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Posted on Wednesday, November 19, 2014 @ 10:07 AM • Post Link Share: 
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  The Producer Price Index Rose 0.2% in October
Posted Under: Data Watch • PPI

Implications: Producer prices surprised to the upside in October versus consensus expectations for a slight decline due to falling energy prices. The gain in overall producer prices was all due to the services sector, where prices rose 0.5%. Oddly, about half of the gain in service prices was due to refiners generating fatter margins while the energy prices fell. In other words, the drop in energy prices did not get fully passed on to users. Meanwhile, it’s the same old story for prices of energy goods, which fell 3% in October and are down 3.7% in the past year, a testament to fracking and horizontal drilling. Overall, today’s report is consistent with our forecast that the US isn’t going to suffer either hyperinflation or deflation. 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 high enough for the Federal Reserve to take notice. Prices for intermediate processed goods are up only 0.4% in the past year and unprocessed goods are down 2% in the past year. Regardless, with the labor market improving more 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. The problems that ail the economy are fiscal and regulatory in nature, which can’t be addressed by the Fed. In other news this morning, the NAHB index, which measures confidence among home builders, rose to 58 in November from 54 in October, with largest gain for current single-family sales. The housing recovery remains on track.

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Posted on Tuesday, November 18, 2014 @ 12:17 PM • 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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