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   Brian Wesbury
Chief Economist
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   Bob Stein
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  New Orders For Durable Goods Increased 0.7% in June
Posted Under: Data Watch • Durable Goods

Implications: A Plow Horse report for durables goods orders in June. The good news was that new orders for durable goods increased 0.7% in June and 0.8% excluding transportation, both narrowly beating consensus expectations. The bad news: orders for most major categories of durable goods have been growing more slowly in the past few months. So, despite strong profits and cash on the balance sheet, many companies are still waiting to ramp up business investment. In addition, shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – declined 1% in June. However, core shipments were still up at a 4.1% annual rate in the second quarter and our models suggest that businesses increased “real” (inflation-adjusted) equipment investment at about a 9% annual rate in Q2. As the broader economy continues to grow, look for orders to pick up some steam. Signaling future gains, unfilled orders for “core” capital goods rose 1.2% in June, hitting a new record high, and are up 8.9% 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. Plugging all of this week’s data into our models suggests real GDP grew at a 2.7% annual rate in Q2. That’s slightly lower than we were estimating a week ago (2.9%) but well within the normal range for a Plow Horse economy.

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Posted on Friday, July 25, 2014 @ 11:00 AM • Post Link Share: 
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  New Single-Family Home Sales Declined 8.1% in June
Posted Under: Data Watch • Home Sales • Housing

Implications: Forget about new home sales for a minute. New claims for unemployment insurance dropped 19,000 last week to 284,000, the lowest since February 2006, which was at the peak of the housing boom. The Labor Department said there was nothing unusual about last week’s reports from the states, but noted the data are often volatile this time of year due to summer-related auto plant shutdowns. This suggests there were fewer shutdowns than normal last week. Continuing unemployment claims declined 8,000 to 2.50 million. Plugging these figures into our payroll models, which are rated #1 by Bloomberg for the past two years, suggests nonfarm payrolls increased 218,000 in July, while private payrolls grew 216,000. These forecasts will likely change next week as we get data from ADP and Intuit, as well as one more week of unemployment claims. On the housing front, new single-family home sales dropped steeply in June and were revised substantially lower in May. Today’s report came in well below even the most pessimistic forecast for sales in June. This does not mean we are back in a housing recession; home construction remains in an upward trend and new homes sales have been hovering in the same range for the past two years. There are a few key reasons why new home sales remain so low. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. 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, financing is still more difficult than it has been in the past. The inventory of new homes rose in June, but still remains very low and most of the inventory gains are for homes not started, instead of homes completed. Homebuilders still have plenty of room to increase both construction and inventories. Once again, the housing recovery remains intact, despite the fits and starts which are to be expected when the overall economy is a Plow Horse, not a Race Horse.

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Posted on Thursday, July 24, 2014 @ 11:46 AM • Post Link Share: 
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  Don’t Believe It, Just Because It’s on TV
Posted Under: CPI • Inflation • Video • TV • CNBC

by Brian Wesbury

I knew Milton Friedman, and Rick Santelli is no Milton Friedman. Don’t get me wrong, there isn’t any personal animosity here. Every time I took my Wheaton College class down to the Board of Trade, Rick Santelli spent time speaking to them, treated them with a great deal of respect and was a perfect gentleman. The students loved him.

Rick has earned his spot on TV, makes news, and reflects views about the intersection of government and markets that too few commentators take the time to address.

What I do have a problem with is that Santelli sometimes repeats things on air about the economy that really shouldn’t be repeated. Yesterday (June 22, 2014), was a perfect example.

After the June Consumer Price Index (CPI) data was released, and it continued to show relatively benign readings, Santelli hammered the data for under-reporting inflation. He specifically mentioned electricity prices and used non-seasonally-adjusted electricity price data to make his point.

“Not seasonally adjusted electricity month over month [in June] was up over 5%. We know why: we are closing coal which is electricity generation. Is the government in all its agencies just against the middle class? Are they just slopping them and cutting them off at the ankles or what?”


Let’s count the ways he was wrong. 1 – He uses non-seasonally-adjusted data to analyze a monthly number. 2- He pays no attention to past history. 3 – He attributes monthly changes to long-term policy decisions. 4 – He uses one month’s data to argue for a government conspiracy. 5 – He allows his politics to affect his analysis.

As can be seen in the chart above, non-seasonally-adjusted electricity prices are massively volatile. Santelli was correct that they were up 5.2% last month. The problem is that they always jump in June as the weather heats up and people switch from natural gas and oil to heat their homes to electricity to run their air conditioning. Look at the table below. Every June prices go up on a non-seasonally-adjusted basis. June 2014 was no different.

Electricity Prices - June - NSA

2000        6.6%

2001        9.6%

2002        6.2%

2003        5.8%

2004        7.2%

2005        7.8%

2006        7.5%

2007        6.9%

2008        6.7%

2009        4.6%

2010        4.3%

2011        4.1%

2012        4.5%

2013        4.6%

2014        5.2%

Then after rising in June, prices always subside in the months that follow and plummet along with the temperatures in October. They will do so again this year, coal or no coal. Yet, we highly doubt there will be reports on TV if not-seasonally-adjusted electricity prices fall 4.2% in October (the average decline over the past five years).

It is true that electricity prices have been accelerating in recent years, but digging through the data to find one piece that is apparently out of line, or using that single data point to try to prove a macro-point, is misleading and in the end unproductive.

We think the Fed is too easy. We think inflation is on the rise. But, we have consistently said that hyper-inflation is not on the table, and investors who build a portfolio waiting for the sky to fall are highly likely to underperform. TV likes to make noise, but having non-economists make big points by mis-using data is a danger for investors.
Posted on Wednesday, July 23, 2014 @ 2:55 PM • Post Link Share: 
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  The Consumer Price Index (CPI) Increased 0.3% in June
Posted Under: CPI • Data Watch • Inflation

Implications: In her last press conference, Janet Yellen said recent higher inflation readings weren't a problem because the data are "noisy." But, lately, that noise all seems to be coming from the direction of higher inflation. Consumer prices increased 0.3% in June, following a large 0.4% rise in May. Although consumer prices are up a moderate 2.1% from a year ago, this year-over-year number masks a real acceleration. Over the past three months, the CPI is up 3.5% at an annual rate. And if you think three months is just noise, how about the first half of the year? In the first six months of 2014, consumer prices are up 2.7% at an annual rate, a clear acceleration from the 1.5% rate seen through the first six months of 2013. Energy led the way in June, with gasoline prices, up 3.3%, accounting for two-thirds of the increase in the overall index. And while a 0.1% increase in "core" prices in June means core prices are up only 1.9% from a year ago, they are still up an annualized 2.5% in the past three months. In addition, owners’ equivalent rent (the government’s estimate of what homeowners would charge themselves for rent), which makes up about ¼ of the overall CPI, is up 2.6% over the past 12 months. This measure will be a key source of the acceleration in inflation in the year ahead, in large part fueled by the shift toward renting rather than owning. The worst news in today’s report was that “real” (inflation-adjusted) average hourly earnings remained flat in June and are down 0.1% in the past year. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, probably increased 0.2% in June. If so, it would be up 1.7% from a year ago, barely below the Fed’s target of 2%. We expect to hit and cross the 2% target later this year, consistent with our view that the Fed starts raising short-term interest rates in the first half of 2015.

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Posted on Tuesday, July 22, 2014 @ 1:11 PM • Post Link Share: 
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  Existing Home Sales Increased 2.6% in June
Posted Under: Data Watch • Home Sales • Housing

Implications: Housing keeps growing…Plow-Horse-like. Which, if you think about it, is a huge disappointment. Yes, existing home sales grew a strong 2.6% in June, rising to a 5.04 million annual rate. But, total sales are still 6.3% below the peak in July 2013. After an eight month slide, existing home sales have now increased for three months in a row. Why did housing slow between July 2013 and March 2014? No one knows for sure, and there are more theory’s out there than analysts, but a lack of inventory was fingered by realtors themselves. Today’s report suggests that is changing. Inventories are up six months in a row, including a 2.2% jump in June. They are 6.5% higher today than they were a year ago. More inventory should help spur sales in the months ahead. One key reason for growing inventories is that home prices continue to move higher (median prices for existing homes are up 4.3% from a year ago). In other words, recovering home prices are getting more potential sellers into the market, which will increase sales. Either way, whether existing home sales are up or down, these data should not change anyone’s impression about the overall economy. Remember, existing home sales contribute almost zero to GDP. Also, despite recent gains in sales, credit remains tight, making it relatively hard to get a mortgage. In June, 32% of all sales were all-cash transactions. However, we do not believe higher mortgage rates are noticeably holding back sales. The US had a bubble in housing during 2003-05, when 30-year mortgage rates averaged 5.8%. Today they are 4.3%. We remain convinced that the underlying trend for housing remains upward. In other housing news this morning, the FHFA price index, for homes financed with conforming mortgages, was up 0.4% in May and is up 5.5% from a year ago. Given the rise in inventory coming on the market, expect the price gains to continue, but at a slower pace than in the past year. On the manufacturing front, the Richmond Fed index, a measure of factory sentiment in the mid-Atlantic region, rose to +7 in July from +4 in June, signaling continued gains in industrial production in July.

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Posted on Tuesday, July 22, 2014 @ 12:14 PM • Post Link Share: 
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  Plow Horse GDP Rebound in Q2
Posted Under: GDP • Monday Morning Outlook
The 2.9% drop in real GDP during the first quarter was a fluke caused by a brutal winter and some one-off events. With much of the monthly data in for Q2, it looks like the US will see that drop almost completely reversed.

Normally, we would expect a bigger bounce as pent-up demand (lost to the weather) returned and added to growth already in train. But, not this time. In recent years, tax rates have been hiked, regulations have increased and government spending has expanded. All of these are a burden on the economy that creates slower potential growth.

As a result, while we expect a nice rebound in Q2 real GDP to 2.9% annualized growth, this still looks like a Plow Horse recovery.

This doesn’t mean we won’t see better growth rates in the years ahead. Monetary policy is loose – and will stay that way even when the Federal Reserve starts raising rates – corporate profits have been terrific, and housing will continue to rebound. Job creation has hastened, helping boost incomes and purchasing power.

However, the economy will remain disappointingly weak unless, and until, government policies change. Given current policies, this economic expansion will not be like the ones in the 1980s or 1990s. Not even close.

As we do every quarter, below is a component by component “add-em-up” forecast of Q2 real GDP – and how we get the 2.9% rebound from the Q1 economic pothole.

Consumption: Auto sales surged at a 26% annual rate in Q2 and “real” (inflation-adjusted) retail sales outside the auto sector grew at a 4% rate. But services make up about 2/3 of personal consumption and those were roughly unchanged. As a result, it looks like real personal consumption of goods and services combined, grew at a 1.9% annual rate in Q2, contributing 1.3 points to the real GDP growth rate (1.9 times the consumption share of GDP, which is 69%, equals 1.3).

Business Investment: Business equipment investment looks like it grew at a 12.5% annual rate in Q2, the fastest pace since 2011. Commercial construction looks like it grew at a 4% rate. Factoring in R&D suggests overall business investment grew at a 7.5% rate, which should add 0.9 points to the real GDP growth rate (7.5 times the 12% business investment share of GDP equals 0.9).

Home Building: Better weather brought more home building in Q2, although nothing close to a housing boom. We see a 6% annualized gain in home building in Q2 adding 0.2 points to the real GDP growth rate (6 times the home building share of GDP, which is 3%, equals 0.2).

Government: Public construction projects, which had been slowed by the weather in Q1, rebounded sharply in Q2. However, military spending continued to head down. On net, it looks like real government purchases grew at a 2% annual rate in Q2, which should add 0.4 percentage points to real GDP growth (2 times the government purchase share of GDP, which is 18%, equals 0.4).

Trade: At this point, the government only has trade data through May, and it doesn’t look very good for US GDP. On average, the “real” trade deficit in goods has grown larger in Q2. As a result, we’re forecasting that net exports subtracted 0.7 points from the real GDP growth rate.

Inventories: Companies cut the pace of inventory accumulation in Q1. But, with partial data only through May, it appears inventory accumulation is reaccelerating. That’s a harbinger of better sales ahead and, for the time being, will add 0.8 points to the real GDP growth rate in Q2.

Nothing in the next GDP report is going to signal an economic boom. But, the dour forecasts of imminent recession which accompanied the reported drop in GDP over the winter months will be proven wrong. (Once again!) We aren’t looking for a boom, but it sure looks like a solid Plow Horse piece of data is on its way.

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Posted on Monday, July 21, 2014 @ 9:38 AM • Post Link Share: 
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  Housing Starts Declined 9.3% in June
Posted Under: Data Watch • Home Starts • Housing

Implications: Housing starts fell substantially in June, with declines in both single-family and multi-family starts. However, don’t read too much into the drop in the headline number. Starts data tend to be very volatile from month-to-month and last month housing starts dropped 29.6% in the South, the steepest decline ever for any single month in at least the last 50 years for that key region. But, starts increased in all other regions of the country. To find the underlining trend and get rid of monthly volatility we look at the 12-month moving average, which just hit its highest level since October 2008. And, even though starts fell, the total number of homes under construction, (started, but not yet finished) increased 1.1% in June and are up 20.5% versus a year ago. The one conclusion we can make from today’s numbers is that multi-family construction is taking the clear lead in the housing recovery. Single-family starts have been essentially flat for almost the past two years, while the trend in multi-family units has been up (although volatile). 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 eventually rise to about 1.5 million units per year (probably around the end of 2015). Although building permits declined in June, it was all due to the volatile multi-family sector; single-family permits rose 2.6%. We expect a rebound in building permits next month. In other news this morning, new claims for unemployment insurance declined 3,000 to 302,000. Continuing claims for jobless benefits dropped 79,000 to 2.51 million. It’s early, but plugging these figures into our models suggests a nonfarm payroll gain of 206,000 in July, another solid month.
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Posted on Thursday, July 17, 2014 @ 10:46 AM • Post Link Share: 
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  The Producer Price Index Rose 0.4% in June
Posted Under: Data Watch • PPI

Implications: The volatility in producer prices continues as we reach the half way mark for 2014, but the underlying trend points to some acceleration in inflation. Following a large jump in April and dip in May, producer prices rose 0.4% in June, more than making up for last month’s decline. The gains in producer prices were broad based, with both goods and service prices moving higher. The rise in the final demand goods index was nearly all due to energy, which rose 2.1% in June. Excluding food and energy, goods prices rose 0.1%. Through the first six months of the year, producer prices are up at a 2.8% annual rate, well above the 1.1% rate over the same period last year. The acceleration is most prevalent in prices for goods, which account for nearly 35% of the total index. Goods prices are up 2.1% in the past year but have climbed at a 3.4% annual rate so far in 2014. By contrast, services are up 1.9% from a year ago and have climbed at a 2.4% rate in the past six months. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for processed goods are up at a 1.4% annual rate in the past three months, nearly identical to the 1.5% gain over the past year. Prices for unprocessed goods are down at a 2.1% annual rate in the past three months versus a 4.2% gain from a year ago. Taken as a whole, the trend in producer price inflation is hovering around 2%. Given loose monetary policy, this trend will likely move higher in the year ahead. If anything, the Federal Reserve should be tapering quantitative easing faster than it already is. We expect the Federal Reserve to start raising short-term rates in the first half of 2015, not the second half as many now expect.
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Posted on Wednesday, July 16, 2014 @ 1:31 PM • Post Link Share: 
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  Industrial Production Rose 0.2% in June
Posted Under: Data Watch • Industrial Production - Cap Utilization

Implications: A Plow Horse report out of the industrial sector today. Industrial production rose a tepid 0.2% in June, coming in slightly below consensus expectations. But, with the June report, we now have data for all of the second quarter, when production grew at a 5.5% annual rate, the fastest quarter of growth in almost four years. Industrial production is up 4.3% from a year ago while manufacturing output is up 3.6%. We expect continued robust growth in the industrial sector in the months ahead. The housing recovery is still young and both businesses and consumers are in a financial position to ramp up investment and the consumption of big-ticket items, like appliances. In particular, note that the output of high-tech equipment is up 6.4% from a year ago and up at a 11.6% annual rate in the past three months, signaling companies’ willingness to upgrade aging equipment from prior years. Capacity utilization now stands at 79.1% in June, and higher than the average of 78.9% over 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. Meanwhile, corporate profits and cash on the balance sheet are close to record highs, showing that companies have the ability to make these investments. In other news today, the NAHB index, which measures confidence among home builders, jumped 4 points to 53 in July, the best reading since January. Looks like a broad pick-up in both sales and foot traffic around the country.
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Posted on Wednesday, July 16, 2014 @ 1:22 PM • Post Link Share: 
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  Retail Sales Increased 0.2% in June
Posted Under: Data Watch • Retail Sales

Implications: The details of today’s report on retail sales make it much better news than the headlines suggest. Retail sales increased a tepid 0.2% in June, falling short of the robust 0.6% gain the consensus expected. Sales excluding autos increased 0.4%, also falling short of consensus expectations. However, sales were revised up substantially for April and May. Including those upward revisions, overall sales increased a solid 0.5% and sales ex-autos increased 0.9%. Despite some news stories bemoaning consumer spending, the data show retail sales are accelerating. In the past three months, retail sales are up at a 5.5% annual rate versus a gain of 4.3% in the past year. “Core” sales, which exclude autos, building materials and gas, increased 0.5% in June and were up 1% including revisions to prior months. Core sales have risen in eleven of the past twelve months. These sales are key input into the GDP data and it looks like “real” (inflation-adjusted) consumer spending, goods and services combined, will be up around a 2% annual rate in Q2. In other news this morning, the Empire State index, which measures manufacturing sentiment in New York, increased to 25.6 in July from 19.3 in June. It’s now the highest level in four years, signaling that the factory sector continues to expand. On the inflation front, trade prices remain calm. Import prices rose 0.1% in June and are up 1.2% from a year ago. Almost all the gain since last year is due to petroleum; import prices ex-oil are up only 0.1% from a year ago. Export prices declined 0.4% in June and are up only 0.2% from last year. Ex-agriculture, export prices are up 0.3% from last year.

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Posted on Tuesday, July 15, 2014 @ 10:35 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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