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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  The First Estimate for Q1 Real GDP Growth is 0.7% at an Annual Rate
Posted Under: Data Watch • GDP

 

Implications:  Nothing in today's report should shift the Federal Reserve away from raising short-term rates at least twice more this year and starting to trim its balance sheet.  Although real GDP expanded at only a 0.7% annual rate in the first quarter, the soft headline was dragged down by slower inventory accumulation, which we expect to pick back up in the quarters ahead.  To check the underlying trend in real GDP growth, we like to take out inventories, international trade, and government spending, none of which can be relied on for long-term growth.  What's left are consumer spending, business investment, and home building, what we also call "core GDP."  That grew at a 2.2% annual rate in Q1, is up 2.8% from a year ago, and is up at a 2.6% annual rate in the past two years.  Business fixed investment soared in the first quarter, growing at a 9.4% annual rate, the fastest pace since 2013.  Business investment slowed after oil prices collapsed but is now turning as those prices recover and fiscal policies improve.  Meanwhile, home building grew at a 13.7% annual rate, the fastest pace since 2015.  We expect gains in housing to continue as builders are still not constructing enough homes to keep up with population growth and scrappage.  Consumer spending grew at only a 0.3% annual rate in Q1, but was held down by auto sales, which are often volatile, and low utility use (due to relatively warm winter weather in January and February).  This report suggests that the Federal Reserve should remain on course to raise rates in June.  Nominal GDP (real GDP growth plus inflation) grew at a 3.0% annual rate in Q1, is up 4.0% from a year ago, and is up at a 3.4% annual rate in the past two years.  All of these figures suggest the Fed can raise rates without hurting the economy.  In other recent news, pending home sales, which are contracts on existing homes, slipped 0.8% in March after a 5.5% surge in February.  These figures suggest a modest increase in existing home sales in April, to a new high for the recovery.

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Posted on Friday, April 28, 2017 @ 10:09 AM • Post Link Share: 
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  New Orders for Durable Goods Rose 0.7% in March
Posted Under: Data Watch • Durable Goods

 

Implications:  Before we dig into the details, the most important news from today's report on durable goods is that shipments of non-defense capital goods excluding aircraft – the measure used to calculate business investment for GDP purposes – rose at a 7.5% annual rate in Q1 versus the Q4 average.  That represents the fastest growth of business investment in equipment since the big slowdown in drilling activity began in Q3 2014.  New orders for durable goods rose once again in March following healthy increases in January and February, though gains were mostly due to orders for aircraft, which are very volatile from month to month.  Strip out the transportation sector and durable goods orders declined a slight 0.2%.  The dip in March non-transportation orders was led by fabricated metal products, with most major categories showing small declines.  But there is little reason for concern. Non-transportation orders have been steadily trending higher since mid-2016, and March represents the first monthly decline since June of last year.  Machinery orders also dipped in March, but we expect them to pick up again in the months ahead alongside continued improvements in the energy sector, which had been pulling down machinery investment since oil prices started declining in mid-2014.  Put it all together and the March report on durable goods could have been better, but it still shows a healthy pickup in business investment that had been a weak spot until late 2016.  In other news this morning, new claims for unemployment insurance increased 14,000 last week to 257,000.  The four-week moving average is 242,000.  Continuing claims rose 10,000 to 1.98 million.  Plugging these figures into our models suggests robust job growth in April, with a payroll gain north of 200,000. 

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Posted on Thursday, April 27, 2017 @ 11:04 AM • Post Link Share: 
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  New Single-Family Home Sales Increased 5.8% in March
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  New home sales blew past expectations in March, rising for their third consecutive month to nearly match the post-recovery high-water mark set in July of last year.  Sales increased 5.8% in March and are now up 15.6% versus a year ago, demonstrating a rare stability in what is typically a very volatile series month-to-month.  Meanwhile, despite a 3,000 increase in unsold new homes, inventories remain low by historical standards (see chart to right) and are not a headwind to future construction.  All of the gain in inventories in March was due to homes where construction had yet to start, with the inventory of completed homes remaining unchanged.  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, which is already accelerating.  Second, credit standards in the mortgage market are 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 new home 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 housing news this morning, the FHFA Index, which measures prices for homes financed with conforming mortgages, rose 0.8% in February and is up 6.5% from a year ago.  In the year ending in February 2016, FHFA prices were up 5.8%.  The national Case-Shiller index, which measures home prices, increased 0.4% in February and is up 5.8% from a year ago. Price gains in the past 12 months have been led by Seattle and Portland, with the slowest gains in New York City and Washington.  On the manufacturing front, the Richmond Fed index, which measures mid-Atlantic factory sentiment, ticked down to +20 in April from +22 in March, signaling further expansion in the factory sector, but at a slightly slower pace.  Solid data all around, which is helping push US equities higher.

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Posted on Tuesday, April 25, 2017 @ 10:56 AM • Post Link Share: 
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  France and the Euro
Posted Under: Bullish • Europe • Monday Morning Outlook

When the French elected François Hollande as President in 2012, the global left rejoiced.  Mr. Hollande ran on a platform of protecting workers from capitalism.  He wanted to raise the top income tax rate to 75%.  Analysts predicted a political turn to the left across Europe, if not beyond.

But, anti-capitalist policies create blowback.  We argued that in the high-tech age, Hollande's policies simply wouldn't work.  If enacted, they would almost immediately do so much harm that others would not follow. The pendulum would swing the other way soon.   

As we now know, Hollande figured this out.  As a self-interested politician, he reversed himself to prevent a tailspin in the French economy.  France's top income tax rate is 45%, not 75% and instead of increasing labor market regulation, Hollande made it easier for businesses to fire workers.  He also gave companies the flexibility to reduce workers' hours and pay when the economy was in recession.

None of these shifts made France a free-market juggernaut.  But, in the end, Hollande's Administration bears a resemblance to that of German Socialist Gerhard Schröder.  He ran as a man of the economic Left, but governed as a man of the Center, enacting much of the labor-market deregulation that has made Germany the strongest economy in Europe.

Now, the pendulum has swung even more.  In an election over the weekend, the French Establishment lost, while a political-upstart, Emmanuel Macron, emerged from a crowded field and is likely to win a run-off in two weeks to be the new president of France.  Macron supports expanded free trade, a lower corporate tax rate, a lower payroll tax rate, limits on France's wealth tax, and more labor market deregulation.

From the standpoint of free markets, Macron was not the best candidate in the race.  That title belonged to Francois Fillon, who ran on a platform as close to Margaret Thatcher and Ronald Reagan as any Frenchman could ever get.  Fillon faced allegations he gave family members no-show jobs in his political office.  In spite of this, he finished a strong third in this past weekend's election after leading in the polls last year.

Fillon received 19.9% of the vote, while the "French Trump" Marine Le Pen received 21.4% of the vote. Le Pen will now challenge Macron, who won with 23.9% of the vote, in the run-off election.  As a group, these three candidates show the people of France clearly voted for a shift from France's historically left-leaning policies.                             

Our view is that this is a further vindication of the Euro.  Countries like France are no longer able to let their currencies depreciate to temporarily hide the economic damage done by high tax rates, too much spending, and too many regulations.  Just like in the U.S., if a French president wants to preside over a more prosperous economy, he has to tackle the burdens of a large bureaucratic state.  There's no other choice.       

Some argue that the Euro is too strong for countries like Italy, Portugal, Spain, and Greece.  But voters in these countries want to keep the Euro in order to make sure their local leaders don't confiscate their hard-earned wealth through inflation.

What this does is force European leaders to find better fiscal policies.  It's true that many countries were enticed to join the Euro with subsidies and rules that treated their government debt like it was German or U.S. debt.  But this is bad fiscal policy, it has nothing to do with monetary policy.  It may have been the political cost of creating the Euro, but it doesn't negate the benefits of a monetary union.

That Union is now bearing fruit as citizens realize the benefits of a single currency and understand the terrible cost of left-leaning fiscal and immigration policies.  In spite of all the doom and gloom you've heard about Europe, and in spite of many real problems with governments that are still way too big, the European economy has better days ahead. 

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

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Posted on Monday, April 24, 2017 @ 10:13 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, April 24, 2017 @ 7:48 AM • Post Link Share: 
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  Existing Home Sales Increased 4.4% in March
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  Existing home sales surged in March, hitting the fastest pace in more than a decade.  Sales of previously-owned homes rose 4.4% in March to a 5.71 million annual rate and are now up 5.9% from a year ago.  It is important to remember 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 since February 2007 even though inventories remain very low.  In fact, inventories have now fallen on a year-over-year basis for 22 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 3.8 months in March.  According to the NAR, anything less than 5.0 months is considered tight supply.  The good news is that demand for existing homes was so strong that 48% of the homes sold in March were on the market for less than a month, pointing to eagerness from buyers.  Higher demand has also driven up median prices, which have now risen for 61 consecutive months on a year-over-year basis. 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 12.4% of total sales in March, 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.  In other recent news, new claims for unemployment insurance increased 10,000 last week to 244,000.  Continuing claims fell 49,000 to 1.98 million.  These figures suggest robust job growth in April.  On the manufacturing front, the Philadelphia Fed index, which measures factory sentiment in that region, fell to a still very high 22.0 in April after hitting 32.8 in March. 

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Posted on Friday, April 21, 2017 @ 11:28 AM • Post Link Share: 
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  Trumponomics and Stocks
Posted Under: Bullish • Government • Markets • Video • Stocks • Wesbury 101
Posted on Wednesday, April 19, 2017 @ 4:08 PM • Post Link Share: 
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  Industrial Production Increased 0.5% in March
Posted Under: Data Watch • Industrial Production - Cap Utilization

 

Implications:  Despite the positive headline number in March, the details of today's report were disappointing. Industrial production rose 0.5% in March, and is now up 1.6% versus a year ago.  But the gain in March was almost all due to utilities.  In February, unusually warm weather pushed utility output to its lowest level in a decade.  So, a return to more normal weather in March resulted in utility output recording its largest one month jump on record.  However, outside the utility sector activity was overall weak, with manufacturing coming in below consensus expectations and mining up only a tepid 0.1%.  Manufacturing, which excludes mining and utilities, fell 0.4% in March. The decline was due to both a 2.9% drop in the volatile auto sector as well as 0.2% drop in "core" industrial production, which is manufacturing excluding autos. Despite March's weakness, "core" industrial production has been accelerating lately, up at a 2.4% annual rate in the past three months versus just 0.7% in the past year.  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 equipment and materials used in the energy sector.  Higher energy prices are also having a direct effect on mining, which has also been accelerating, up at a 18.4% annual rate the past three months versus just 3% in the past year.  Oil and gas-well drilling posted its tenth consecutive gain in March, jumping 7.6%, and now up at a massive 190.5% annual rate in the past three months.  Based on other commodity prices, we think oil prices are close to "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 recent news, the Empire State index, a measure of manufacturing sentiment in New York, fell to +5.2 in April from +16.4 in March, signaling continued improvement in the factory sector in that region but at a slower pace.

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Posted on Tuesday, April 18, 2017 @ 12:14 PM • Post Link Share: 
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  Housing Starts Declined 6.8% in March
Posted Under: Data Watch • Home Starts • Housing

 

Implications:  After a strong showing in February, housing starts fell more than expected in March, declining 6.8%, as both single-family and multi-family starts gave up ground.  However, this is not the start of a new downward trend in housing.  After unusually mild weather in January and February boosted the pace of starts, a return to normal temperatures in March simply brought starts back in line with the trend. Looking at the year-over-year measure to smooth out some of the monthly volatility shows that starts are still up a healthy 9.2%.  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.  Supporting the case for a continued upward trend, permits for new homes rose 3.6% in March.  And although all of the month's gain was due a to a 13.8% jump in the volatile multi-family sector, permits to build single-family homes are still up 13.5% from a year ago.  In other words, don't expect the drop in single-family permits in March to lead to a decline in the future pace of home building.    Moreover, like in February, 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 March, the multi-family share of starts fell to 32.4%. The shift toward single-family is a positive sign for the economy 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 to a still-high 68 in April from 71 in March. Expect further strength in the housing sector in the year ahead as more jobs, faster wage growth, and, for at least the time being, optimism about more market-friendly policies from a Trump Administration, continue to encourage both prospective home buyers and builders.

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Posted on Tuesday, April 18, 2017 @ 12:03 PM • Post Link Share: 
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  The Consumer Price Index Declined 0.3% in March
Posted Under: CPI • Data Watch • Inflation

 

Implications:  The consumer price index declined in March for the first time in more than a year.  But one month does not make a trend.  When you do look at the trend, as the chart to the right shows, consumer prices have been steadily rising since early 2015.  Energy prices were a key driver pushing prices lower in March, down 3.2%, as gasoline prices fell 6.2%.  Meanwhile rising costs for fruits and vegetables pushed food prices higher. Stripping out these volatile food and energy components, "core" CPI declined 0.1% in March.  That is the first decline in "core" prices since January of 2010. Housing and medical care, which have been key drivers pushing prices higher in recent years, continued to rise in March, both up 0.1%.  But falling costs for wireless telephone service, vehicles (particularly used cars and trucks), and clothing pushed "core" consumer prices lower.  Don't sound the alarm bells.  In spite of the drop in March, consumer prices are up still 2.4% in the past year while "core" prices are up 2.0%.  And plugging the CPI into our models suggests the Fed's favorite measure of inflation, the PCE index, is up 2.0% from a year ago, exactly on target with the lingering effects of loose monetary policy the past couple of years still on the way.  The best news in today's report was a 0.5% rise in real average hourly earnings.  These earnings are up a modest 0.3% over the past year, but, given continued employment gains and a tightening labor market, this should accelerate soon.  As a whole, the March CPI report should do little to change the Federal Reserve's path of at least two more rate hikes in 2017 as well as the start to balance sheet normalization.  

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Posted on Monday, April 17, 2017 @ 10:30 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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