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  Tasty Tax Reform
Posted Under: Bullish • Government • Markets • Video • Taxes • Stocks • Wesbury 101
Posted on Friday, November 17, 2017 @ 1:50 PM • Post Link Share: 
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  Housing Starts Increased 13.7% in October
Posted Under: Data Watch • Home Starts • Housing


Implications:  Housing starts rebounded sharply in October, easily surpassing consensus expectations as home builders made up for activity lost to the hurricanes in late August and early September.  Two key factors boosted starts in October: first, multi-unit starts (mostly apartments), which are normally very volatile, soared 36.8%; second, single-family starts jumped 16.6% in the South to their highest level in a decade, reversing the 14.1% decline in September due to Hurricanes Harvey and Irma.  In fact, the South alone represented 59% of the increase in starts in October.  According to the Census Bureau, the counties affected by the hurricanes accounted for 26% of new construction authorized in the southern region in 2016, which explains why the storms had such a large effect on overall starts. Though the year-to-year measure of housing starts is down 2.9%, this was caused by a large spike in multi-family starts back in October 2016.  As that rolls off, year-over-year comparisons will improve. As a sign of that, October data show starts were the second highest overall since 2007.  Single-family starts tied the highest level since 2007.  Given the volatility of multi-family starts, we expect overall starts to drop next month, but with permits to build homes up 5.9% in October, the trend is up.  Multi-family construction led the way in the early stages of the housing recovery (2011-15); by 2015, 35.7% of all starts were in the multi-family sector, the largest share since the mid-1980s, when the last wave of Baby Boomers was growing up and moving to cities.  Since then, the multi-family share of starts has been trending down.  We expect this trend to continue and view the shift toward single-family construction as a positive sign for the economy.  On average, each single-family home contributes to GDP about twice the amount of a multi-family unit.  Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year.  And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark.  In other recent housing news, the NAHB index, which measures homebuilder sentiment, rose to 70 in November from 68 in October, signaling continued optimism from developers.

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Posted on Friday, November 17, 2017 @ 10:24 AM • Post Link Share: 
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  Industrial Production Increased 0.9% in October
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production continued its post-hurricane rally in October, easily beating consensus expectations as the manufacturing sector led the way.  But even without the storms, production would have been a solid 0.3%, according to the Federal Reserve.  Industrial production rose 0.9% in October and is now up 2.8% versus a year ago.  The biggest positive contribution to today's headline number came from manufacturing which rose 1.3%, matching the largest monthly gain since 2010.  Auto manufacturing rose 1% in October and is now up at a 27.5% annual rate in the past three months, getting back to pre-hurricane levels of output.  Meanwhile, non-auto manufacturing posted its largest monthly gain since 2006, rising 1.3%.  This strength was also reflected in manufacturing capacity utilization, which rose to its highest level since 2008.  Looking forward, expect further gains in overall production as the economy recovers from the effects of the two hurricanes.  The one disappointment in today's report came from mining which fell 1.3%, primarily due to both oil and gas well drilling and extraction.  Oil and gas-well drilling has struggled since the storms, but its monthly declines have begun to level off and it is still up a massive 61% from a year ago.  Look for a surge in drilling activity in the months ahead once the effects of the storms pass.  In other news this morning, the Philly Fed Index, a measure of sentiment among East Coast manufacturers, fell to a still high 22.7 in November from 27.9 in October.  On the employment front, new claims for jobless benefits rose 10,000 last week to 249,000.  Meanwhile, continuing claims fell 44,000 to 1.86 million.  Look for another solid month of job growth in November.  Finally, on inflation, import prices rose 0.2% in October while export prices remained unchanged.  In the past year however, import prices are up 2.5% while export prices are up 2.7%, both in stark contrast to the price declines in the twelve months ending in October 2016.  Yet another reason why the Federal Reserve should and will raise rates in December.   

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Posted on Thursday, November 16, 2017 @ 11:36 AM • Post Link Share: 
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  The Consumer Price Index Rose 0.1% in October
Posted Under: CPI • Data Watch • Inflation


Implications:  Consumer prices continued to rise in October and are up at the fastest three-month pace going back to late 2012.  Hurricanes Harvey and Irma were key culprits pushing prices higher in August and September, but even as storm impacts fade, consumer prices ticked 0.1% higher in October as the usual suspects led the way.  Housing costs rose 0.3% in October and are up 2.8% in the past year, while prices for services also rose 0.3% in October and are up 2.7%  over the past twelve months.  As a result, consumer prices as a whole are up 2.0% in the past year.  And with yesterday's report on producer prices showing rising inflation in the pipeline, we expect consumer prices will continue to average at or above the 2.0% year-to-year pace in the months ahead.  Energy prices declined 1.0% in October following significant hurricane-related increases over the prior two months, while food prices were unchanged.  "Core" consumer prices, which strip out the food and energy components, rose 0.2% in October and are up 1.8% in the past year. That represents the fastest twelve-month increase in "core" prices going back to April.  Taking today's data and the trend into consideration shows why the Fed has confidence that the inflation picture is firming around their 2% target and justifies a December rate hike as well as the continuation of policy normalization heading into 2018 . Markets are currently pricing in a roughly 92% chance for a hike in December, with just one to two hikes priced in for 2018.  With Jerome Powell taking over the reins from Chairwoman Yellen – and tax and regulatory reform looking likely out of Washington -  we think three to four hikes looks more likely next year. The most disappointing news in today's report is that real average hourly earnings declined 0.1% in October.  However, these earnings are up 0.4% over the past year and data from the Bureau of Labor Statistics employment report show overall worker earnings (which takes into account both wage gains and increased hours worked) are rising at around a 4% annual rate. Along with healthy household balance sheets, consumers have room to increase spending.

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Posted on Wednesday, November 15, 2017 @ 11:01 AM • Post Link Share: 
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  Retail Sales Increased 0.2% in October
Posted Under: Data Watch • Retail Sales


Implications: Retail sales beat expectations for October and were revised up for prior months, a sign that - if you cut through the volatility due to the hurricanes - the economy is picking up.  Retail sales rose 0.2% in October, after being held down by Harvey in August and then surging in September as consumers recovered following the storms.  The growth in October was led by autos, which should remain unusually strong through year end as people replace vehicles destroyed in the hurricanes.  But sales were also strong at restaurants & bars as well as food and beverage stores.  The weakest categories in October were building materials, which should rebound in future months as Texas and Florida rebuild, and gas station sales, due to gas prices falling after the surge in September.  Total retail sales are now up 4.6% in the past year.  The best news today was the considerable strength for "core" sales, which excludes autos, building materials, and gas.  Core sales grew 0.4% in October, and are up 3.4% from a year ago.  Although some retail outlets are getting beat up by on-line retailing, the sector looks good from the consumer's point of view.  Jobs and wages are moving up, consumers' financial obligations are an unusually small part of their incomes, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  In other news this morning, business inventories were unchanged in September but revised up for earlier in the third quarter.  As a result of these figures and the retail revisions, we now expect the government's estimate of Q3 real GDP growth to be revised up to a 3.3% annual rate from an originally reported 3.0%.  Meanwhile, early tracking for Q4 real GDP growth in the 3.5 – 4.0% range.  If we're right about Q4, this would be the first time we've had three straight quarters above 3% since before the financial crisis.  In other news this morning, the Empire State index, a measure of manufacturing sentiment in New York, fell to 19.4 in November from 30.2 in October, suggesting continued strength in the factory sector.

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Posted on Wednesday, November 15, 2017 @ 10:47 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 Wednesday, November 15, 2017 @ 8:09 AM • Post Link Share: 
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  The Producer Price Index Increased 0.4% in October
Posted Under: Data Watch • Inflation • PPI


Implications:  Producer prices rose much faster than expected in October, with nearly every category moving higher.  Prices for services led the way, rising 0.5% in October as margins for fuel and lubricant dealers surged 24.9% (it's not unusual to see large swings in this category from month-to-month).  In fact, nearly every category in today's report shows inflation pressures that are likely to flow through to consumer prices in the months ahead.  Goods prices rose 0.3% in October, with pharmaceuticals and industrial chemicals leading the way.  Food prices rose 0.5% following three months of flat or declining prices, while energy prices (typically one of the more volatile components month-to-month) was unchanged in October.  "Core" producer prices – which exclude both food and energy – rose 0.4% in October and are up 2.4% in the past year.  That represents the fastest twelve-month rise since early 2012.  There may still be remnants of hurricane impacts in the pricing data, but that's starting to subside, and producer prices have now been at or above 2% on a year-to-year basis in seven of the last nine months.  In other words, prices were moving higher well before the storms touched down in Texas and Florida.  A look further down the pipeline shows the trend higher should continue in the months to come.  Intermediate processed goods rose 1.0% in October and are up 5.0% from a year ago, while unprocessed goods were unchanged in October but remain up 7.7% in the past year.  Given these figures, it would be difficult for the "data dependent" Fed to cite current inflation trends as a reason to hold off on continued rate hikes. And with employment growth remaining strong, Chairwoman Yellen, and her successor Jerome Powell, look to have a clear runway for gradual but steady rate hikes into 2018. 

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Posted on Tuesday, November 14, 2017 @ 10:36 AM • Post Link Share: 
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  Investing vs. Trading
Posted Under: Government • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Stocks
Are you an investor or a trader?  Investors think long-term, while traders focus on short-term price movements.

Trading furs, cloth, commodities, or tulips, has gone back centuries, if not millennia, but was about adding value and moving goods to markets.  In other words, through trading many ran businesses that looked a great deal like investing.

The "ticker tape" allowed the trading of financial products, but after the Great Depression many wouldn't touch stocks for decades.  Now, financial market news and quotes are on TV all-day and pushed out over smartphones.  This can encourage "trading" over "investing."  Or another way of saying the same thing, the short-term over the long-term.

For example, many people have zero idea what Bitcoin is, why it is needed, or what gives it value, but they are mesmerized by it nonetheless.  It's just digital scrip – an alternative to sovereign currency.  It pays no dividend and isn't widely accepted.  No one knows if it will last.

In the meantime, there are monumental events taking place that get missed if one focuses on the trees and not the forest.  Horizontal drilling and fracking are one of those.

Remember when the world was about to run out of natural gas and oil? Remember when the Middle East and Russia, because of their energy reserves, could dominate geopolitics?

Well, all that has changed.  The US is now the world's biggest energy producer and, by 2020, the US is likely to become a net energy exporter to the rest of the world.  This explains the political upheaval in Saudi Arabia as the royal family moves slowly toward a more free-market friendly environment.  Russia faces similar forces that, in the end, will create more global stability.

Because of US supplies, Europe can become less dependent on Russian oil and natural gas.  In addition, just like when Ronald Reagan was president of the US, as the pendulum swings toward less regulation, lower tax rates and smaller government, Europe must follow suit.

The combination of these developments causes stronger global economic growth,which is great news for investors.

However, the dominance of governments in recent decades, and the reporting of every utterance of Federal Reserve or foreign central bankers, creates anxiety among many investors.  Some investors are worried about a flattening, or inversion, of the yield curve as the Fed tightens.

But these concerns are overdone.  It's true that an inverted yield curve signals tight money, but inversions typically don't happen until the Fed pulls enough reserves out of the system to push the federal funds rate above nominal GDP growth.  Right now, that's about 3.5%, which means the Fed is likely at least two years away.  And, the banking system is still stuffed with over $2 trillion in excess bank reserves.  Monetary policy, by definition, is not tight until those excess reserves are gone.

Focusing on trading, and not investing, misses these longer-term developments and highlights short-term fears.  Patience, persistence and optimism help avoid the pitfalls of short-term thinking.  The current environment will continue to reward those who stay focused on investing.

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Posted on Monday, November 13, 2017 @ 10:39 AM • Post Link Share: 
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  Stealth tax on the wealthy in the GOP tax reform plan?
Posted Under: Government • Video • Spending • Taxes • TV • Fox Business
Posted on Tuesday, November 7, 2017 @ 11:17 AM • Post Link Share: 
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  Clearing a Path for Tax Reform
Posted Under: GDP • Government • Monday Morning Outlook • Spending • Taxes

Washington D.C. used to complain that Ronald Reagan employed a strategy of "starving the beast" – cutting taxes so that new spending was tough to legislate.  Now, D.C. seems to employ the strategy of "gorging the beast" – spending so much that tax cuts are hard to pass.

Persistent over-spending, and costly entitlements have created permanent deficits.  In addition, arcane budget rules and "scoring" models (which estimate the budget impact of legislation) make tax reform very complicated.

In order to let it pass with just 51 votes in the Senate, the cost of the legislation must not increase the deficit by more than $1.5 trillion over 10 years.  And any increase in the deficit in year 11, or beyond, must be paid for.  These arcane hurdles are why the tax reform bill passed by the House of Representatives last week looks like it does.

In essence, the tax bill cuts taxes on companies and just about anyone in the bottom 60% of the income spectrum, but pays for this by shifting an even larger share of the income tax burden onto high earners.  So, while we think the tax plan will boost economic growth, it falls well short of what we would call an "ideal" supply-side tax cut.

The corporate side of the tax plan is very positive.  At 35%, the US has the highest corporate tax rate in the developed world.  Bringing that rate down to 20% makes the US competitive, will bring more investment to the US, and will boost economic growth.  In addition, it allows 100% expensing of most investment for the next five years.

Notably, the proposal makes the 20% corporate tax rate permanent (not just 10 years, like the changes to individual tax rates).  Combined with the budget rules against showing revenue losses beyond ten years, that's why the proposal treats high individual earners so harshly.

Congress says companies won't invest if they think their tax rate will go back up in 2028.  But we think this fear is overblown.  US economic growth will pick up, and future lawmakers are not going to risk upsetting that by letting the rate jump back to 35% overnight.  Politicians are always worried about the next election, and the threat of a stock market selloff or rising recession risk would spook even the most liberal Democrats.

In turn, extra economic growth should generate lots of extra revenue, which means the deficit would not rise as much as the official budget scorekeepers (the Joint Committee on Taxation or the Congressional Budget Office) say it would.  For example, an extra 1 percentage point of real GDP growth per year would close the budget gap by $2.7 trillion over ten years, which is more than the cost of the tax cut itself.  

In fact, there are early signs that the economy is accelerating already.  The Trump administration has rolled back an incredible amount of regulation.  That regulatory rollback - combined with expectations of tax reform and a more business friendly government in general - has lifted economic growth.

In spite of the double-whammy of Hurricanes Harvey and Irma, US economic activity has accelerated this year.  In fact, we have had two quarters of real GDP growth at or above 3% so far this year, with our fourth quarter growth forecast at 3.5%.

But the Joint Tax Committee is expecting only a 1.9% real GDP growth rate over the next ten years.  We think this is way too pessimistic.  The economy has been stuck in the doldrums since 2009 because government grew too large.  Between 1985 and 2005, real GDP averaged 3.2% growth.  Using those growth rates (which we believe are achievable) would allow for more robust tax reform that actually cuts tax rates across the board.

To be blunt, we are not particularly enthusiastic about the way the proposal treats individuals, and think it's a huge missed opportunity.  For one thing, the top tax rate of 39.6% is unchanged, and that's the tax bracket where earners respond the most to incentives.

And while we wholeheartedly support the idea of limiting the deductibility of state and local taxes – because it creates political pressure for shrinking government at the state and local level – we're concerned about the downside incentive effects for some high earners who would then pay even higher marginal tax rates.  Put it all together, and some earners in high tax states like California are going to pay a marginal rate north of 60% once Medicare taxes are included.     

With full GOP control of the House, Senate, and White House, Republicans have a rare opportunity to adopt policies to get the US back on the path of faster economic growth.  Instead, they remain hampered by rules set up long ago that are hostile to growth, the same kind of rules that underestimated the costs of programs like Obamacare, but also underestimate the benefits to growth from lower tax rates.  

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

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Posted on Monday, November 6, 2017 @ 12:26 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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