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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Existing Home Sales Declined 3.2% in July
Posted Under: Data Watch • Home Sales • Housing


Implications:  After four consecutive months of steady growth, existing home sales took a breather in July, as supply constraints and high prices continue to hamper buyers.  Sales of previously owned homes fell 3.2% in July to a 5.39 million annual rate and are now down 1.6% from a year ago.  Many pessimistic analysts are likely to point out that this is the first year-over-year drop since November 2015, but this is a reflection of the surge in existing home sales last June/July, not the beginning of the end for the housing market.  Housing is volatile from month to month, and we think the broader trend will continue to be upward, but there are still some headwinds.  Tight supply and rising prices continue to hold back sales.  Even though inventories rose 0.9% in July, they have now fallen for fourteen consecutive months on a year-over-year basis.  Further, the months' supply of existing homes – how long it would take to sell the current inventory at the most recent selling pace – is only 4.7 months.  According to the National Association of Realtors® (NAR), anything less than 5.0 months is considered tight supply.  The good news is that demand was so strong that 47% of properties in July sold in less than a month, pointing to further interest from buyers in the months ahead.  However, higher demand from the summer selling season also helped push the median price for an existing home up 5.3% versus a year ago, the 53rd month in a row of year-over-year gains.  While this may temporarily price some lower-end buyers out of the market, it should help alleviate some of the supply constraints as "on the fence" sellers take advantage of higher prices and trade-up to a new home, bringing more existing properties onto the market as well.   In other housing news this morning, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.2% in June and is up 5.6% from a year ago.  Another sign that supply remains limited and home builders have room to keep ramping up construction.

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Posted on Wednesday, August 24, 2016 @ 11:02 AM • Post Link Share: 
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  New Single-Family Home Sales Increased 12.4% in July
Posted Under: Data Watch • Home Sales • Housing


Implications:  Look out above!  New home sales boomed in July, easily crushing the most optimistic forecast from any economics group.  Sales rose 12.4% for the month to the fastest pace since 2007 and are now up 31.3% versus a year ago.  If anything, builders are falling behind the demand for new homes.  The inventory of unsold homes fell 7,000 in July and remains very low by historical standards (see chart to right).  The months' supply of homes (how long it would take to sell the entire inventory of homes) fell to only 4.3 in July.  To put this in perspective, that's lower than the average for any calendar year since 2004.  This means homebuilders still have plenty of room to increase both construction and inventories.  It's important to remember that home sales data are very volatile from month to month, so let's not get too carried away, but we think there are a few reasons to expect housing to remain a positive factor for the economy.  First, employment gains continue and wage growth is accelerating.  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 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.  Even though the median sales price of a new home is now down 0.5% from last year, this is likely due to a shift in the "mix" of homes sold, as other measures of home prices show continued gains.  On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory sentiment fell to -11 in August from +10 in July, signaling that activity in the factory sector will continue to be volatile.  That's what we should expect in a Plow Horse Economy.

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Posted on Tuesday, August 23, 2016 @ 11:29 AM • Post Link Share: 
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  Shut Out the Pessimists
Posted Under: Bullish • Employment • Housing • Monday Morning Outlook

You know the economy is getting better when the pessimists' theories on economic doom have been so wrong for so long they have to start recycling the old ones.

Right after the crisis a wave of mortgage "re-sets" was supposed to cause a double dip recession.  The idea was that many of the mortgages taken out in the housing boom, particularly interest-only mortgages,  had to re-set at higher interest rates or require principal payments, which would eat up workers' meager earnings, in turn reducing consumer spending and putting us back in recession.      

Since that gloom never materialized, some analysts are at it again.  Now, home equity lines of credit (HELOCs) are going to cause the recession.  But, just like the first time this theory appeared, a little number-crunching shows just how small the problem is relative to the size of the economy.  

US consumers have a little less than $500 billion in outstanding HELOCs right now, according to the NY Fed.  So let's make the outrageously pessimistic assumption that ALL of them re-set overnight and annual payments on these loans have to double, from about $25 billion per year (5% of $500 billion) to $50 billion per year.  That extra $25 billion is only 0.2% of annual consumer spending.  In other words, there's nothing to this theory.        

The other recession theory grabbing attention is about a tiny portion of the federal budget that is supposedly signaling that all the other bullish reports on the job market are missing the boat.  Tax revenue from federal unemployment taxes (or FUTA, a levy on businesses that funds the unemployment insurance program) totaled only $47.2 billion in the past year, versus $66.6 billion back in Fiscal Year 2012. That decline shows that the quality of jobs is heading down and that we are either headed into a recession or there already.

Anyone who makes this argument ought to have his economic credentials revoked, because they clearly don't know how unemployment insurance works.  When the US enters a recession, some states end up borrowing money from the federal government, which they repay when the economy starts to heal.  Those repayments come in the form of states temporarily getting a smaller share of unemployment tax revenue and the federal government getting a larger share, which is exactly what happened in 2010-2012.  Once the repayments are done, states go back to taking more and the federal government takes less.

This pattern is nothing new.  Federal unemployment tax revenue surged after the 1981-82 recession, peaking in 1984-85.  Stagnation in FUTA receipts after 1985 had nothing to do with slow job growth.  The US added 12.4 million jobs from mid-1985 through mid-1990.  These receipts also surged after the 1990-91 recession, peaking in 1995.  We then added 14.5 million jobs in the next five years.  In other words, a peak in FUTA early in an expansion is completely normal.

But the worst part of the analysis is the assertion that federal payroll tax revenue is falling.  That's completely untrue.  Federal payroll taxes (like Social Security and Medicare) have been $1.1 trillion in the past twelve months, a record high on both an overall and inflation-adjusted basis.  And that's true whether you adjust by using the overall consumer price index or the "core" index, which has grown faster because it excludes food and energy.       

Even Brexit is having trouble causing the British recession so many feared.  British jobless claims fell in July, after Brexit, while British retail sales spiked higher.  So much for the end of the world.

Look, someday a recession is going to happen.  But with monetary policy loose, tax rates relatively low, and free trade still holding up, it's not happening anytime soon.  Smart investors need to focus on the truth and shut out the pessimists.

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

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Posted on Monday, August 22, 2016 @ 11:22 AM • Post Link Share: 
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  M2 and C&! Loan Growth
Posted Under: Government • Fed Reserve


Source: St. Louis Federal Reserve FRED Database

Posted on Monday, August 22, 2016 @ 7:47 AM • Post Link Share: 
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  The Consumer Price Index was Unchanged in July
Posted Under: CPI • Data Watch • Inflation


Implications:  A pullback in energy prices kept overall consumer prices unchanged in July, but the underlying trend continues to show prices rising at a moderate clip.  While up a modest 0.8% in the past year, consumer prices have risen at a 1.5% annualized in the past six months and at a 1.6% annual rate in the past three months.  Energy prices fell 1.6% in July, following a combined 6.1% rise over the previous three months.  While these prices remain down 10.9% in the past year, they are up at a 3.9% annual rate in the past three months and are up through the first half of August.  Excluding just energy, consumer prices are up 1.9% in the past year, which means that as energy prices rise, the headline index will follow at a faster pace than many are expecting.  Food prices were unchanged in July, as rising costs for fruits and vegetables were offset by declining prices for meat, poultry, and fish.  "Core" consumer prices, which exclude the volatile food and energy components, rose 0.1% in July and are up 2.2% in the past year.  No wonder even a "dove" like New York Fed Chief Bill Dudley is trying to move the markets away from the consensus view that the Fed won't raise rates this year.    A consistent pace of "core" inflation around 2% – paired with continued employment gains and an acceleration in the headline consumer price index – shows the economy is ready for the next rate hike.  The increase in the core CPI in July was led by housing rents, medical care, and autos.  Owners' equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in July, is up 3.3% in the past year, and will be a key source of higher inflation in the year ahead.  One of the best pieces of news in today's report is that "real" (inflation-adjusted) average hourly earnings rose 0.4% in July.  Real wages are up a healthy 1.7% in the past year and we think wages will rise faster than prices in the year ahead as employment continues to grow at a healthy clip.  Barring a surprise to the downside in employment and inflation releases next month, the "data dependent" Fed has the numbers to support raising rates in September.

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Posted on Tuesday, August 16, 2016 @ 1:31 PM • Post Link Share: 
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  Industrial Production Rose 0.7% in July
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production surged in July at the fastest pace since 2014, extending June's gain and demonstrating strength in a sector that has begun to find its footing.  While the headline number is still down 0.6% from a year ago, it is up 0.8% at an annual rate in the past six months and up at a 3.9% annual rate in the past three months, an acceleration that signals the sector may be leaving behind the headwinds related to the drop in oil prices in the past couple of years.  This is reinforced by July's gain being broad-based, with every major headline number showing expansion.  We like to follow non-auto manufacturing, which strips out the most volatile sectors, and that rose 0.4% in July, the best growth since 2014.  Meanwhile, the more volatile sectors added to industrial growth in July.  Auto production increased 1.9% on top of a sharp 5.2% increase in June, hitting a new all-time record high.  Utility output jumped 2.1%, reflecting unusually warm July weather in the lower 48 states.  Perhaps the best news was that mining production jumped 0.7% in July, and is now up at a 4.7% annual rate in the past three months.  This month's gain was driven primarily by coal mining, however, oil and gas well drilling jumped 4.9% as well, the largest monthly gain since 2010. While mining (and energy in general) has been a drag on production over the past year, we expect activity in that sector to stabilize and even grow in the months ahead as energy prices are well off the lows from earlier this year.  Based on other commodity prices, oil prices should average at higher levels over the next several years.  Although we don't expect overall industrial production to boom any time soon – weak overseas economies will continue to be a headwind – we do 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 -4.2 in August from +0.5 in July, signaling that the improvement in the factory sector will not be a straight line.  That's what we should expect in Plow Horse Economy. 

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Posted on Tuesday, August 16, 2016 @ 12:00 PM • Post Link Share: 
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  Housing Starts Rose 2.1% in July
Posted Under: Data Watch • Home Starts • Housing


Implications:  Home building continues to be a bright spot for the US economy.  Housing starts rose 2.1% in July, climbing to a 5-month high, beating consensus expectations and coming in higher than any forecast from any economics group.  Home building often moves in a seesaw pattern.  So, to get rid of the monthly volatility and expose underlying trends, we look at the 12-month moving average, which is now the highest since 2008.  Although the increase in housing starts in July was led by multi-family units, that's happened less frequently in the past year.  When the housing recovery started, multi-family construction generally led the way.  The number of multi-family units now under construction is the highest since the early 1970s.  But the share of all housing starts that are multi-family appears to have peaked in 2014-15 and single-family building has generally starting to climb more quickly.  This trend should reassert itself soon.  Single-family building permits are up 2.4% from a year ago while multi-family permits are down 1.6%.  The shift in the mix of homes toward single-family units is a positive one because, 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 rise to about 1.5 million units per year, so a great deal of the recovery in home building is still ahead of us.   It won't be a straight line higher, but expect the housing sector to keep adding to real GDP growth in 2016-17.  In other recent housing news, the NAHB index, which measures sentiment among home builders, rose to 60 in August from 59 in July showing that the index remains in healthy expansion territory.  More jobs and faster wage growth are making it easier to buy a home and builders are responding.

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Posted on Tuesday, August 16, 2016 @ 11:31 AM • Post Link Share: 
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  Beware of Popular Narratives
Posted Under: Bullish • Government • Markets • Monday Morning Outlook • Fed Reserve • Stocks

Narratives matter.  They affect political outcomes and influence investment decisions.  Narratives serve a purpose, but in serving that purpose they are often highly misleading, especially when they are invented to cover up a mistake, or to convince people to vote a certain way.  These days, there are three main narratives impacting investors.

Narrative #1 says that Wall Street caused the Great Recession of 2008/09 and that government saved the economy, and recoveries are always slow after financial crises.

Narrative #2 argues that the US is not really in recovery.  Anything good happening out there, a rising stock market or falling unemployment rate, is either a bubble or a lie.

Narrative #3 says that the US government did not allow all the excesses of the 2008 crisis to be completely wrung out of the system.  Using Quantitative Easing, TARP and government stimulus to boost economic activity has created a bubble on top of a bubble.  The next crash will be even bigger.

We don't believe in any of these narratives.  We believe that government (Fannie Mae, Freddie Mac, 1% interest rates, the Community Reinvestment Act, and Mark-to-Market Accounting) caused the crisis.  The Troubled Asset Relief Program (TARP) and QE did not fix it, either.  The S&P 500 fell 40% in the five months after TARP was passed and QE was invented.  What turned things around was finally getting rid of the nonsensical mark-to-market accounting rule in March 2009.  Only then did the stock market and economy turned around.  This is a real, innovation-driven recovery.

Those who believe that the unemployment rate is a lie are ignoring the fact that jobs have climbed for 70 consecutive months and initial claims have been below 300,000 for almost 1 ½ years.  These same analysts say the US stock market is one big bubble, inflated by global central banks.  Yes, they say, the Fed "tapered" and stopped QE, then raised interest rates, but now foreign central banks have taken up where the Fed left off.

What they can't explain is why it didn't work the other way.  Why have European and Japanese stocks fallen so far behind US stocks in the past 7 years?  If foreign QE lifts US stocks, why doesn't US QE lift foreign stocks?  No major European or Asian stock market is at record highs like the US.

All the bubble talk is either cover for a blown forecast, or an excuse to explain something good by someone who has said that nothing good can happen with a Democrat in the White House.  Those who spin this narrative have argued for the past seven years that the US stock market or economy would collapse.  But since the opposite has happened, these pundits have fallen back to the defensive position that everything is a bubble.

Slow growth isn't a surprise to us.  We have called it a Plow Horse economy for a long time.  But that is because government spending, taxation and regulation hurt economic growth, not because of financial problems.  Continental Europe has an even bigger government burden and we call Italy, France, Spain, Greece, et al., a "Plow Horse with Shin Splints."

What we find interesting about all these narratives is that they are all so government-centric.  All of them seem to ignore the role of Entrepreneurship.  In the past seven years, fracking has made the US the most productive energy producer in the world.  The cloud, smartphone, tablets, apps, 3-D printing, genetic mapping and testing, vertical farming, and Big Data are all boosting productivity and profits at company after company.

For the record, Ben Bernanke and Janet Yellen have never fracked a well or pulled an all-nighter writing an app, and those who call the stock market a bubble are actually slapping entrepreneurs and innovators in the face.  QE did not create the cloud or Big Data.  Entrepreneurs did!  The stock market, jobs, incomes and profits are all up because of these new technologies.     

The narratives the conventional wisdom has chosen to use to describe the economy are woefully inadequate and misleading.  They should come with Surgeon General warning labels. 

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

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Posted on Monday, August 15, 2016 @ 9:23 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, August 15, 2016 @ 9:08 AM • Post Link Share: 
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  The Producer Price Index Unexpectedly Declined 0.4% in July
Posted Under: Data Watch • Inflation • PPI


Implications:  Coming off the fastest three-month rise in nearly four years, producer prices pulled back in July.  But while the declines in July were broad based, and we won't be surprised if the pouting pundits of pessimism tout today's report as a reason for the Fed to hold off on raising rates in September, data are volatile and a single month's report should not be the deciding factor for monetary policy.  For example, recent reports that oil inventories are starting to decline could boost oil prices in the months ahead.  Prices for services led the index lower in July, as retailers and wholesalers saw falling margins.  Prices for goods also fell in July, with both food and energy costs declining.  But even excluding the volatile food and energy components, "core" prices fell 0.3% in July and are up a modest 0.7% in the past year.  The "core" measure is where the Fed places greater weight when making the decisions on monetary policy.   In spite of the price drop in July, the headline measure of producer price inflation is showing a pickup in pace, up at a 2.2% annualized rate in the past three months compared to a 0.5% annual rate in the past six months and a 0.2% decline from a year ago.  So while inflation remains modest, the U.S. is certainly not experiencing deflation. Rather, rising energy prices may push inflation up at a faster pace than many are expecting.  In other recent inflation news, import prices rose 0.1% in July but remain down 3.7% from a year ago.  The drop is mostly from petroleum, but not all of it; import prices are down 1.3% from a year ago even excluding petroleum.  Export prices rose 0.2% in July but remain down 3% from a year ago. 

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Posted on Friday, August 12, 2016 @ 12:29 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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