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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  Real GDP was Revised to a -0.7% Annual Rate in Q1
Posted Under: Data Watch • GDP

 
Implications: Look out for the Pouting Pundits of Pessimism calling for a recession. Today’s GDP report showed contraction, but the report is for Q1, the last days of which ended two months ago, so it’s a “rearview mirror” picture of the economy and very likely a distorted one. Real GDP growth was revised down to a -0.7% annual rate from an original estimate of +0.2%. But as we have always argued, there were three main temporary culprits behind the Q1 weakness: plummeting energy prices, bad weather, and West Coast port strikes – all of which have dissipated. Also, part of the downward revision was due to lower inventories, which leaves more room for growth in future quarters. There also seems to be a fourth factor that held down growth in Q1 and it has nothing to do with actual output, but how the government seasonally adjusts the data. A study from the Federal Reserve shows that the government hasn’t been adjusting the data correctly based on the time of year. In turn, the wrong adjustments have meant growth looks artificially low in the first quarter, and artificially high in other quarters. The average for the year is the same, but it should be spread out more evenly than the government data now show. Luckily, the government is aware of the problem and will release new seasonal adjustment methods for GDP in late July. This puts the Fed in an interesting place. If the data are really better than what the government now says, and if the economic data continue to show a pick-up in activity, a June rate hike does not seem like much of a stretch. Today’s report also provided the first glimpse at overall corporate profits, and just like GDP, the headline was ugly. Corporate profits fell 5.9% in Q1, but the drop in both real GDP and profits resembles what happened in the first quarter of last year, after which profits rebounded sharply. Keep in mind that despite the drop in Q1, corporate profits are still up 3.7% from a year ago. In other news yesterday, pending home sales (contracts on existing homes) increased 3.4% in April, hitting a nine-year high. This report suggests existing home sales, which are counted at closing, will show a solid gain in May. Also yesterday, initial claims increased 7,000 last week to 282,000 and continuing claims increased 11,000 to 2.22 million. Plugging these figures into our payroll models suggests a nonfarm gain of 234,000 in May. (The forecast will change as we get more data in the next week on claims, the ADP index, and consumer spending.)

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Posted on Friday, May 29, 2015 @ 10:17 AM • Post Link Share: 
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  Black Swans & Forecasting
Posted Under: Bullish • Gold • Housing • Markets • Video • Bonds • Stocks • Wesbury 101
 
Posted on Wednesday, May 27, 2015 @ 2:08 PM • Post Link Share: 
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  New Single-Family Home Sales Increased 6.8% in April
Posted Under: Data Watch • Home Sales • Housing

 
Implications: If you still needed any evidence that the economic slowdown in the first quarter was temporary and the economy is already rebounding, just look at today’s report on new home sales. Sales of new homes rose 6.8% in April, coming in stronger than the consensus expected, and are up 26.1% from a year ago. This is why we still believe the Fed will take a closer look at raising rates in June than the vast majority of investors now expect. One possible reason for the gain in new home sales in April may be all the talk about the Federal Reserve raising rates later this year, which may be getting some buyers into the market sooner, thinking they can avoid paying higher mortgage rates in the future. Perhaps the best news in today’s report was the decline in the months’ supply to 4.8. As a result, homebuilders still have plenty of room to increase both construction and inventories. The median sales price of a new home in April rose 4.1% to $297,300, an increase of 8.3% over the past year, a further sign of short supply. But sales still remain depressed relative to history. We think there are a few reasons for this. First, 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 this report. Third, although we may be starting to see a thaw, financing is still more difficult than it has been in the past. Each of these is beginning to change. Recently, single-family housing starts have showed some signs of picking up relative to multi-family starts, suggesting builders (the quintessential entrepreneur) see a larger appetite for homeownership and single-family home purchases. In other housing news this morning, price gains continue, but at a slower pace. The national Case-Shiller index increased 1% in March and is up 4.1% in the past year compared to a 9% price gain in the year ending in March 2014. Price increases in the past twelve months have been led by San Francisco, Denver, Dallas, Miami, and Tampa. The FHFA index, which focuses on homes financed with conforming mortgages, rose 0.3% in March and is up 5.2% from a year ago. In the year ending in March 2014, the index was up 6.3%. We expect further gains in home prices in 2015, although at a slower pace than previous years.

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Posted on Tuesday, May 26, 2015 @ 12:03 PM • Post Link Share: 
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  New Orders for Durable Goods Declined 0.5% in April
Posted Under: Data Watch • Durable Goods

 
Implications: A solid report on new orders for durable goods today. Although the headline number slipped 0.5% in April, the underlying details of the report were encouraging. The decline in overall orders was due to the very volatile transportation sector, specifically a 6.1% drop in aircraft orders. Orders excluding transportation rose 0.5% in April and were revised up into positive territory for March. Orders for durables had been facing downward pressure from the drop in energy prices since the middle of last year. But, now that energy prices have stopped falling and have somewhat stabilized, orders for durables outside the transportation sector should move higher. For example, orders for machinery showed declines in February and March, but in April, machinery orders were up 3.1%. We think this is a positive sign that the worst is behind for those in the energy sector. The better numbers coming out of the durables sector over the past two months are more confirmation that the drop in Q1 GDP was not the start of a new recession, but caused by temporary factors which have now dissipated, including bad weather, West Coast port strikes, and the aforementioned drop in energy prices. The best piece of news in today’s report was that “core” shipments, which exclude defense and aircraft, rose 0.8% in April and were revised higher in March. If unchanged in May and June, “core” shipments will be up at a 2.9% annual rate in Q2 versus the Q1 average. Plugging these and other recent data into our models, we are forecasting a downward revision to Q1 real GDP growth to a -0.9% annual rate. However, we also expect a rapid rebound in Q2, just like last year. We expect gains in orders for durables in the year ahead. Consumer purchasing power is growing with more jobs and higher incomes, while debt ratios remain very low, leaving room for an upswing in big-ticket spending. Meanwhile, profit margins are 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 today, the Richmond Fed index, which measures mid-Atlantic factory sentiment, rose to +1 in May from -3 in April.

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Posted on Tuesday, May 26, 2015 @ 11:45 AM • Post Link Share: 
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  Inflation: Dormant, Not Dead
Posted Under: Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates
Last month we explained why the dreaded threat of hyperinflation hasn’t materialized, and likely wouldn’t materialize, in spite of the huge expansion of the Federal Reserve’s balance sheet the past several years, including QE1, 2, and 3.

The April inflation report, released Friday, underscored this theme. Consumer prices rose a tepid 0.1% in April and were down 0.2% from a year ago. With the exception of the Panic of 2008 and its immediate aftermath, that year-to-year decline was the lowest reading for inflation in 60 years.

However, this doesn’t mean the US is experiencing deflation, or that inflation is dead. Quite the contrary. We expect inflation to pick up over the next few years, faster and further than most investors anticipate.

To see why, just look at the details of the April report. Yes, the very same report some thought was proof that inflation would never return.

First off, inflation data has been dominated by energy prices, which are down 19.4% from a year ago. Excluding energy, consumer prices are up 1.8% in the past twelve months (the same if we exclude food and energy). But energy prices were not going to fall forever and have already bounced back somewhat. As a result, the underlying trend of consumer prices should move back toward the “ex-energy” measure in the year ahead – to roughly 2%, or more.

But there are other reasons to believe inflation outside the energy sector should pick up. Normally, lower energy prices, because they boost purchasing power outside of energy, lead to an increase in demand for non-energy goods and rising prices in these other sectors.

But the drop in energy prices has been so sharp, consumers appear to be taking their time deciding how to spend the windfall. At the same time, tax receipts have soared which has drained purchasing power from many consumers. This temporary dip in demand has a short-term effect on inflation measures.

But people don’t work for the heck of it; they work to generate purchasing power. And the gains from lower energy prices will eventually help sales in other sectors, which should also lead to higher prices in those sectors as well. We may be seeing signs of this already. In the past three months, “core” prices are up at a 2.6% annual rate and in the past two months they are up 2.9% annualized – the fastest pace in seven years.

In addition, housing costs, which make up almost one-third of overall consumer prices, continue to gradually accelerate. These prices were up 0.3% in 2009, 0.4% in 2010, then 1.9%, 2.2%, 2.5% and 2.9% from 2011 to 2014. In the past twelve months (thru April, they’re up 3%). Meanwhile, with home builders still constructing too few homes to meet population growth and scrappage rates, supply constraints should help generate even faster rent hikes in the year ahead.

The bottom line is that monetary policy is too loose. The Fed has kept short-term rates near zero for more than six years. The last time the unemployment rate was falling to 5.4% (where it is today) during an economic expansion was in August 2004 and the Fed then had short-term rates at 1.5% and heading higher. If you go by the more expansive U-6 definition of the jobless rate (also includes marginally attached and part-time workers), which is 10.8%, it was also there in May 1994, when the fed funds rate was 4.25%.

The current looseness of monetary policy will eventually generate higher inflation. It may not be hyperinflation, but it’s more than many investors are prepared for.

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


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Posted on Tuesday, May 26, 2015 @ 11:30 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 Tuesday, May 26, 2015 @ 8:05 AM • Post Link Share: 
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  The Consumer Price Index Increased 0.1% in April
Posted Under: CPI • Data Watch • Inflation

 
Implications: The CPI told a tale of two prices in April; prices for energy and prices for everything else. Overall consumer prices rose 0.1% in April but have remained flat to slightly negative on a year-over-year basis through the first four months of 2015. This is due to energy prices, which fell 1.3% in April and are down 19.4% from a year ago. However “core” prices, which exclude food and energy, increased 0.3% in April, the largest monthly gain in two years, and are up 1.8% in the past twelve months, 1.9% annualized in the last six months, and 2.6% annualized since January; the fastest 3-month pace since August 2011. In other words, underlying inflation trends are accelerating. With core prices so close to the Fed’s two percent inflation target, policymakers should remain concerned about future increases in inflation, even with overall consumer prices near zero. “Core” consumer prices in April were led higher by housing. Owners’ equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in April, is up 2.8% in the past year, and will be a key source of higher inflation in the year ahead. One surprise in today’s report was a 0.7% increase in prices for medical care, the largest monthly gain since 2007. This rise was almost entirely due to an increase in the prices for hospital services. Some analysts will use the fact that overall prices are down slightly from a year ago to warn about “Deflation.” But true deflation – of the kind we ought to be concerned about – is caused by overly tight monetary policy and price declines that are widespread, not isolated to one sector of the economy. Think of the Great Depression. Meanwhile, food prices were unchanged in April, but are still up 2% in the past 12 months, so if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and “true” inflation is higher. On the earnings front, “real” (inflation-adjusted) average hourly earnings were flat in April, but are up a healthy 2.3% in the past year and have been growing at a faster 3.9% over the past six months, signaling that consumer purchasing power continues to grow. The bottom line is that if it weren’t for the decline in energy prices, inflation would be very close to the Fed’s two percent target. The Fed knows that the decline in energy prices is a temporary factor, and the continued rise in core prices should keep a June rate hike on the table.

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Posted on Friday, May 22, 2015 @ 10:58 AM • Post Link Share: 
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  Existing Home Sales Declined 3.3% in April
Posted Under: Data Watch • Home Sales • Housing

 
Implications: Let's hold off on housing for a moment. The most exciting news today was that initial claims for unemployment insurance came in at 274,000, bringing the four-week moving average to 266,000, the lowest level since April 2000. This, paired with a decline in continuing claims to the lowest level since November 2000, signals greater strength in the labor market and further supports the Fed raising rates sooner rather than later. Sales of existing homes took a breather in April; however this marks the second consecutive month of sales above an annual rate of 5 million units. Sales have now increased year over year for seven months, showing that demand continues to grow. Sales are up 6.1% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 15% a year ago. All-cash buyers are down to 24% of sales from 32% a year ago. As a result, while total sales are up a moderate 6.1% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 18.6%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. The inventory of existing homes increased 10% in April, however it remains 0.9% lower than a year ago. Lack of supply is one of the main drivers behind continuing price increases and houses on the market selling faster in April (39 days) than at any time since July 2013 (32 days). The median sales price of an existing home rose to $219,400 in April, up 8.9% from a year ago. In other news this morning, the Philadelphia Fed index, a measure of strength in East Coast manufacturing, declined to 6.7 in May versus 7.5 in April, signaling continued Plow Horse growth in that sector.

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Posted on Thursday, May 21, 2015 @ 11:47 AM • Post Link Share: 
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  Brian Wesbury on Fox Business: Taxes to Blame for Consumers Not Spending
Posted Under: Government • Retail Sales • Video • Fed Reserve • Interest Rates • Taxes • TV • Fox Business
 
Posted on Thursday, May 21, 2015 @ 10:53 AM • Post Link Share: 
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  QE Did Not Build the iWatch
Posted Under: Bullish • Employment • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Bonds • Stocks • Wesbury 101
 
Posted on Tuesday, May 19, 2015 @ 12:33 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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Housing Starts Surged 20.2% in April
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