 | Housing starts rose 2.6% in April to 717,000 units at an annual rate, well above consensus |
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Implications: The recovery in home building is definitely underway. Housing starts rose 2.6% in April to 717,000 units at an annual rate and are up 29.9% from a year ago. In addition, March housing starts were revised substantially higher from 654,000 to 699,000 units at an annual rate. The total number of homes under construction (started, but not yet finished) increased for the eighth straight month, the first time this has happened since 2004-05. Permits to build homes, although declining 7.0% in April, are up 23.7% from a year ago. Some people may see the April decline as a sign of weakness, but this weakness was all focused in multi-family permits which fell 20.8% in April after a 32.3% rise in March. Single-family permits actually rose 1.9% in April and are at the second highest level in two years, signaling continued gains in home building in the coming year. It looks like the second quarter of 2012 will be the fifth straight quarter where home building boosts real GDP. Multi-family activity – both starts and permits – has been leading the way and we expect that to continue, particularly now that a legal settlement means more foreclosures can move forward. Some people occupying homes they have not been paying for will now have to go elsewhere and rent. Based on population growth and “scrappage,” housing starts should eventually rise to about 1.5 million units per year (probably by 2016), which means the recovery in home building is still very young. For more on the housing market, please see our research report (link).
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| Posted on Wednesday, May 16, 2012 @ 10:32 AM • Post Link |
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| | Industrial production increased 1.1% in April, easily beating consensus expected gain of 0.6% |
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Implications: A great report today on the factory sector. Industrial production rose 1.1% in April, easily beating the consensus expected gain of 0.6%, as both mining and utilities bounced back in April. The manufacturing sector also gained 0.5% in April, and was up 0.2% including downward revisions to prior months. The data we watch most closely is manufacturing production ex-autos. This figure rose 0.3% in April, and has risen in 8 of the last 9 months. That’s a very good track record, given that manufacturing ex-autos usually falls three or four times a year even during normal economic expansions. The fact that it hasn’t over the past few years is a testament to the current strength in the manufacturing sector. Higher production is making factories use higher levels of capacity. Utilization in manufacturing is now at 77.9%, which is higher than the 20-year average of 77.7%. Overall utilization in the factory sector rose to 79.2%, the highest level since April 2008. As capacity use moves higher, firms have an increasing incentive to invest in more plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments.
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| Posted on Wednesday, May 16, 2012 @ 10:09 AM • Post Link |
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| | April Consumer Price Index (CPI) unchanged in April, up 2.3% versus a year ago |
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Implications: Consumer prices were unchanged in April, exactly as the consensus expected. However, the lack of change in overall prices masked more worrisome details in the report. Energy prices fell 1.7% in April, reflecting what we all saw when we went to gas stations last month. But excluding energy, prices were up across the board. “Core” inflation, which excludes food and energy, was up 0.2% in April and is up 2.3% from a year ago, the largest gain since September 2008. This is already above the Federal Reserve’s target of 2%. Meanwhile, monetary policy is very loose and housing costs (which are measured by rents, not asset values) are rising. Owners’ equivalent rent was up 0.2% in April and is up 2.1% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. With loose monetary policy and housing costs accelerating, it’s hard to see core inflation getting back down to the Fed’s 2% target anytime soon. On the earnings front, “real” (inflation-adjusted) wages per hour were flat in April. Although these earnings are down 0.5% from a year ago, the number of hours worked is up 2.1%, giving consumers more purchasing power. In other news this morning, the Empire State index, a measure of manufacturing in New York, increased to +17.1 in May from +6.6 in April, easily beating the consensus expected gain to +9.0. In other words, the factory sector continues to grow.
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| Posted on Tuesday, May 15, 2012 @ 10:49 AM • Post Link |
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| | Retail sales increased 0.1% in April, up 6.4% versus a year ago |
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Implications: The headline numbers for retail sales in April were tepid, with overall sales and sales excluding autos up only 0.1% each. However, the details of the report were much stronger than the headlines. Stripping out the most volatile parts of the report – autos, building materials, and gas – sales were up 0.4% in April and 0.5% including upward revisions for prior months. Even including those volatile categories, sales increased for the 21st time in the past 22 months, a remarkably consistent upward trend. Compared to a year ago, retail sales are up 6.4%, but the growth has accelerated lately, up at a 7.7% annual rate in the past three months. Notice that all these gains continue to outstrip inflation. Adjusted for the consumer price index, retail sales are up a robust 4% in the past year. Upward revisions to retail sales for prior months suggest real consumer spending (including services) increased at a 3% annual rate in Q1. With two more months to go, it looks like real consumer spending is growing at about a 2.5% rate in Q2. Mixing this data with today’s report on inventories suggests later this month Q1 real GDP will show a downward revision to a growth rate of 1.8%. The original report for Q1 had a growth rate of 2.2%, but, since then, inventories have been revised downward. Although these negative revisions will probably grab some headlines, it’s important to remember that lower inventories today mean faster production growth in future quarters. In other news this morning, the NAHB Homebuilders index, a measure of confidence, increased to 29 in May from 24 in April. Confidence among homebuilders is now the highest in five years, another sign that the recovery in housing is gaining traction.
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| Posted on Tuesday, May 15, 2012 @ 10:38 AM • Post Link |
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| | Let's Stress Test Governments |
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Several years ago, Treasury Secretary John Snow was testifying to Congress about the federal budget. He worked for President Bush and, after a long career of opposing deficits, was trying to justify a deficit of about 3% of GDP.
Representative Barney Frank was incredulous. He asked Snow how he could now justify deficits. Frank then came up with a theory: He said Snow was opposed to deficits when the president was a Democrat, but didn’t care about them when the president was a Republican.
Frank was being sarcastic, but he had a good point. Nonetheless, his theory is also true when the roles are reversed.
It now seems that deficits don’t matter all over again. Paul Krugman, a leading apostle of fiscal liberalism, consistently denounced President Bush for deficits. Now he is aggressively arguing against austerity around the world and asking for a substantial boost in federal spending despite the largest peacetime deficits in US history. He doesn’t just say “deficits don’t matter,” he suggests that “deficits are necessary.”
If you can’t see the political nature of all this, you are not looking. Barney Frank was certainly right – it depends on which side is in power.
No matter who is in office, our view has been consistent. Deficits themselves don’t matter. Ultimately, what matters is how much of the nation’s resources are being spent by the government. Spending is the key…it is what crowds out the private sector.
The deficit itself is huge, but interest rates are very low today, emerging market countries have a huge appetite for US debt to back their own expanding currencies, the US has a massive asset base ($150 trillion in the private sector alone), and a budget which freezes spending could eradicate the deficit in five or six years.
In other words, right now the deficit itself is not the problem. It is, however, indicative of the problem – that leaders (of both political parties) cannot control their spending habits. This is not about the economy. If spending created wealth, Greece, Italy, Spain, or even California, would be booming. But they aren’t. They are falling apart.
California recently announced it’s looking at a $16 billion deficit, not the $9 billion it forecasted in January. The new projected deficit is about 18% of revenues. California already has some of the highest tax rates in the country. It’s not taxes or the deficit that matters, it’s the spending.
And the problems go deeper than just money. Big government tends to erode the character traits – motivation, thrift, self-reliance – that make progress and economic growth possible. The bottom line is that the last thing the economy needs now is more government spending.
In light of these budget issues, it’s interesting that a recent series of bad trades at JP Morgan generated a current loss of $2 billion for a company that earned about $5 billion last quarter. The stress tests forced on big banks suggested that losses like this could be absorbed and they were right.
But the federal government is running a deficit of more than $3 billion per day, European countries are going bankrupt and California is falling apart financially.
Instead of arguing about deficits, why don’t we stress test governments? And then get spending down to fix the problem.
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| Posted on Monday, May 14, 2012 @ 12:03 PM • Post Link |
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| | Is the unemployment rate lower than it should be? |
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Is the unemployment rate lower than it should be? Ben Bernanke is incredulous; He argues that unemployment has fallen more than GDP suggests it should have. Others suggest that declines in the labor force are artificially reducing the unemployment rate.
So, while no one denies that private sector jobs have grown for 26 consecutive months, they argue that this doesn’t matter because the labor force participation rate (LFPR) has fallen to 63.6%, its lowest reading since 1981. This low reading is a combination of two things – a flattening in the labor force and a growing population. If the LFPR were at the pre-Obama, or pre-recession peak, the unemployment rate would be significantly higher, possibly 11%.
While we will not argue with the math – the unemployment rate really would be higher if the labor force were bigger – we do argue with the conclusion. The US economy is much better than an unemployment rate of 11% would suggest and the decline in the LFPR is not a “new” development.
The LPFR has been trending down since 2000 (see chart). There are three reasons for this. First, the population is aging and as it does a smaller percent of the population is in the workforce. Second, the peak in 2000 was partly due to the dot.com bubble, but also a huge reduction in government spending relative to the economy. Third, the female participation rate reached a peak after climbing for more than 30 years.
The most important reason is the aging population. In 1975, the total US population grew by 1%, while the population of those 65+ years old grew by 2.9%. In 1999, the 65-years-or-older age group grew just 0.5%. Since then the population has been aging rapidly and in 2012 (65 years after 1947), the 65+ cohort will grow 3.5%, while the population grows just 0.9%.
As the chart shows, this trend in the number of people 65+ years old is a mirror image of the labor force participation rate. The participation rate is falling as the number of people who reach retirement age rises. It’s not a mystery. Moreover, because people are living longer these days, the share of that older population continues to increase relative to historical norms. In other words, all this fretting about the LFPR is overdone. The population is aging…that’s the number one thing driving this data.
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| Posted on Friday, May 11, 2012 @ 1:50 PM • Post Link |
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| | Producer Price Index (PPI) declined 0.2% in April |
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Implications: Due to falling energy prices, overall producer prices were down 0.2% in April, coming in lower than the consensus expected. That’s good news for companies making purchases, but no justification for another round of quantitative easing. “Core” prices, which exclude food and energy, and which the Federal Reserve claims are more important than the overall number, were up 0.2% in April. The increase in core prices was led by pharmaceutical drugs which accounted for about a quarter of the “core” PPI increase. Core prices are now up 2.7% from last year, which is faster than the overall PPI. In the past three months, the core PPI is up at a 2.5% annual rate while overall prices are up at a 0.6% rate. We don’t expect that to last. Due to loose monetary policy, these inflation measures will head higher later this year. Taking a look further down the producer pipeline, core intermediate goods prices are accelerating, up at a 7.5% annual rate in the past three months, although core crude prices are down at a 3.7% annual rate in the same timeframe. Be careful of the stories you may read in the coming weeks about how the Federal Reserve was right all along and that inflation is not a problem. By later this year, the conventional wisdom will realize this was temporary.
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| Posted on Friday, May 11, 2012 @ 10:10 AM • Post Link |
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| | Trade deficit in goods and services came in at $51.8 billion in March |
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Implications: Imports and exports both rose to new record highs in March, but imports increased more than exports, so the trade deficit expanded. Not only was the level of imports the highest on record, but the increase in imports was the most for any month on record, in part a result of a bounce back in shipments from China following Lunar New Year celebrations. The best news in today’s report was that exports to Europe, including the Euro area, hit a new all-time record high. (This is true even if we exclude Germany.) The large depreciation in the exchange value of the dollar in the past decade means the US is a much more attractive place from which to export. That’s why many foreign automakers are increasingly using the US as an export hub. Because productivity is so high, unit labor costs are low in the US relative to other advanced economies. Nonetheless, reviving US consumers still like imported goods, which will boost imports. On net, trade was a neutral factor for real GDP in Q1, but should be a slight drag on growth in Q2. In other trade news today, import and export prices reflect the recent lull in inflation. Import prices were down 0.5% in April and are up only 0.5% from a year ago. Excluding oil, import prices were unchanged in April and are up 0.7% in the past year. Prices for exports are similarly quiet, with overall prices up 0.7% in the past year and 1.2% excluding agriculture. However, given the stance of monetary policy, we expect these products to show more inflation later this year. In the labor market, new claims for unemployment insurance dipped 1,000 last week to 367,000. Continuing claims for regular state benefits fell 61,000 to 3.23 million, the lowest since July 2008. These figures suggest faster payroll growth in May then in March/April.
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| Posted on Thursday, May 10, 2012 @ 9:58 AM • Post Link |
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| | Ahead of the Senate's Vote on Student Loans |
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| Posted on Wednesday, May 09, 2012 @ 10:39 AM • Post Link |
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| | Dead Cat Bounce for Socialism |
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The Social Welfare State is dying. Like the Berlin Wall and the Iron Curtain, the cradle-to-grave social welfare experiment must eventually collapse. A system of taxing work and profits, while subsidizing leisure, sloth, and retirement, must eventually fail.
The end of the Social Welfare State is painful for many, and it will not end quickly or quietly as the elections of this past weekend prove. Francois Hollande, a Socialist, was elected president of France, while Greece saw a surge in votes for “anti-bailout” political parties in parliament.
These elections are described as blows against “austerity.” They are also seen as anti-German. Germany resisted bailouts and pushed spending cuts.
In theory, a rejection of austerity could be a good thing. Some people include tax hikes in the concept of austerity and avoiding tax hikes would be a good thing for Europe. France has a top income tax rate of 45%, a wealth tax of 0.5% and a Value Added Tax (VAT) of 21.2%. Greece has a top income tax rate of 45% and a VAT of 23%. These burdensome tax rates hinder growth, investment and work effort and still don’t cover all the spending.
To solve the deficit problem, Francois Hollande wants to raise France’s top income tax rate to 75%. Greece’s “anti-bailout” parties, mostly on the left, also want higher taxes on the upscale, plus defense cuts. The Greek military helps break up domestic riots, so this is a self-serving demand.
So, in reality, French and Greek rejection of austerity does not mean policies that would enhance long term economic growth. Instead, it means they want to temporarily pull the wool over their own eyes, resist the obvious need to reduce government spending, and just hope for the best.
This chapter of the French story will not end well. The country has already gone much further along the road to socialism than the US, with general government spending equal to about 56% of GDP, very near the highest of any advanced or emerging market in the world. Greece, at 49%, is not far behind. Yet, voters are doubling down.
Markets already sense the problems this will cause. The Euro is weaker and stock prices are down around the globe. Many fear that pressure on the European Central Bank to buy more Euro debt and help avoid austerity will create inflation. This is happening despite the fact that Hollande was a huge favorite to win and this should have been built into the market already. It was the ease of victory, combined with the vote in Greece that made the day feel even more anti-market.
But even easy money would ultimately be a dead end, leading to higher interest rates and less capital investment. Anyway, the Germans would never go along with a euro as weak and inflationary as many in Greece and France want. And Germany has huge leverage: if the ECB gets too loose, only Germany could leave the euro, go back to its old currency, and not get hammered by financial markets.
In the end, this is a battle the socialists are simply not going to win. Greece is too small to be convincing; France is about to show the world what doesn’t work.
With any luck, after dabbling in folly, France will reverse course quickly. Maybe Hollande himself, not an unintelligent man, will realize the mistake of fighting the end of the social welfare state. The citizens of Europe who think austerity is unnecessary are about to get a lesson in reality. In the end the only way out is more capitalism.
And this brings us to our most important point. Financial markets in the US moved abruptly to a “risk off” trade as these election results were finalized. Stocks sold off and bonds rallied. But those who think these elections will hurt the US are wrong. The end of the social welfare state in Europe is a precursor for the US. It’s a Dead Cat Bounce for Socialism.
Click here for a PDF version.
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| Posted on Monday, May 07, 2012 @ 9:54 AM • Post Link |
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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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First Trust Economics Blog
"The Antidote to Conventional Wisdom"
Chief Economist, Brian S. Wesbury
The First Trust Economics Blog is the antidote to conventional wisdom, dedicated to helping readers understand the complexity of modern economics from a supply-side, free market perspective.
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