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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  The Two Americas
Posted Under: Video • Wesbury 101
 
Posted on Friday, April 17, 2015 @ 10:56 AM • Post Link Share: 
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  The Consumer Price Index increased 0.2% in March
Posted Under: CPI • Data Watch • Inflation

 
Implications: Add another check to the list of data points suggesting the economy is ready for the Fed to lift rates in June. Almost every category showed rising prices for the month, but the largest contributors were energy and housing. “Core” prices, which exclude food and energy, increased 0.2% in March, the largest (unrounded) monthly gain since May of last year. With “core” prices up 1.8% in the past twelve months, the Federal Reserve should remain concerned about future increases in inflation even though overall consumer prices are slightly negative from a year ago. The reason overall consumer prices are depressed is that energy prices have dropped 18.3% in the past year. Excluding energy, prices are up 1.8%, very close to the Fed’s 2% target for inflation. 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. Food prices held back inflation in March, as a bountiful growing season has translated to falling prices for fruits and vegetables. However, food prices are still up 2.3% 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. In addition, housing costs are going up. Owners’ equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in March, is up 2.7% in the past year, and will be a key source of higher inflation in the year ahead. Finally, “real” (inflation-adjusted) average hourly earnings rose 0.1% in March. These earning are up a healthy 2.2% in the past year and have been growing at a faster 4.3% over the past six months, signaling that consumer purchasing power continues to grow. If it weren’t for the decline in energy prices, inflation would be very close to the Fed’s two percent target. And with oil prices stabilized and moving higher in April, the Fed should get the confirmation they need in next month's report to justify a first rate hike in June.

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Posted on Friday, April 17, 2015 @ 10:48 AM • Post Link Share: 
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  Housing Starts Increased 2.0% in March
Posted Under: Data Watch • Home Starts • Housing

 
Implications: After a huge weather-related drop in February, housing starts rebounded in March but not nearly as much as the consensus expected. In fact, March housing starts came in below the lowest forecast by any economics group. The breakdown of home building by region suggests there was a bounce back from the weather: Starts in the Northeast increased at the fastest pace on record in March (going back to 1959), while the Midwest saw a 31.3% gain. Instead, this month the weakness was in the South and West. It’s not clear why these two particular regions had a slowdown in housing starts, but regional figures are very volatile from month to month and it is most likely just statistical noise. Other data suggest housing starts will rebound more sharply in the months ahead. The total number of homes under construction, (started, but not yet finished) increased 0.6% in March and are up 16.5% versus a year ago. In other words, homebuilders were busy in March, just not breaking ground as fast as most economists expected. Meanwhile, single-family permits for future building, which are relatively stable month to month, rose 2.1% in March and are up 4.1 % from a year ago. And yesterday, the NAHB index, which measures confidence among home builders, rose to 56 in April from 52 in March. Readings greater than 50 mean more respondents said conditions were good than bad, which bodes well for future home building. Based on population growth and “scrappage,” housing starts should rise to about 1.5 million units per year over the next couple of years, so a great deal of the recovery in home building is still ahead of us. A pace of less than 1.5 million means the number of housing units per person is falling. We don’t think that’s likely to continue when payrolls are increasing more than three million per year and wages are starting to accelerate. Supporting this case, in other news this morning, initial claims for unemployment insurance rose 12,000 last week to 294,000. The four-week moving average is 283,000 and this is now the 6th consecutive week below 300,000. Continuing claims for regular state benefits declined 40,000 to 2.27 million, the lowest level for any week since 2000. It’s still early, but our models are tracking a payroll gain of 285,000 in April, a very solid month. On the manufacturing front, the Philadelphia Fed index, which measures factory sentiment in that region, increased to +7.5 in April from +5.0 in March, offsetting yesterday’s report of declining factory sentiment in New York.

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Posted on Thursday, April 16, 2015 @ 9:48 AM • Post Link Share: 
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  Industrial Production Declined 0.6% in March
Posted Under: Data Watch • Industrial Production - Cap Utilization

 
Implications: Outside the auto sector, industrial production was soft in March, with overall production declining 0.6%. However, most of the weakness was due to two temporary factors -- weather and the sharp drop in oil prices. Utility output slumped 5.9% in March (the largest decline since January 2006) as weather returned to normal after the coldest February for the most people since 1979. Meanwhile, the rapid decline in oil prices and the commensurate drop in oil production caused the index for “oil & gas drilling and servicing” to decline 17.5% in March. This pulled down the mining component of industrial production, which includes oil and gas exploration, by 0.7%. The good news is that energy prices look to have stabilized, so mining production should soon bottom out at a lower level. And if energy prices bounce at all, mining will bounce as well. Taking out mining and utilities gives us manufacturing, which rose 0.1% as auto output bounced back sharply while the rest of manufacturing fell about 0.1%. Lingering parts shortages due to the West Coast port strikes that ended in late February may have hampered manufacturing outside the auto sector in March. If so, that's another reason to expect a bounce in production in the months ahead as supply channels improve. One continuing bright spot is high-tech manufacturing, which increased 0.3% in March and is up 4.0% from a year ago. The fundamentals for production growth remain in place. Companies are sitting on huge cash reserves and profits are close to record highs. In addition, at 78.4%, capacity utilization remains close to the average of 78.6% over the past twenty years, so further gains in production will give companies an incentive to build out plants and buy equipment. In other manufacturing news today, the Empire State index, a measure of manufacturing sentiment in New York, came in at a surprisingly low -1.2 in April versus 6.9 in March. We suspect that's an aberration, but we will be closely watching other regional gauges on the manufacturing sector.

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Posted on Wednesday, April 15, 2015 @ 11:03 AM • Post Link Share: 
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  Retail Sales Increased 0.9% in March
Posted Under: Data Watch • Retail Sales

 
Implications: After falling for three consecutive months, retail sales rebounded in March, as the harsh cold winter finally subsided. Sales rose 0.9% in March led by auto sales, which rose 2.7% to a new record high. The spring thaw also seemed to generate more home projects; building materials roared back in March, rising at the fastest pace since July 2013. These sectors, along with gas station sales, can be volatile from month to month. Taking out these three categories gives us “core” retail sales, which were up 0.4% in March. Still, even with the March gain “core” sales were only up at a 0.2% annual rate in the first quarter. As a result, we estimate that real (inflation-adjusted) consumer spending (on goods and services combined) rose at a 1.6% annual rate. This is consistent with our forecast that real GDP grew at a 1% annual rate in Q1. So, like last year, unusually harsh winter weather will hold down growth in Q1. And on top of the weather, some production was likely curtailed by the west coast port strikes (which ended in late February) as well as a drop in drilling activity. Although some analysts may look at the first quarter’s weaker data as a sign that the Federal Reserve should not lift rates any time soon, we strongly disagree. The factors affecting economic growth in Q1 were all temporary and growth will rebound in Q2 and beyond. We think the Fed is well aware of this and will stay on track to raise rates in June. We expect a strong rebound in consumer spending this spring as weather patterns return to normal and consumers unleash more of the savings they’ve accumulated due to lower gas prices. Remember every one cent decline in the price of gas saves consumers about $3.7 million per day. So, right now, consumers are spending $296 million less a day on gas versus six months ago. Look for those savings to generate higher sales in the months ahead.

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Posted on Tuesday, April 14, 2015 @ 10:47 AM • Post Link Share: 
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  The Producer Price Index Increased 0.2% in March
Posted Under: Data Watch • PPI

 
Implications: After falling four months in a row, producer prices finally moved higher in March. The key reason was that energy prices finally moved higher, the first time that’s happened since mid-2014. In the meantime, energy prices are still down 21.7% versus a year ago, so it shouldn’t be any surprise that overall producer prices are still down 0.8% from last year. Food prices are also down 4.4% from a year ago. Outside of food and energy, prices are up from a year ago, but not much. Service prices have increased 0.9% while “core” goods, which exclude food and energy, are up 0.6%. This suggests that as oil prices stabilize the overall producer price index will move higher. Outside of the energy sector, price increases in March were led by autos on the goods side and both portfolio management and loan services in the service sector. The other reason to suspect higher inflation readings in the year ahead is that monetary policy is loose and will remain loose even after the Federal Reserve starts raising short-term interest rates. Counterintuitively, higher short-term rates may boost economic growth. Monetary velocity – how quickly the money supply circulates through the economy – should pick up as potential borrowers hurry up their plans to avoid even higher interest rates further down the road. In other words, the Plow Horse economy won’t stop when the Fed shifts gears. In the meantime, prices further up the production pipeline remain subdued. Prices for intermediate processed goods are down 6.6% in the past year while prices for unprocessed goods are down 26.6%. Look for these figures to turn up soon.

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Posted on Tuesday, April 14, 2015 @ 10:33 AM • Post Link Share: 
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  June Rate Hike Still on Tap
Posted Under: Employment • Government • Monday Morning Outlook • Fed Reserve • Interest Rates
According to a recent survey by the Wall Street Journal, most economists think a June rate hike is unlikely. In fact, four times as many think the Federal Reserve won’t start raising rates until September or later as currently think the Fed will start in June.

We’re in the minority and still think the first hike arrives in June. The Fed minutes show that the consensus at the Fed remains dependent on the data. (Expect to hear that over and over as long as Janet Yellen leads the central bank.) In the past couple of months the data have been weak. But, in our view, those figures have been soft due to unusually harsh February weather, prolonged port strikes on the West Coast, and falling oil prices that have hurt the oil patch in the near-term, but which will help other sectors over time.

More timely economic figures have already turned back up, thanks to a combination of more normal weather patterns, the end of the port strikes, and oil prices that appear to have leveled off. Sales of cars and light trucks spiked 5.5% in March. As a result, it looks to us like overall retail sales will be up a strong 1.2% for the month.

Meanwhile, the four-week average of new unemployment claims has hit the lowest level since the peak of the Internet boom in Spring 2000. The four-week average for continuing claims is the lowest since 2001. It’s still early, but these reports suggest a steep rebound in job creation in March to somewhere north of 250,000. So if the Fed is data dependent, it should have plenty of reports over the two months to justify starting rate hikes in June.

In a recent speech, Bill Dudley, who along with Fed Vice-Chair Stanley Fischer is part of Yellen’s inner circle, noted that real GDP is up at a 2.7% annual rate in the past two years and thinks, despite some temporary weakness in Q1, the 2.7% pace is the underlying trend for the economy.

More importantly, Dudley said hiking rates doesn't mean the Fed is "tight" and normalizing policy "would be a cause of celebration” and a “positive signal” for the economy. In addition, Dudley said the public is paying too much attention to the timing of the first rate hike and not enough to how quickly the Fed will lift rates once it gets going.

These are not the kinds of things he would say if rate hikes were still a long way off; they’re exactly the kind of thing he’d say when preparing the markets for rate hikes a wee bit earlier than they now anticipate.

A rate hike in June is not a slam dunk. Some at the Fed will oppose it, even if they don’t dissent publicly. But we still believe the most likely outcome is a pick-up in growth, a first hike in June, and only about 100 basis points of rate hikes in the following twelve months, even slower than the gradual series of rate hikes in the 1990s and 2000s.

If anything, the first year of rate hikes will be too slow. A few years from now, investors and analysts will look back at the angst over the first rate hike and wonder what all the fuss was about.

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

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Posted on Monday, April 13, 2015 @ 10:46 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 13, 2015 @ 7:48 AM • Post Link Share: 
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  The Triple Mandate
Posted Under: Employment • Government • Inflation • Markets • Fed Reserve • Interest Rates
 
Posted on Friday, April 10, 2015 @ 1:41 PM • 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 06, 2015 @ 11:53 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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The ISM Non-Manufacturing Index Declined to 56.5 in March
Don't "Dread" The Plow Horse
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