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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Expect Strong Christmas Spending
Posted Under: Employment • Monday Morning Outlook • Retail Sales
We are watching Christmas season sales data very carefully, but we also warn investors that the early data are not very useful. No matter what initial readings show, the underlying fundamentals look relatively strong.

First, nonfarm payrolls are up 2.8 million in the past twelve months (through October), the strongest one-year increase leading up to a holiday shopping season since Christmas 1999.

Second, we're seeing early signs of accelerating wage growth. Average hourly earnings have risen 2.5% in the past year, the fastest pace so far in the current Plow Horse economic expansion.

And third, consumers' financial obligations are still hovering near the lowest share of income since the early 1980s. These are the payments consumers need to make month-in, month-out based on what they've already bought, including mortgage payments, rent, car payments, and debt service on student loans, credit cards, and other lending arrangements.

These are the same three key reasons why auto sales have been so strong lately. We expect November auto sales to be 18+ million, on an annualized basis, for a record third month in a row. Strong fundamentals beat cash for clunkers every time.

Some analysts bemoan a decline in credit quality in auto lending, saying the surge in auto sales is due to overly easy credit. For example, the total balance on seriously delinquent auto loans (90+ days in arrears) is up 20% in the past year, according to the NY Federal Reserve. That's an increase of $6 billion in serious delinquencies. Meanwhile, seriously delinquent student loans are up $14 billion in the past year.

But all serious delinquencies (including mortgage debt, home equity loans, auto loans, student debt, and credit cards, combined) are down $50 billion from a year ago. In other words, the fear-mongers focus on numbers showing tough news, while ignoring the major trend in declining debt delinquency among consumers.

The early surveys on Christmas season spending appear as useful as ever, which is to say not much at all.

Last year, the National Retail Federation said Thanksgiving weekend sales were down 11%, but overall retail sales ended up rising 4% for November/December 2014 versus the same two months in 2013. This year, the NRF says sales should be up 3.7% from a year ago.

Shoppertrak, a survey of 12,000 brick and mortar stores, said Thanksgiving and Black Friday sales were down this year, but noted that sales have crept much earlier into November. We'd add that sales are also more likely to creep deeper into the holiday season, as internet shopping grows more competitive every year.

In the end, don't get caught up in following the headlines on how sales are going so far. If you focus on the fundamentals, like jobs and wages, you're likely to get much closer to the truth.

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

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Posted on Monday, November 30, 2015 @ 10:54 AM • Post Link Share: 
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  New Single-Family Home Sales Increased 10.7% in October
Posted Under: Data Watch • Home Sales • Housing

Implications: New home sales posted a healthy gain in October, rebounding sharply from September's steep decline. Sales increased 10.7% in October to a 495,000 annual rate and are up 4.9% in the past year. The increased pace of sales more than offset a 3,000 unit rise in inventories, so the months' supply of new homes – how long it would take to sell all the homes in inventory at the current sales pace – fell to 5.5 months. That's right in line with the 5.6 months average over the past 20 years. It's important to remember that, even with October's jump in sales, the current pace of 495,000 new homes sold is still low relative to history. Given population growth rates, sales should roughly double to about 900,000 over the next few years. We think a few reasons have contributed to the slow rebound in the pace of sales. 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 are seeing a thaw, financing is still more difficult than it has been in the past. The trend is what matters, though, and the trend in sales has been up and should stay that way in the year ahead. Although some analysts may jump on the weak price data in today's report, with median prices down 6% from a year ago, that reflects a shift in the "mix" of homes being sold, with sales growing fastest in lower-priced categories. We think the Case-Shiller and FHFA indexes are much better measures of home price trends, as they are insulated from the shift in the mix of homes sold. And this morning's FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.8% in September and is up 6.1% from a year ago. This report sends the same signal as yesterday's Case-Shiller index, which suggests that price gains are (modestly) accelerating again, due in part to a lack of inventory in the housing sector. As a result, look for home construction to accelerate in 2016.

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Posted on Wednesday, November 25, 2015 @ 11:44 AM • Post Link Share: 
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  Personal Income Increased 0.4% in October
Posted Under: Data Watch • PIC

Implications: Workers are earning robust gains in income while also boosting their spending, but not as fast. Personal income rose 0.4% in October, matching consensus expectations, and is up 4.6% in the past year. Meanwhile, despite the surge in auto sales (which likely continued in November), consumer spending is up a lukewarm 2.9% from a year ago. In other words, the increase in consumer spending in the past year isn't due to some sort of unsustainable credit binge. Instead, it simply reflects higher purchasing power by American workers. They're producing more, earning more, and spending more as a result. The main driver of the income gains has been private-sector wages and salaries, which were up 0.6% in October and are up 5.3% from a year ago. The only bad news in this report – and sadly it's nothing new – was the continued failure to make progress against government redistribution. Although unemployment compensation is hovering around the lowest levels since 2007, overall government transfers to persons are up 4.9% in the past year. Before the Panic of 2008, government transfers – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp – were roughly 14% of income. In early 2010, they peaked at 18.5%. Now they're around 17%, but not falling any further. Redistribution hurts growth because it shifts resources away from productive ventures. This is why we have a Plow Horse economy, not a Race Horse economy. Moreover, the budget deal on Capitol Hill, although warmly received by establishment politicians and their cheerleaders in the media, suggests no progress against redistribution until at least 2017. On the inflation front, the PCE deflator, the Fed's favorite measure, rose 0.1% in October. Although it's only up 0.2% from a year ago, it continues to be held down by falling energy prices. The "core" PCE deflator, which excludes food and energy, is up 1.3% from a year ago. That's also below the Fed's 2% inflation target, but we expect some acceleration in the coming year. As soon as energy prices stop falling, inflation is going to pick up, supporting the case for starting rate hikes in December. In other news today, new claims for unemployment benefits fell 12,000 last week to 260,000. Continuing claims rose 34,000 to 2.21 million. It's still very early, but our models suggest the first report on November payrolls will show a nonfarm gain of 172,000 before being revised up in later months.

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Posted on Wednesday, November 25, 2015 @ 10:50 AM • Post Link Share: 
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  New Orders for Durable Goods Increased 3.0% in October
Posted Under: Data Watch • Durable Goods

Implications: A strong headline number on orders for durable goods in October, but most of the action was in the volatile transportation sector. New orders for durable goods rose 3%, driven mainly by a sharp rebound in orders for civilian aircraft after a big drop in September. However, orders for industrial machinery increased 1.6% while orders for computers and electronics increased 1.8%, each the second largest gain for those categories in the past year. As a result, orders excluding the volatile transportation sector were up a respectable 0.5% in October. The government doesn't release specific data by sector until next week, but the gain in machinery suggests the decline in orders for drilling and mining equipment, due to lower energy prices, may be nearing an end. As of September, orders for "mining, oil field, and gas field machinery" were down more than 50% from a year ago. We think oil prices will average at higher levels during the next several years, so the impact of falling energy prices should be coming to an end soon, if it hasn't already. Another issue holding back orders is that they are measured in dollar value, so if the price of investment goods is falling, the "real" (inflation-adjusted) value of orders may still be rising. In addition, although we lack hard data at this point, we wonder if more firms are using 3D printing to make their own products in-house, which would cut orders placed with other businesses. "Core" shipments, which exclude defense and aircraft, declined 0.4% in October. It's still very early but plugging these and other recent data into our models, we are forecasting real GDP grew at a 2% annual rate in Q4. Expect stronger 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. Meanwhile, profit margins are high and corporate balance sheets are loaded with cash. The Plow Horse Economy continues to move forward, just not by leaps and bounds.
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Posted on Wednesday, November 25, 2015 @ 10:35 AM • Post Link Share: 
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  Real GDP was Revised to a 2.1% Annual Growth Rate in Q3
Posted Under: Data Watch • GDP

Implications:  Good news and bad news in today's GDP report, which is exactly what we should expect given the Plow Horse Economy.  The good news is obvious: real GDP growth in the third quarter was revised up to a more respectable 2.1% annual rate from a previous estimate of 1.5%.  In addition, business investment in equipment grew at the fastest pace in a year, despite being weighed down by fewer oil rigs and drilling equipment.  The pick-up in equipment should help boost future productivity growth.  However, the biggest driver of the upward GDP revision was inventories, which can't be relied on for long-term growth.  In addition, corporate profits declined 1.1% in the third quarter and are down 4.7% from a year ago.  The drop in profits was due to slower growth in advanced economies abroad and the stronger dollar, which pushed down profits earned abroad; profits earned domestically grew in Q3.  In terms of monetary policy, today's report continues to flash green for the Federal Reserve to start raising rates in December.  Nominal GDP (real growth plus inflation) was revised up to a 3.4% annual growth rate in Q3 from a prior estimate of 2.7%.  Nominal GDP is up 3.1% from a year ago and up at a 3.9% annual rate in the past two years.  These figures show the Fed's target of essentially zero for short-term interest rates is too low and monetary policy is too loose.  On the housing front, the national Case-Shiller index, which measures prices across the country, increased 0.8% in September and is up 4.9% from a year ago.  The largest gains in the past year have been in San Francisco, Denver, Portland, and Dallas.  Given that national average home prices have already reached fair value, we expect the gains in home prices to continue, but at a slower pace over the next couple of years.  In other news this morning, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, fell to -3 in November from -1 in October.  Plugging this into our models suggests the national ISM index will be up in November, but only modestly. 

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Posted on Tuesday, November 24, 2015 @ 11:04 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, November 23, 2015 @ 1:22 PM • Post Link Share: 
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  Existing Home Sales Declined 3.4% in October
Posted Under: Data Watch • Home Sales • Housing

Implications: Existing home sales came in weaker than expected in October, but remained at healthy pace despite buyers having limited options in the existing home market. Sales of previously owned homes fell to a 5.36 million annual rate in October, a 3.4% decline, but are still up 3.9% from a year ago. We do not expect this month's slowdown to become a new normal. Housing data are volatile from month to month and we expect the previous positive trend to reassert itself next month. All-cash sales are down 7.7% from a year ago while sales that require a mortgage are up 8.1% over the same period. The gain in mortgage-financed sales suggests a long-overdue thaw in lending. What's interesting is that the percentage of buyers using mortgage credit has increased as the Federal Reserve tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. The major factor that held back growth in today's report was supply, or lack thereof. Total housing inventory fell 2.3% in October and is now down 4.5% from a year ago. This is leaving buyers with fewer choices and also helps explain rising prices, with median sales prices up 5.8% from a year ago. Moving forward, higher prices should lure "on-the-fence" sellers into the market, boosting inventory, and increasing sales in the year ahead. In other recent news, new claims for jobless benefits fell 5,000 last week to 271,000 while continuing claims declined slightly to 2.18 million, illustrating the continued improvement in the US labor market. This positive news was echoed by the Philadelphia Fed index, a measure of sentiment in East Coast manufacturing, which jumped back to +1.9 in November from -4.5 in October signaling expansion. All signs point to continued Plow Horse growth.

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Posted on Monday, November 23, 2015 @ 11:33 AM • Post Link Share: 
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  Giving Thanks!
Posted Under: Bullish • Government • Monday Morning Outlook • Fed Reserve
If the US were in the middle of an economic boom, like in the mid-1980s or late-1990s, it would be very easy to be thankful in the week ahead. Instead, a cornucopia of complaints seems to accompany what has been a plodding economic recovery, what we call the Plow Horse Economy.

But that's why it's even more important than ever to be thankful for the things that are going right with the US economy. In particular, even as our overly large government continues to grow larger, with more spending, more entitlements, and more regulation – all of which bog down the economic growth rate like mud in the fields. It has been a battle between entrepreneurs and their wealth creation, versus government and redistribution. So far, the entrepreneurs have kept the economy moving forward.

Think of all the massive changes in the past several years. As it turns out, we really can drill our way to lower energy prices. Ubiquitous apps have made life much easier and increased productivity for workers, parents, students, travelers. And the list of new benefits seems to never end. Death rates for cancer patients are way down. Innovation in food production continues to soar. Driverless cars, while not here yet for regular consumers, continue to improve and wind their way down the long road toward mass production. It's the cornucopia of invention we should celebrate.

Instead, it's monetary policy and the political world that journalists seem to obsess about; particularly those on business TV. These sources of "information," or what could more accurately be called "econo-tainment," instead dwell on every zig and zag of politics, and very often dubious narratives intricately woven by some short-seller.

But it's because of the innovations, because of businesses that have found a way to charge ahead despite every obstacle put in front of them, the economy has moved forward.

In certain ways, this decade resembles the 1930s. Not in the sense that our economic situation is like the despair of the Great Depression; not even close. But in the sense that amid general dissatisfaction with the economy and a very bad policy set from Washington, important positive innovations were still happening. Jet engines, photocopiers, ballpoint pens, helicopters, and nylons were all invented in the 1930s, making life better for decades to come.

So when you pause to be thankful later this week, think for moment of the innovators who have been toiling away to make our lives better. Yes, they don't do it just for the heck of it; yes, they want to enrich themselves along the way. But whether they help themselves or not, where would we be without their efforts? Happy Thanksgiving!

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

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Posted on Monday, November 23, 2015 @ 10:34 AM • Post Link Share: 
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  Housing Starts Declined 11.0% in October
Posted Under: Data Watch • Home Starts • Housing

Implications: Housing starts fell 11% in October, giving back more than all of the gain in September and then some. However, we continue to expect robust gains in home building in the year ahead and can think of at least four reasons not to worry. First, volatility in overall starts is typical and was driven by even more volatile multi-family starts, which fell 25.1% in October, after jumping 18.1% in September. Second, starts plummeted in the South as big storms and floods likely disrupted builders' plans to break ground. Third, building permits rose in October, while permits to build single-family homes hit their highest level since 2007. And fourth, the total number of homes under construction (started but not yet finished) increased 0.9% in October and is up 16.4% versus a year ago. The number of single-family homes under construction are up 14% in the past year and are at the highest level since 2008. The number of multi-family units under construction stands at the highest since the mid-1980s. Add it all up, and it's clear that builders were very busy in October, even though ground breaking took a breather. Based on population growth and "scrappage," we expect overall housing starts should rise to about 1.5 million units per year by 2017, so a great deal of the recovery in home building is still ahead of us. Expect the housing sector to remain one of the bright spots in the Plow Horse Economy.

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Posted on Wednesday, November 18, 2015 @ 10:55 AM • Post Link Share: 
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  The Worst Recovery Ever…For Part-Time Jobs
Posted Under: Bullish • Employment • Research Reports
Mark Twain has been attributed with saying "If you don't read the newspaper, you're uninformed. If you read the newspaper, you're misinformed." And given the media's portrayal of the job market recovery over the past six-and-a-half years, we can see where he was coming from.

We hear all the time "It's a part-time recovery for jobs." In reality, exactly the opposite is true. This has been the worst recovery for part-time jobs in more than 40 years! We aren't really sure where the idea came from to begin with. Maybe it was because part-time jobs rose substantially during the last recession and people just assumed that trend continued.

Or maybe it's because the media, playing the role of armchair economists, dug into the household side of the employment report and figured out that you can see how many part-time or full time jobs are reported each month, and they cherry-pick just the months that show large part-time gains to support their argument.

Take for instance April of 2015, the household survey showed a gain of 437,000 part-time jobs while full-time showed a 252,000 loss. So for that single month, all of the gains in household employment were due to part-time jobs. But, as with many data series, the month-to-month reports can be very volatile.

To get a better idea of what's really going on, you need to look at the trend over at least the past year. Take that small step back, and a much clearer picture emerges. It turns out that, from October 2014 to October 2015, the US added 2.3 million full-time jobs and actually lost 507,000 part-time jobs. So despite monthly volatility, all of the jobs created in the past year have been full-time.

The table below shows expansions and contractions in the US economy going back to January 1970. It's true, the last recession did see a large gain in part-time employment, but this recovery has been like nothing we have seen in the last 45 years – part-time jobs have actually declined by 276,000, while full-time jobs have risen by 9.3 million. This means 100% of the jobs that have been created in this expansion so far have been full time jobs. 100%! And the employment picture keeps improving.

Private sector payrolls have risen for 68 consecutive months, the best streak going back to at least the early 1900's. Meanwhile, the unemployment rate has been cut in half from 10% to 5% and the more expansive U-6 rate, which also includes marginally attached and discouraged workers as well as those employed part-time for economic reasons, has fallen from a high of 17.1% down to 9.8% in October.

Don't get us wrong, we aren't praising the strength of this economic recovery. We still call it a plow-horse. Government is too big, taxes are too high and regulation is much too onerous. And jobs could be growing faster with better policies in place, but this has certainly not been a part-time recovery. The pouting pundits trying to push that story are either cherry-picking the data or never looked at it to begin with. Either way, they are just plain wrong.

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Economist

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Posted on Tuesday, November 17, 2015 @ 2:11 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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