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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  New Orders for Durable Goods Declined 0.7% in April
Posted Under: Data Watch • Durable Goods


Implications:  Durable goods data underwent a "benchmark revision" in April, which altered the level of overall orders and affected past monthly changes more significantly than usual. As a result, while the April durable goods orders decline of 0.7% suggests a slow start to Q2, we see no reason to sound an alarm.  Following healthy gains for overall orders in February (1.4%) and March (2.3%), a lull in April was not unexpected.  Commercial aircraft orders led the decline, though orders for most major categories fell.  Strip out the typically volatile transportation sector and durable goods orders declined 0.4%, coming in below the consensus expected gain of 0.4%.  The dip in April non-transportation orders was led by fabricated metal products and machinery.  But there is little reason for concern.  Non-transportation orders have been steadily trending higher since mid-2016 – up 4.9% in the past year – and April represents the first monthly decline since August.  Despite the dip in machinery orders in April, we expect them to pick up again in the months ahead alongside continued improvements in the energy sector, which had been pulling down machinery investment after oil prices started declining in mid-2014.  Across the board, companies may be waiting for Washington to make progress on tax reform and other issues, which could provide a boost to orders and increase investment in most durable goods sectors.  In the meantime, economic growth continues to plow ahead, with new claims for unemployment insurance increased 1,000 last week to 234,000.  The four-week moving average is a four-decade-low 235,000.  Continuing claims rose 24,000 to 1.92 million.  Plugging these figures into our models suggests robust job growth in May, with a payroll gain of around 200,000. 

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Posted on Friday, May 26, 2017 @ 10:59 AM • Post Link Share: 
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  Real GDP was Revised up to a 1.2% Annual Rate in Q1
Posted Under: Data Watch • GDP


Implications:  Another quarter, another Plow Horse report.  "Real" (inflation-adjusted) GDP grew at a 1.2% annual rate in the first quarter, an upward revision from the previous estimate of 0.7%.  Most of the upward revision was due to consumer spending as well as business investment in intellectual property and structures, while inventories were revised down.  Since the economic recovery started in mid-2009, real GDP has been growing at an average annual rate of 2.1%.  Look for faster economic growth over the next couple of years, but not much faster until policymakers in Washington, DC start cutting tax rates, restraining spending, and moving toward a free market in health care.  We like to follow "core" GDP, which is real GDP excluding inventories, trade, and government purchases.  In the past two years, core GDP is up at a 2.6% annual rate.  The brightest spot in today's report was that business fixed investment grew at an 11.4% annual rate in Q1, the fastest pace in five years.  The most disappointing news was that economy-wide corporate profits slipped 1.9% in Q1.  However, they're up 3.7% from a year ago and much of the weakness in Q1 was due to an unusually large reduction in the value of inventories.  As a result, we expect this measure of profits to accelerate in the year ahead.  In terms of monetary policy, nothing in today's report should prevent the Federal Reserve from raising rates again in June.  Nominal GDP (real growth plus inflation) was revised up to a 3.4% annual growth rate in Q1 from a prior estimate of 3.0%.  Nominal GDP is up 4.1% from a year ago and up at a 3.4% annual rate in the past two years.  These figures show the Fed's target for short-term interest rates is too low and monetary policy is too loose. 

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Posted on Friday, May 26, 2017 @ 10:48 AM • Post Link Share: 
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  Existing Home Sales Declined 2.3% in April
Posted Under: Data Watch • Home Sales • Housing


Implications:  After hitting the fastest pace in more than a decade in March, existing home sales took a breather in April.  Sales of previously-owned homes fell 2.3% in April to a 5.57 million annual rate, but are still up 1.6% from a year ago.  It is important to remember home sales are volatile from month to month, and we expect the general upward trend of the past several years to keep going.  That being said, tight supply and rising prices remain headwinds.  Inventories have now fallen on a year-over-year basis for 23 consecutive months and are down 9% from a year ago.  Inventories were the lowest on record for any April dating back to at least 1999, when reporting began.  This has also affected the months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – which was 4.2 months in April, down from 4.6 months a year ago.  According to the NAR, anything less than 5.0 months is considered tight supply.  The good news is that demand for existing homes was so strong that a typical property only stayed on the market for 29 days, the shortest timeframe on record since the NAR began tracking in 2011.  Higher demand and a shift in the "mix" of homes sold toward more expensive properties has also driven up median prices, which have now risen for 62 consecutive months on a year-over-year basis.  Sales of homes in the 0-$100K and $100-250K ranges, which together represented 53.5% of total sales in April, are the only price brackets where sales are down from a year ago, signaling that supply constraints may be disproportionately hitting the lower end of the market.  Tough regulations on land use raise the fixed costs of housing, tilting development toward higher end homes.  The NAR suggests that strong demand could also be pushing some properties into higher brackets as multiple offers boost the final sales price.  Although some analysts may be concerned about the impact of higher mortgage rates, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is eventually going to move higher again.  In other housing news this morning, the FHFA Index, which measures prices for homes financed with conforming mortgages, rose 0.6% in March and is up 6.3% from a year ago.  In the year ending in March 2016, FHFA prices were up 6.3% as well.

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Posted on Wednesday, May 24, 2017 @ 11:49 AM • Post Link Share: 
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  New Single-Family Home Sales Declined 11.4% in April
Posted Under: Data Watch • Home Sales • Housing


Implications:  After annual revisions in today's report pushed up sales of new homes to their fastest post-recovery pace in March, the headline number disappointed in April, falling 11.4%, the largest one-month drop in over two years.  Sales came in at a 569,000 annual rate in April, coming in below the estimate of even the most pessimistic economics group. However, it is important to remember home sales are very volatile and one month doesn't make a trend.  Going forward, we expect the trend to remain upward and housing to remain a positive factor for the economy.  First, employment gains continue, which should put upward pressure on wage growth, which is already accelerating.  Second, credit standards in the mortgage market are starting to thaw.  Third, the homeownership rate remains depressed as a larger share of the population is renting, leaving plenty of potential buyers as economic 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 new home sales higher. Meanwhile, despite a 4,000 increase in unsold new homes, inventories remain low by historical standards (see chart to right) and are not a headwind to future construction.  In fact, all of the gain in inventories in April was due to homes where construction had either yet to start or was still under way, with the inventory of completed homes remaining unchanged. Look for overall gains in home sales in the year ahead as these factors combine to drive expansion, and any headwind created by an increase in mortgage rates is offset by expectations of faster future economic growth.  On the manufacturing front, the Richmond Fed index, which measures mid-Atlantic factory sentiment, fell unexpectedly to +1 in May from +20 in April, signaling further expansion in the factory sector, but at a slower pace.

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Posted on Tuesday, May 23, 2017 @ 12:01 PM • Post Link Share: 
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  Tax Cut Politics
Posted Under: GDP • Government • Monday Morning Outlook • Spending • Taxes

While some investors are freaking out about investigations, tweets, or the personality of President Trump, we are still watching policy.  So far, some regulation has been rolled back and more is on tap, the Supreme Court has a more market friendly make-up, and there is a hiring freeze on many government agencies.  These policies will help economic growth, but they are not enough to get it above 2.5% annually.

The latest political news is that the Justice Department appointed a former FBI Director, Robert Mueller, to look into the supposed ties between Russia and the Trump campaign.  Some may fret that this is a negative for the market, but we believe it will reduce, to some extent, the bickering in Washington and allow more focus on major policy questions.   

Mueller has already had a long career (apparently has very little craving for the limelight) and will conduct a thorough and clean investigation.  Leaks will be few and the investigation will drag on for a long time.

This will allow the GOP to focus their efforts on health care and tax cuts.  They believe the more legislative accomplishments they have to show their voters, the better off they'll be in 2018.

The politics of these policy changes is complicated.  Republican leaders in the House of Representatives have proposed a "border-adjusted tax" which we think is a bad policy move (see our piece from February 13).  One reason they did this is because they are trying to make the tax cut "revenue neutral" so that it fits in budget rules and might possibly get some Democrats on board.

The Trump Administration said no to the border adjustment and proposed sweeping tax cuts that Congressional budget experts say aren't revenue neutral.  They "score" it as losing tax receipts because they use a "static scoring model" which does not account for revenue from more economic growth.  For example, the Congressional Budget Office estimates that 1% more GDP growth over the next 10 years will bring in $3.0 trillion in additional revenue.  If you don't score that revenue bump, tax cuts are almost impossible to accomplish.

So, to overcome this budget hurdle, the GOP must use the budget reconciliation process.  This means a simple majority is all that is needed to pass the law and no filibuster by Democrats is allowed.

Using reconciliation (a legal maneuver) means that tax cuts that are scored to reduce revenue can't last beyond a 10-year budget window.  That's why President Bush's tax cuts "sunset."

Some Republicans, who still want a border-adjusted tax, are digging in their heels and saying the tax cut should be "revenue neutral," and "permanent."  These are code words that they want to use the budget rules to force higher taxes on some to pay for tax cuts on others.  The "border adjustment" is one way.  Others are pushing for a carbon tax         

But the US economy doesn't need higher tax rates on anyone, it needs better incentives and that means lower tax rates.  

For the past generation, many free-market economists have urged budget scorekeepers to do "dynamic" scoring, which considers the impact of tax cuts on broad economic growth.  But the scorekeepers have resisted, which has biased the budget process in favor of higher taxes.  With control of the House, Senate, and White House, the dynamic scorekeepers could have the upper hand.  If so, Congress could pass actual tax cuts that won't automatically expire at the end of ten years without resorting to offsetting tax hikes on anyone.

But even if they do expire in 10 years, we consider that permanent by DC standards.  Reagan cut taxes in 1981, raised them in 1982, and did tax reform in 1986.  Bush raised taxes in 1991, Clinton in 1993 and then cut them in 1997.  Bush cut taxes in 2001 and 2003, Obama raised tax rates.

The Trump Administration should ignore the budget rule games and find tax cuts that help the economy.  It's the politics that is noisy and confusing, the policy is simple.

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

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Posted on Monday, May 22, 2017 @ 10:28 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, May 22, 2017 @ 7:50 AM • Post Link Share: 
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  There is NO Great Stagnation
Posted Under: GDP • Government • Productivity • Video • Spending • Wesbury 101
Posted on Tuesday, May 16, 2017 @ 1:39 PM • Post Link Share: 
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  Industrial Production Increased 1.0% in April
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production exploded to the upside in April, posting the largest one-month jump since February 2014.  Production rose 1.0% in April and is now up 2.1% versus a year ago.  The details of today's report were strong as well, with broad-based gains as opposed to all the strength coming from a single sector.  Manufacturing, which excludes mining and utilities, rose 1.0% in April, also its largest jump since February 2014.  The jump was due to both a 5.0% increase in the volatile auto sector as well as 0.7% gain in "core" industrial production, which is manufacturing excluding autos.  In fact, April's gain in "core" industrial production was its strongest since 2014 as well.  Despite the drop in March, this measure has been accelerating, up 2.8% at annual rate in the past three months versus just 1.5% in the past year.  We think the acceleration in core production is, in part, a lagged effect of the rebound in oil prices, which adds to the production of equipment and materials used in the energy sector.  Higher energy prices are also having a direct effect on mining, which has also been accelerating, up at a 19.9% annual rate the past three months versus 7.3% in the past year.  Oil and gas-well drilling posted its eleventh consecutive gain in April, jumping 9%, and is now up at a massive 233% annual rate in the past three months.  Based on other commodity prices, we think oil prices are just below "fair value" range, and with oil companies profitable at current prices mining should stay in recovery after the problems of the past two years.  We expect solid growth in the year ahead, in part due to less weakness in foreign developed economies.  In other recent news, the Empire State index, a measure of manufacturing sentiment in New York, fell unexpectedly to -1.0 in May from +5.2 in April, signaling a slight contraction in the factory sector in that region.  Overall, though, expect continued national gains in the industrial sector.

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Posted on Tuesday, May 16, 2017 @ 11:02 AM • Post Link Share: 
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  Housing Starts Declined 2.6% in April
Posted Under: Data Watch • Home Starts • Housing


Implications:  Housing starts came in much lower than the consensus expected in April, falling 2.6% to a 1.17 million annual rate.  Starts were below even the lowest forecast from any economics group.  However, this does not signal the end of the housing recovery; far from it.  Multi-unit starts, which are extremely volatile from month to month, were entirely responsible for the April decline.  Meanwhile, single family-starts rose 0.4% and are now up 8.9% in the past year.  The "mix" of construction has been generally shifting toward single-family building and this is a good sign for the overall economy.  When the housing recovery started, multi-family construction led the way. But the share of all housing starts that are multi-family appears to have peaked in 2015, when 35.7% of all starts were multi-family, the largest since the mid-1980s, when the last wave of Baby Boomers was growing up and moving to cities. In April, the multi-family share of starts fell to 28.8%.  The shift toward single-family is a positive sign for the economy 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 eventually rise to about 1.5 million units per year, so much of the recovery in home building is still ahead of us.  The worst news in today's report was that single-family permits fell 4.5% in April.  But they are still up 6.2% in the past year, so don't expect the drop in single-family permits in April to lead to a decline in the future pace of home building.  In other recent housing news, the NAHB index, which measures sentiment among home builders, rose to 70 in May from 68 in April.  Expect further strength in the housing sector in the year ahead as more jobs, faster wage growth, and, for at least the time being, optimism about more market-friendly policies from a Trump Administration, continue to encourage both prospective home buyers and builders.    

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Posted on Tuesday, May 16, 2017 @ 10:50 AM • Post Link Share: 
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  A Healthy US Consumer
Posted Under: Bullish • Monday Morning Outlook • PIC

News of the consumer's death has traveled fast.

It's not hard to find stories of beleaguered and battle-wearied consumers.  Famed retail giants are slashing revenue and earnings outlooks, creating worries about retail space in general and malls in particular.  Auto sales are slowing, auto loan delinquencies are rising, while delinquent student loans create their own paroxysms of fear in analyst minds. 

But, just as with many negative forecasts over these past eight years, the news of the consumer's death is greatly exaggerated.  On average, consumers are in good shape.

The best news for the consumer is that the labor market continues to heal.  At 4.4%, the unemployment rate is the lowest since 2007.  Some watch what they call the "true" unemployment rate, which includes discouraged workers as well as part-timers who claim they'd prefer full-time jobs – that's 8.6%, also the lowest since 2007.  Meanwhile, wages and salaries are up 5.5% in the past year, outstripping inflation.

Meanwhile, consumer debt burdens are down.  The Federal Reserve keeps track of the "financial obligations ratio," which measures the share of after-tax income consumers need to meet monthly debt service payments plus regular (non-debt) payments such as renting a home, leasing a car, property taxes, and homeowners' insurance.  At 15.4% of after-tax income, these payments are near the lowest since the early 1980s.       

Yes, serious (90-days or more) auto loan and student loan delinquencies are at record highs.  But serious delinquencies, for all loans – including auto and student loans, plus mortgages, home-equity, credit card, and other consumer debts are down substantially in the past seven years, to $415 billion at the end of 2016 versus $1.04 trillion at the end of 2009.

Don't get us wrong.  The rapid and persistent rise in student loan debt is a problem.  Some indebted students are finding they must put off borrowing to buy a home, for example.  But these loans pay colleges and universities to employ professors and administrators who spend it, meaning it's a transfer payment to the self-described "educator" class.

Unlike a subprime loan that facilitates the building of a home (an asset), the real problem with student loans is they often generate a product that decries wealth creation.   But that's true whether they borrow the money they use to pay for college or pay for it out of their own pockets (or their parents').  
Yes, after hitting a record high in 2016, at 17.5 million, sales of cars and light trucks appear to be slowing.  However, the growth of the driving-age population and scrappage rates suggest underlying demand of about 15.5 million units per year.  So, if anything, auto sales were probably artificially strong in 2014-16 as consumers made up for lost time back in 2010-12 when the age of cars on the road had risen after the Panic of 2008.  Now, the industry is just gradually returning to normal.  In other words, it's not a sign that consumers can't spend.      

Nor are we concerned about problems with retail spending.  Consumer habits are changing and shifting toward the internet, where sales are booming.  When you can shop on-line with your phone or tablet and have products delivered to your doorstep, the economy doesn't need billions more square-feet of retail space.  So brick and mortar retailing will continue to grow at a slower pace than GDP, while warehouses will expand.   

If all you ever look for is a sign that consumers are in trouble, you can find it and spin it.  But once you broaden your vision to include the entire consumer landscape, it disappears like a mirage of water in the desert.

Real economic growth has been slow – about 2% per year.  That means just about any economic statistic appears weak when compared to the 4% growth of the 1980s and 1990s.

But that doesn't mean the economy is teetering on the edge.  As supply-siders, we think "supply creates its own demand."  What this means is that production creates wealth, not consumption.  And no matter what the pessimists say, the US entrepreneur has been on a roll.  It's the heavy hand of government holding things back.  Nonetheless, workers are earning more while shifting their purchasing habits.  This churn is a normal part of creative destruction, something to be embraced, not feared.

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

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Posted on Monday, May 15, 2017 @ 9:31 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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