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   Brian Wesbury
Chief Economist
 
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   Bob Stein
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  The Best Era America Has Ever Seen
Posted Under: Bullish
In 1852, Karl Marx said “Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past.”

Obviously Marx had never ventured to the United States, or he would have seen a country of entrepreneurs that had freedom and property rights along with a constitution so well thought out that it has only been amended 27 times in 227 years. No one puts it better than Ronald Regan and the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

“This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers -- 56 men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.

They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.

This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days -- maybe on leap years we could have an intermission -- [laughter] -- this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”


America has proved that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. As we approach July 4th it’s important to take a step back and realize just how fortunate we are to live in the best era America has ever seen. Happy 4th of July to you all.

Posted on Thursday, July 02, 2015 @ 10:04 AM • Post Link Share: 
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  Nonfarm Payrolls Increased 223,000 in June
Posted Under: Data Watch • Employment

 
Implications: Today’s report on the labor market shows continued improvement, but not quite as much as the consensus expected. Nonfarm payrolls increased a solid 223,000 in June, close to the average of 245,000 in the past year. Meanwhile, the jobless rate fell to 5.3%, the lowest since early 2008 and very close to the roughly 5.1% the Federal Reserve thinks is the long-run average. However, the details of the report were weaker than the headlines. The drop in the unemployment rate was due to a 432,000 decline in the labor force as the participation rate fell to 62.6%, the lowest since 1977. Civilian employment, an alternative measure of jobs that includes small business start-ups, declined 56,000. Although certainly not good news, don’t overreact to this month’s negative news on civilian employment or the size of the labor force. These figures are volatile from month to month, have both been trending up in the past year, and may have been influenced in June by the timing of the end of the school year. In other words, don’t lose sight of the fact that this is the 64th month in a row with growth in private payrolls, the longest streak since at least the late 1930s. Other details in today’s report were mixed. The good news was that the median duration of unemployment fell to 11.3 weeks, the lowest so far in the recovery. To put this in perspective, the median duration was 17.0 weeks at the end of 2013, which shows what a difference it made when Congress ended extended unemployment benefits at the beginning of 2014. The weak news was that average hourly earnings were unchanged in June and are up a tepid 2.0% in the past year. However, combined with increases in hours worked, workers’ total cash earnings are up 4.4% versus a year ago, more than enough for consumers to increase their spending. In other news this morning, new claims for unemployment benefits increased 10,000 to 281,000, the 17th straight week below 300,000. Continuing claims rose 15,000 to 2.26 million. These figures are consistent with continued payroll growth north of 200,000 per month. Also, late yesterday automakers reported sales at a 17.2 million annual rate in June, down 3.5% from May’s torrid pace, but still up 1.5% from a year ago. Putting this all together, the economic recovery has been a Plow Horse and remains a Plow Horse. It’s not the boom of the 1980s or 1990s – not even close – but it continues to move forward.

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Posted on Thursday, July 02, 2015 @ 10:01 AM • Post Link Share: 
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  The ISM Manufacturing Index Rose to 53.5 in June
Posted Under: Data Watch • ISM

 
Implications: A slumping oil and gas industry couldn’t hold back manufacturing activity in June, as the ISM manufacturing index, which measures factory sentiment around the country, beat consensus estimates to tie the highest reading of 2015. The index has now remained above 50 (levels higher than 50 signal expansion) for a 30th consecutive month. In addition, the most forward-looking index, new orders, rose for a third consecutive month and now stands at the highest level so far this year. The production index fell slightly to a still robust 54.0 in June, showing continued solid gains in output. With new orders continuing to rise, expect sustained strength in production in the months ahead. While the index remains below the high of 58.1 seen in August 2014, we don’t believe this is anything to worry about. Remember that the economy was unusually strong in the summer of last year as it recovered from bad weather in the first quarter of 2014. The biggest jump in the June report came from the employment index, which rose 3.8 points to 55.5. This move higher is supported by the continued strength in initial and continuing claims reports. On the inflation front, the prices paid index was unchanged in June at 49.5. After significant declines starting in late 2014, prices have now begun to stabilize and should remain steady to slightly higher in the months ahead. Taken as a whole, this month’s ISM report bolsters the case for a quick rebound after a weak Q1. In other news today, ADP reported an increase of 237,000 in private-sector payrolls in June. Plugging this into our models suggests tomorrow’s official report will show an increase of 240,000 in nonfarm payrolls, slightly above the consensus expected 230,000. In other news this morning, construction spending increased 0.8% in May and was revised up for the past several months. The gain in May was led by chemical manufacturing facilities. On the housing front, pending home sales, which are contracts on existing homes, increased 0.9% in May, suggesting another gain in existing home sales in June. Meanwhile, the national Case-Shiller index, which measures home prices, was unchanged in April and up 4.2% in the past year. Compared to a year ago, the largest price increases have been in Denver, San Francisco, Dallas, and Miami. We expect national average home prices to increase around 3% in the year ahead, a little shy of increases in rents.

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Posted on Wednesday, July 01, 2015 @ 11:27 AM • Post Link Share: 
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  Ignore Greece
Posted Under: Double Dip • Europe • Government • Spending
Don’t let anyone tell you Greece is sticking up for its "dignity" by fighting “austerity.” The current Greek government is sticking up for socialism by fighting reality.

After several years of working toward some very minor market-friendly reforms, and finally starting to see a glimmer of economic growth, Greece elected a far left government back in January. Its economic and financial situation has gotten worse ever since. Instead of trying to boost growth and pay its debts, by trimming government spending and reducing regulation, the government is saying it won't cut retirement benefits and wants to raise taxes on what little private sector it has left.

Since Greece no longer has its own currency, it can’t just devalue and cut pension benefits by sleight-of-hand. Instead, politicians have to make tough choices. Greece finally ran out of other peoples’ money. And, since private investors will no longer buy Greek bonds, it has to count on government entities. Fortunately, so far at least, the IMF, the EU, and the ECB have refused to support the status quo.

So what does the new government do? It blames the only groups willing to lend it money and refuses to cut spending. Then, it decides to have a vote, scheduled for July 5th, on the lenders’ latest offer, which would combine higher taxes with pension cuts and some other market reforms. This referendum is all about politicians running scared. They don't want to make the choice themselves, so they put it to a vote, again.

But Greece has debt payments to make this week, before the vote, on which it’s likely to default. Worse, the government is urging citizens to vote against the lenders’ offer.

Meanwhile, Greek banks have seen massive outflows of deposits. To meet the demand for liquidity, Greek banks have been getting Euros from the Bank of Greece (their central bank), which prints them with permission from the ECB. But now that a debt default is a serious concern, the ECB has withdrawn its permission for the Bank of Greece to print more Euros.

So, the Greek government has declared a “bank holiday” until July 6, during which depositors can only withdraw 60 euros per day. Greece also imposed capital controls to try to keep Euros in the country. This is a travesty, and Greece is headed for a double-dip Depression.

Fortunately, Greece is not Lehman Brothers. It's like Detroit. When Detroit defaulted, the U.S., and even Michigan, survived just fine. Detroit had already wasted the money it had borrowed, and so has Greece. The only thing left is recognizing the loss. That does not damage the economy; it will be absorbed by the IMF, EU, and ECB.

What Europe wouldn’t be able to absorb is if it caved to the Greek government, if it let them rollover their debts without insisting on reforms that will help Greece eventually repay its obligations. That would bring more Euro leftists into government and lead to even more stagnation and default in the future.

Regardless of how this turns out, it's getting way more press than it deserves. Any sell-off in US equities is a buying opportunity. Stay the course.

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

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Posted on Monday, June 29, 2015 @ 10:55 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, June 29, 2015 @ 7:40 AM • Post Link Share: 
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  Personal Income Increased 0.5% in May
Posted Under: Data Watch • PIC

 
Implications: Whatever happened to the theory that consumers would just pocket the savings from lower energy prices instead of spending it? Instead, consumer spending came back with a vengeance in May, rising 0.9%, the fastest pace for any month since 2009. And that was back when the government was using “cash-for-clunkers” to pass out checks to car buyers. Skipping that program, we’d have to go back to 2006. “Real” (inflation-adjusted) consumer spending is up 3.4% from a year ago, also the fastest growth since 2006. Expect more of this in the year ahead. Payrolls are growing about three million per year and wage growth is accelerating as well. Private-sector wages & salaries are up a robust 5.7% in the past year. Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.5% in May and is up 4.4% in the past year, faster than the 3.6% gain in consumer spending. This is why consumers have enough income growth to keep on lifting their spending without getting into financial trouble. One part of the report we keep a close eye on is government redistribution. In the past year, government transfers to persons are up 5%, largely driven by Obamacare. However, outside Medicaid, government transfers are up a slower 4.3% in the past year and unemployment compensation is the lowest since 2007. The bad news is that overall government transfer payments – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp. – aren’t falling back to where they were before the Panic of 2008, when they were roughly 14% of income. In early 2010, they peaked at 18%. Now they are down to 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 instead of a Race Horse economy. The PCE deflator, the Fed’s favorite measure of inflation, increased 0.3% in May. Although it’s only up 0.2% from a year ago, it’s been held down by falling energy prices. The “core” PCE deflator, which excludes food and energy, is up 1.2% from a year ago. That’s still below the Fed’s 2% inflation target, but it’s up at a 1.7% annualized rate in the past three months. Now that energy prices have leveled off, look for overall inflation to move up toward “core” inflation over the rest of the year. In other news this morning, initial claims for unemployment insurance rose 3,000 last week to 271,000, the 16th straight week below 300,000. Continuing claims for regular state benefits increased 22,000 to 2.25 million. These claims numbers are at rock bottom levels and are about as good as it gets.

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Posted on Thursday, June 25, 2015 @ 10:24 AM • Post Link Share: 
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  Real GDP Growth in Q1 was Revised up to a -0.2% Annual Rate
Posted Under: Data Watch • GDP

 
Implications: Today’s final GDP report for the first quarter showed a smaller contraction than previously reported, but still only provides a distorted “rearview mirror” picture of the economy. Real GDP growth declined at a -0.2% annual rate in Q1 versus last month’s estimate of -0.7%. However, “final” never really means “final” when it comes to government reports – it will be revised many times in the years ahead. The most recent issue with GDP data is the realization that over recent decades there has been a persistent underestimation of growth in Q1 because of faulty seasonal adjustments. In July, the BEA will attempt to fix this and we expect these revisions to show that real GDP actually increased in Q1, probably at a pace of about 1%. That’s still below the roughly 2.5% trend of the past two years, but it will show that port strikes, collapsing oil prices and harsh winter weather didn’t undermine growth completely. And, just like last year, we expect growth in Q2 and Q3 to rebound. This supports our view that the Federal Reserve will start raising short-term interest rates by September. We think a rate hike is already overdue. Nominal GDP growth – real GDP growth plus inflation – is up 3.8% from a year ago and up 3.5% annualized in the past two years, much too high for a short-term interest rate near zero. Today’s report also provided a second look at overall corporate profits, and just like GDP, the headline was revised higher. Corporate profits declined 5.2% in Q1, better than the originally reported 5.8% decline. 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 4.5% from a year ago.

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Posted on Wednesday, June 24, 2015 @ 11:31 AM • Post Link Share: 
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  New Single-Family Home Sales Increased 2.2% in May
Posted Under: Data Watch • Home Sales • Housing

 
Implications: Excellent report out of the housing market today as purchases of new homes rose to the fastest pace in seven years, signaling that buyers are once again on the hunt. Sales of new homes rose 2.2% in May, exceeding even the most optimistic forecasts, and are up 19.5% from a year ago. This is one reason we think the Federal Reserve will move forward with raising rates by September. In fact, all the talk about the Fed raising rates is probably getting some buyers into the market sooner, thinking they can avoid paying higher mortgage rates in the future. Meanwhile, today’s data is very good news for homebuilding activity in the year ahead. The months’ supply of new homes fell to 4.5 in May from 4.6 in April as sales picked up but inventories remained unchanged. And although the raw inventory of unsold new homes is up in the past year, all of the increase is due to homes where construction hasn’t even been started. The number of completed homes sitting unsold is unchanged from a year ago, and still at very low levels, while the number of unsold new homes still under construction is down from a year ago. As a result, builders have plenty of room to increase both construction and inventories. However, 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, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.3% in April and was up 5.3% from a year ago. In the twelve months ending in April 2014 and April 2013, the index was up 6.0% and 7.2%, respectively. In other words, while home prices continue to rise, they’re doing so at a slower rate as a more robust pace of home building brings supply closer in-line with demand. Expect more of the same in the year ahead.

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Posted on Tuesday, June 23, 2015 @ 11:25 AM • Post Link Share: 
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  New Orders for Durable Goods Declined 1.8% in May
Posted Under: Data Watch • Durable Goods

 
Implications: Don’t judge a book by its cover. Although the headline number for new orders of durable goods fell 1.8% in May, the underlying details of the report were more encouraging. The decline in overall orders was due to the very volatile transportation sector, specifically a 35.3% drop in civilian aircraft orders, which brought the overall transportation sector down 6.4% in May. Orders excluding transportation rose 0.5% as most major categories showed small gains. 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 continue to move higher. Orders for machinery used for mining and in oil and gas fields were down 40% in the year ending in March. But these machinery orders were up slightly in April and overall machinery orders were up 0.5% in April and 0.4% in May. “Core” shipments, which exclude defense and aircraft, rose 0.3% in May. If unchanged in June, “core” shipments will be up at a 1.6% annual rate in Q2 versus the Q1 average. Plugging these and other recent data into our models, we are forecasting an upward revision to Q1 real GDP growth to a -0.3% annual rate from a previous government estimate of -0.7%. However, just like last year, we expect a rapid rebound in real GDP growth in Q2. We also 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, 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 +6 in June from +1 in May. As a result, it looks like the national ISM Manufacturing index will be up in June.

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Posted on Tuesday, June 23, 2015 @ 10:30 AM • Post Link Share: 
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  M2 and C&I Loans
Posted Under: Government • Fed Reserve

 
Source: St. Louis Federal Reserve FRED Database
Posted on Monday, June 22, 2015 @ 12:37 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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