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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Housing Starts Increased 8.3% in June
Posted Under: Data Watch • Home Starts • Housing


Implications:  After falling for three consecutive months, housing starts rebounded strongly in June, beating the consensus to post their largest monthly gain of the year.  Even though both single-family and multi-unit starts were responsible for the gain in June's headline number, in the past year single-family starts are up 10.3% while multi-unit starts are down 12.9%.  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 June, the multi-family share of starts was 30.1%.  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. In other words, much of the recovery in home building is still ahead of us.  Another bright spot in today's report was that housing completions rose 5.2% in June and are now up 8.1% in the past year.  Further, building permits for new structures posted their biggest one month jump since 2015 in June.  Expect housing starts to continue to gain steam in the months ahead as more unfinished projects are completed and builders move onto new ones.  In other recent housing news, the NAHB index, which measures sentiment among home builders fell to a still elevated 64 in July from 67 in June.  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 the Trump Administration, continue to encourage both prospective home buyers and builders.  On the factory front, the Empire State index, a measure of manufacturing sentiment in New York, fell to a still healthy 9.8 in July from 19.8 in June. Finally, on inflation, import prices fell 0.2% in June but are up 1.5% from a year ago.  Export prices also fell 0.2% in June, but have increased 0.6% in the past year.  Both figures are a stark contrast to the negative direction of prices in the year ending in June 2016.  

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Posted on Wednesday, July 19, 2017 @ 11:02 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, July 17, 2017 @ 1:41 PM • Post Link Share: 
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  Hey Government: It's Time to Get Serious!
Posted Under: Government • Monday Morning Outlook • Spending • Taxes

At eight years, the current economic recovery is the third longest on record.  Personal income, consumer spending, household assets, and net worth, are all at record highs.  Stock markets are at record highs.  Corporate profits are within striking distance of their all-time highs.  Federal tax receipts are at record highs. 

So, how is it possible that the federal budget, along with some state and local budgets, still look like they're in the middle of a nasty recession?

The answer: Government fiscal management is completely out of control.  Politicians find time to fret about Amazon's purchase of Whole Foods and won't stop bashing banks, but they've lost their ability to deal with their own fiscal reality.

The federal government is projected to run a nearly $700 billion deficit this year, and long-term forecasts suggest trillion dollar deficits as far as the eye can see.  Illinois and the City of Chicago are running chronic deficits, while New Jersey and New York are fiscal basket cases.

This makes the politicians of the 1990s look downright responsible.  In 1999, after a 10-year recovery, these entities were all running surpluses. But even if this recovery lasts 12 years, deficits will persist.  And what happens if there's another recession?

Politicians have claimed intellectual support for their fiscal irresponsibility from John Maynard Keynes.  He believed in deficit-spending to help cure the problems of weak consumer spending in a recession.  As a result, the Panic of 2008 gave cover to grow government, and they did so in spectacular fashion.  But that "emergency" spending then morphed into permanent overspending and chronic deficits.

Tax rates are higher today than in 1999, and the economy is bigger, but governments have consistently outspent the ability of taxpayers to fund it.

Even Keynes thought the government should roll back spending and get budget deficits under control in better economic times.  But politicians are long past seeking his intellectual support.  They love to lecture business-people about greedy human nature, yet can't turn that analysis on themselves.

Businesses and entrepreneurs create new things and build wealth.  Politicians redistribute that wealth.  And while some of what government does can help the economy, like providing defense or supporting property rights, the U.S. government has expanded well beyond that point.  Politicians have never been this reckless or fiscally irresponsible.

Whenever we say this, people ask; "what would you cut from the budget?"  And then, if you are actually brave enough to answer, you get attacked for "not caring."

This needs to stop.  Illinois is in a death spiral.  Tax rate increases will chase more productive people out of the state, while ratcheting spending higher.  And just like Detroit and Puerto Rico, the state will go bankrupt.

The U.S. government is on this path, but, because it has the ability to fund itself with the best debt in the world, a true fiscal day of reckoning is still 15-20 years away.

Government spending needs to be peeled back everywhere.  It's no longer a case of picking and choosing.  And until that happens, the fiscal irresponsibility of the government is the number one threat to not only America, but the world.

No matter what politicians tell us, any pain caused by private sector greed will pale in comparison to the mayhem that collapsing governments can create.  Just look at Venezuela or Greece!  It's time to reset America's fiscal reality.  And if that means debt ceiling brinksmanship, shutting down the government, or moving to a simple majority on spending decisions, so be it.  It's time to get serious!

BrianS. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

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Posted on Monday, July 17, 2017 @ 11:15 AM • Post Link Share: 
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  Industrial Production Rose 0.4% in June
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production rose for the fifth consecutive month in June, beating consensus expectations and signaling an uptick in activity across the board.  The headline measure for industrial activity rose 0.4% in June and is now up 2% from a year ago.  Manufacturing, which excludes mining and utilities, bounced back in June, rising 0.2%.  This gain was primarily due to a 0.7% jump in the volatile auto sector, though "core" industrial production, which is manufacturing excluding autos, rose 0.1% as well.  Manufacturing has begun to accelerate recently, up at a 3.2% annual rate in the past three months versus a gain of 1.2% in the past year.  And this isn't just due to auto production either, both "core" and auto manufacturing are showing similar accelerating patterns in the past three months versus their year ago measures.  Another major contribution to today's headline number came from mining which jumped 1.6% in June, and is now up at an 18.4% annual rate in the past three months versus 9.9% in the past year.  Further, oil and gas-well drilling posted its thirteenth consecutive gain in June, jumping 6.9%, and is now up a massive 115% at an annual rate in the past three months.  Based on other commodity prices, we think oil prices are below "fair value" range, but with oil companies profitable at current prices mining should stay in recovery after the problems of the past two years.

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Posted on Friday, July 14, 2017 @ 11:30 AM • Post Link Share: 
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  Retail Sales Declined 0.2% in June
Posted Under: Data Watch • Retail Sales


Implications:   Retail sales were soft again in June, but don't take that as a sign consumer spending is rolling over or the economy as a whole is getting weaker.  Total retail sales slipped 0.2% in June and half of the drop in overall sales was due to lower gas prices. This normal volatility causes retail sales to drop three or four months during a year, even in a growing economy.  "Core" sales, which exclude autos, building materials, and gas, were also down 0.2%.  In spite of the weak month, for the second quarter as a whole, core sales were up at a healthy 3% annual rate versus the first quarter, consistent with our forecast that "real" (inflation-adjusted) consumer spending on goods and services combined, rose at about a 3% annual rate as well.  This is not a sign of a dying consumer.  Even with the 0.2% decline in total retail sales in June, they're still up 2.8% from a year ago, which is outstripping the 1.6% increase in the consumer price index.  Note that one area of continuing strength is among non-brick and mortar retailers, where sales rose 0.4% in June, are up 9.2% from a year ago, and now make up 10.9% of sales, the largest portion on record.  Expect a rebound in retail sales in the months ahead.  The fundamental trends that drive growth in consumer spending continue to look good.  These include healthy job growth, wage growth, and very low consumer financial obligations relative to historical norms. Although household debt is at a record high, household debts are the lowest relative to household assets since the peak of the internet boom almost 20 year ago.  In other news this morning, business inventories increased 0.3% in May.  Plugging this into our forecast, suggests real GDP grew at a 2.5% annual rate in the second quarter, a little faster than the 2.1% average since the economic recovery started in mid-2009.  

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Posted on Friday, July 14, 2017 @ 11:02 AM • Post Link Share: 
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  The Consumer Price Index was Unchanged in June
Posted Under: CPI • Data Watch • Inflation


Implications:  Consumer prices were unchanged in June and have been tame over recent months, but cries that a lull in inflation should give the Fed pause are overblown.  Consumer prices are up 1.6% in the past year, compared to a 1.0% increase in the twelve months ending June 2016 and a 0.1% increase for the period ending June 2015.  In other words, inflation is still in a rising trend.  Energy prices fell 1.6% in June, while food prices were flat.  Strip out the typically volatile food and energy components, and "core" CPI rose 0.1% in June and is up 1.7% in the past year.  Medical care and rent costs led "core" prices higher in June, rising 0.4% and 0.3% respectively, more than offsetting declining prices for autos.  We expect rents to accelerate in the year ahead as supply constraints get tighter in the housing market.  Meanwhile, energy prices should stop falling and rebound a bit.  Combined, these forces should push the CPI back above 2% around the end of the year.  The best news in today's report is that real average hourly earnings rose 0.2% in June.  These earnings are up 0.8% over the past year, up at a 1.3% annual rate over the past six months, and a 1.9% annual rate over the past three.  This acceleration signals that a loose monetary policy has led to a tighter labor market.  Because the Fed believes in the Phillips Curve, the trend of accelerating price and wage gains should have Fed officials focusing more on the potential for inflation to rise faster than desired as the jobless rate continues to fall below their long-term target.  That's why we expect the Fed to stick to their plan of starting to unwind the balance sheet while also raising rates one more time in 2017. 

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Posted on Friday, July 14, 2017 @ 10:09 AM • Post Link Share: 
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  The Producer Price Index Rose 0.1% in June
Posted Under: Data Watch • Government • Inflation • PPI • Fed Reserve • Interest Rates

Implications:  Services sector prices pushed the producer price index higher by 0.1% in June, and prices are up a healthy 2.0% in the past year.  Within the service sector, prices for final demand services less trade, transportation, and warehousing (in other words services like healthcare, lodging, and banking) led the index higher, rising 0.3% in June.  Goods prices also ticked higher in June, with food prices rising 0.6%, offsetting a 0.5% decline in energy prices.  Take out the volatile food and energy sectors, and you are left with "core" prices, which rose 0.1% in June (following a 0.4% rise in April and a 0.3% increase in May), and have risen 1.9% in the past twelve months.  With both headline and "core" producer prices hovering around the Fed's 2% inflation target (and both measures easily above 2% when looking at the annualized rate over the past three and six month periods) there should be little doubt that balance sheet unwinding and further rate hikes are warranted.  A look further back in the pipeline at prices for intermediate demand suggests inflation pressures are continuing.  While intermediate processed goods prices declined 0.2% in June, they are up 3.8% in the past year and have increased in eight of the last ten months.  Meanwhile prices for intermediate unprocessed goods rose 1.5% in June and are up 6.5% over the last twelve months.  The Fed will keep these prices, which give a hint to the direction final demand prices will follow in future months, in mind as they plan the path for monetary policy.  News out this morning on the Fed's other key area of focus, employment, showed that initial jobless claims fell 3,000 last week to 247,000.  Meanwhile continuing claims declined 20,000 to 1.95 million.  It's early, but taking these together suggests healthy job creation continues in July.

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Posted on Thursday, July 13, 2017 @ 10:30 AM • Post Link Share: 
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  Debt-Laden Companies? #FakeNews?
Posted Under: Bullish • GDP • Monday Morning Outlook

Remember the weak May payroll report – just 138,000?  Didn't think so.  But, back then, that first report on May was reported as a massive economic slowdown that should stop the Fed from further rate hikes.

But the weak May number was due to a calendar quirk that led to an undercount of college kids getting summer jobs.  Payrolls jumped 222,000 in June, were revised up for May and, now, the two month average is 187,000.  That's exactly the same as the average in the past twelve months and almost exactly the same as the 189,000 average in the past seven years.  In other words, the negative story from a month ago was misleading.

So, guess what?  The Pouting Pundits of Pessimism are pivoting!  It's not jobs anymore, now it is "high debt levels among nonfinancial corporations."  They say this happens near the very end of an economic expansion, so brace yourself.

It is true that nonfinancial US corporation debt is at a record high of $18.9 trillion.  It's also true this debt is the highest ever relative to GDP.  But these companies don't pay their debt with GDP.  They hold debt against assets and incomes.

Since 1980, nonfinancial corporate debt has averaged 44.9% of total assets (financial assets, real estate, equipment, inventories, and intellectual property).  Right now, these debts total 44.5% of assets, or slightly less than average.  The record was 50.6 in 1993.  Think about that, 1993 was right at the beginning of the longest economic expansion in US history.

Some say that the value of corporate financial assets is inflated by financial alchemy.  So, let's take financial assets, which include record amounts of cash, out of the equation.

Before we do that, please realize that the financial assets of nonfinancial companies exceed total debts by $1.4 trillion, a record gap.  But let's look at ratios without them, anyway.  The debt-to-nonfinancial asset ratio at 85%.  This is right in the middle of the past 25-year range – roughly 74% to 95%.

Debt relative to the market value of these companies has averaged 82.2% since 1980 and currently stands at 80.0%.  If you calculate net worth using historical costs for their nonfinancial assets (instead of market value), the debt-to-net worth ratio is 121%, but has averaged 128% since 1980, 125% since 1990, and 119% since 2000.  Again, nothing abnormal.

What about interest payments?  The most recent data show that interest and miscellaneous payments are 11.2% of these companies' profits versus an average of 13.2% since 1980, 12.2% since 1990, and 11.6% since 2000.  What happens if interest rates keep rising?  Less than you think.  Only 28% of the debt is short-term versus an average of 44% in the 1980s, 41% in the 1990s, and 33% in the 2000s.

None of this means the economy is safe forever.  Another recession is inevitable.  It's just not coming anytime soon.  In the meantime, beware of stories that take one simple measure – like corporate leverage – and spin it pessimistically.      

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

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Posted on Monday, July 10, 2017 @ 10:22 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, July 10, 2017 @ 7:45 AM • Post Link Share: 
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  Nonfarm Payrolls Increased 222,000 in June
Posted Under: Data Watch • Employment


Implications:  What a difference a month makes!  Five weeks ago, when the May jobs report showed payrolls rising much less than expected, the pessimists were popping champagne.  But today's report shows how important it is to focus on the trend.  Nonfarm payrolls increased 222,000 in June and were revised up 47,000 for April and May.  We think measured job growth in May was held down by a calendar quirk, which resulted in that report missing some college students getting summer jobs.  That quirk unwound in June, causing a sharp rebound.  Taking May and June together, payrolls increased an average of 187,000 per month.  To put this in perspective, monthly average payroll growth has been 180,000 so far this year, 187,000 in the past twelve months, and 189,000 in the past seven years.  In other words, little has changed and job growth remains consistent.  Civilian employment, an alternative measure of jobs that includes small business start-ups, increased 245,000 in June and is up 211,000 per month in the past year.  Although the unemployment rate ticked up to 4.4% in June, the rise was due to a 361,000 increase in the labor force, which is good news.  In the past year, the labor force is up 1.7 million while the jobless rate has dropped half a percentage point.  At 62.8%, the participation rate remains low by the standards of the last 40 years, but the 12-month moving average has been gradually rising since early 2016.  As always, we like to measure the effect of job reports on consumer purchasing power.  Average hourly earnings rose 0.2% in June and are up 2.5% in the past year.  Meanwhile, the total number of hours worked increased 0.5% in June and is up 2% in the past year.  Multiplying the number of hours worked by wages per hour, total earnings are up 4.5% from a year ago.  In an environment where consumer inflation is running at about 2%, that gain in total earnings plus low debt service ratios for households leaves plenty of room for more purchasing power.  Another positive detail in today's report is that the median duration for unemployment fell to 9.6 weeks in June, the lowest since mid-2008.  Recent news from the Fed suggests it will announce the start of balance-sheet renormalization in September, but hold off on another rate hike until December.  We agree with an announcement about the balance sheet in September but think investors are underestimating the possibility of a September rate hike.  The bottom line is that the US economy continues to grow and the labor market keeps getting better.         

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Posted on Friday, July 7, 2017 @ 10:36 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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