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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Existing Home Sales Increased 2.4% in July
Posted Under: Data Watch • Home Sales • Housing

Implications: Housing keeps growing…Plow-Horse-like. Existing home sales grew 2.4% in July, rising to a 5.15 million annual rate, the best level since September 2013. But total sales are still 4.3% below the peak a year ago. After declining seven out of eight months late last year and early this year, existing home sales have now increased four months in a row. Why did housing slow between July 2013 and March 2014? No one knows for sure, there are more theories out there than analysts, but a lack of inventory was fingered by realtors themselves. The past few months’ reports suggest that’s changing. Inventories are up seven months in a row, including a 3.5% jump in July. They are 5.8% higher today than they were a year ago. More inventory should help spur sales in the months ahead. One key reason for growing inventories is that home prices continue to move higher (median prices for existing homes are up 4.9% from a year ago). In other words, recovering home prices are getting more potential sellers into the market, which will increase sales. Another encouraging sign of the housing market healing was that distressed homes (foreclosures and short sales) accounted for only 9% of July sales, down from 15% a year ago, and the first time in single digits since NAR started tracking distressed sales in October 2008. We remain convinced that the underlying trend for housing remains upward. In other news this morning, new claims for unemployment insurance declined 14,000 last week to 298,000. Continuing claims dropped 49,000 to 2.50 million. Plugging these figures into our payroll models suggests August gains of 208,000 nonfarm, with 193,000 in the private sector. These forecasts will change over the next couple of weeks as we get more data. On the manufacturing front, the Philadelphia Fed index, which measures manufacturing sentiment in that region, rose to 28 in August, easily beating the consensus and coming in at the highest reading since March 2011.

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Posted on Thursday, August 21, 2014 @ 1:09 PM • Post Link Share: 
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  Innovation Pushes Economy Forward
Posted Under: Bullish • GDP • Video • TV • Fox Business
Posted on Wednesday, August 20, 2014 @ 4:17 PM • Post Link Share: 
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  George Soros’ bearish bet
Posted Under: Bullish • Markets • Video • Stocks • TV • Fox Business
Posted on Wednesday, August 20, 2014 @ 4:09 PM • Post Link Share: 
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  Mideast tensions in focus on Wall Street
Posted Under: Markets • Video • Stocks • TV • Fox Business
Posted on Wednesday, August 20, 2014 @ 4:06 PM • Post Link Share: 
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  The Consumer Price Index Increased 0.1% in July
Posted Under: CPI • Data Watch • Inflation

Implications: Consumer prices continued to move higher in July, though only at the tepid 0.1% pace the consensus expected. Although consumer prices are up a moderate 2% from a year ago, the year-over-year number masks an acceleration. The CPI is up at a 2.5% annual rate in the past six months and up at a 2.8% rate in the past three months. Since the start of 2014, consumer prices are up 2.4% at an annual rate versus the 1.2% pace in first seven months of 2013. Owners’ equivalent rent (what homeowners would pay if they were renting their homes from soemone else) led the way in July, up 0.3%, accounting for most of the increase in the overall index. Owners’ equivalent rent, which makes up about ¼ of the overall CPI, is up 2.7% over the past 12 months and will be a key source of the acceleration in inflation in the year ahead, in large part fueled by the shift toward renting rather than owning. And while energy prices declined 0.3% in July, muting the rise in the overall CPI, we expect this measure to move higher in the months ahead, continuing the trend higher we have seen over the past twelve months. The worst news in today’s report was that “real” (inflation-adjusted) average hourly earnings remained flat in July and are unchanged in the past year. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, probably increased 0.1% in July. If so, it would be up 1.6% from a year ago, barely below the Fed’s target of 2%. We expect to hit and cross the 2% target later this year, consistent with our view that the Fed starts raising short-term interest rates in the first half of 2015.

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Posted on Tuesday, August 19, 2014 @ 10:13 AM • Post Link Share: 
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  Housing Starts Surged 15.7% in July
Posted Under: Data Watch • Home Starts • Housing

Implications: Great news on home building. Housing starts boomed in July, soaring 15.7%, and were revised up substantially for June. The upward trend should continue. Building permits also soared in July, up 8.1%, as single-family and multi-family permits rose 0.9% and 21.5% respectively. Starts can be volatile from month to month, so to find the underlying trend we look at the 12-month moving average, which now stands at the highest level since October 2008. The total number of homes under construction, (started, but not yet finished) increased 2.9% in July and are up 22.8% versus a year ago. No wonder residential construction jobs are up 116,000 in the past year. Multi-family construction is taking the clear lead in the housing recovery. Single-family starts have been in a tight range for the past two years, while the trend in multi-family units has been up (although volatile). In the past year, 35% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year. In other recent housing news, the NAHB index, which measures confidence among home builders, rose two points to 55 in August, the best reading since January. Looks like a broad pick-up in both sales and foot traffic around the country.

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Posted on Tuesday, August 19, 2014 @ 9:47 AM • Post Link Share: 
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  Jackson Hole: A Recipe for Inflation
Posted Under: Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates
On Thursday, The Federal Reserve Bank of Kansas City’s annual retreat in Jackson Hole, WY will start. The topic of discussion is: “Re-Evaluating Labor Market Dynamics.”

The title itself says a lot about the Fed’s current mindset. Economists have been studying labor market dynamics for many, many decades, if not centuries. So, why does the Fed need to do any re-evaluating?

The answer: the unemployment rate is still 6.2% and other measures of the labor market are far from robust. This is true even though the Fed has spent trillions on bonds, boosted its balance sheet to record levels and cut interest rates to zero.

Maybe the Fed should “re-evaluate monetary policy,” or study “the impact of fiscal policy on the economy” or find “the actual efficacy of QE.” With all those juicy, and important, policy topics available, why study the labor market?

Back when Ben Bernanke was Chairman of the Fed, he targeted a 6.5% unemployment rate to start tightening. Now, Fed Chair Janet Yellen says it’s more complicated than that. There are more important measures of labor market health.

What’s interesting about all of this is that the Fed is becoming a poster child for “mission creep.” When the Fed first started in 1913, its job was to protect the value of the US currency. Then, with passage of the Federal Reserve Reform Act of 1977, the Fed received a dual mandate – to keep “the unemployment rate” and inflation low.

This dual mandate was a mistake. The Fed has control over one thing – the amount of money circulating in the economy. But, money itself cannot create jobs, or fewer part-time jobs, or increase the labor force participation rate. If printing money actually created wealth, then we should allow every citizen to counterfeit their own currency. Of course, this would not work. Counterfeiting is illegal because you get something for nothing.

No monetary policy expert has argued that the US experienced the crisis of 2008 because the Fed was too tight. And no one, with credentials, argues now that the US economy is growing slowly because money is scarce.

In other words, monetary liquidity was not, and has not been, a problem for the economy. As a result, any findings by the Fed that the labor market is not performing at its full potential can be seen as proof that monetary policy is not the tool for the job.

As the US learned in the 1980s, over the long-term, a single policy lever cannot accomplish more than one policy objective. Monetary policy controls inflation in the long run. Fiscal policy impacts the real economy (GDP and unemployment).

The Fed has now been easy for over five years, so it is impossible to argue that monetary policy is being used as a short-term tool. If the labor market is still having problems it must be because fiscal policy is harming potential growth. With government spending, and especially redistribution, much higher than in the 1990s, regulation a huge and growing burden, Obamacare, and higher tax rates, it’s no wonder employment and incomes are lagging.

Unfortunately, the Fed does not see it this way. It is willing to maintain abnormally, and artificially, low interest rates because the US hasn’t reached so-called full employment. But those artificially low rates may cause other problems, like a bubble in some sector, which the Fed has now decided to deal with using “macro-prudential policy tools.” It sounds really technical, but it's essentially playing “whack-a-mole” once excesses from easy money pop up. In effect, the Fed wants to use monetary policy as a long-term policy tool and deal with short-term monetary problems by using regulatory tools.

In reality, the existence of financial market excesses should prove that Fed policy is being mishandled. But the Fed will choose to view excesses as a mistake by financial institutions themselves. Blame the other guy, always.

This is a recipe for falling behind the curve. The Fed is already there and is likely to stay there for some time to come.

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Posted on Monday, August 18, 2014 @ 10:45 AM • Post Link Share: 
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  Industrial Production Increased 0.4% in July
Posted Under: Data Watch • Industrial Production - Cap Utilization

Implications: A very strong report out of the industrial sector today, led by a surge by automakers. Overall, industrial production rose a healthy 0.4% in July, coming in slightly above consensus expectations and growing at the fastest pace in five months. However, the overall 0.4% gain was held down by a steep 3.5% drop in utility output, due to a relatively mild July. Taking out utilities and mining gives us manufacturing, which boomed 1.1% in July. Autos led the way, increasing 10.1%, the largest monthly gain since July 2009, back during cash-for-clunkers. But even outside the auto sector, manufacturing grew a solid 0.4%. We expect continued robust growth in the industrial sector in the year ahead. The housing recovery is still young and both businesses and consumers are in a financial position to ramp up investment and the consumption of big-ticket items, like appliances. In particular, note that the output of high-tech equipment is up 8.3% from a year ago and up at a 17.3% annual rate in the past three months, signaling companies’ willingness to upgrade aging equipment from prior years. Capacity utilization now stands at 79.2% in July, higher than the average of 78.9% over the past twenty years. Further gains in production in the year ahead will push capacity use higher, which means companies will have an increasing incentive to build out plants and equipment. The bottom line is that today’s data, which show declining “slack,” will help those at the Federal Reserve who want to raise short-term rates earlier rather than later. In other recent news, new claims for unemployment insurance increased 21,000 last week to 311,000. Continuing claims rose 25,000 to 2.54 million. It’s still early, but plugging these figures into our models suggests August payrolls are increasing 205,000 nonfarm and 195,000 in the private sector.

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Posted on Friday, August 15, 2014 @ 11:34 AM • Post Link Share: 
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  The Producer Price Index (PPI) Rose 0.1% in July
Posted Under: Data Watch • Inflation • PPI

Implications: The zig-zag pattern in producer prices continues as we start the second half of 2014, but the underlying trend points to some acceleration in inflation. Following a dip in May and a jump in June, producer prices rose a modest 0.1% in July. The gain was all from services, as goods prices were flat in July. The rise in service prices was led by transportation and warehousing, up 0.5% in July. Prices for goods were flat in July as a 0.6% drop in energy prices offset a 0.4% increase in food and a 0.2% gain in goods excluding food and energy. Through the first seven months of 2014, producer prices are up at a 2.5% annual rate, well above the 1.4% rate over the same period in 2013. The acceleration is more prevalent in prices for goods, which account for nearly 35% of the total index. Goods prices are up 2.0% in the past twelve months but have climbed at a 2.9% annual rate so far in 2014. By contrast, services are up 1.5% from a year ago and have climbed at a 2.2% rate in the past seven months. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for processed goods are up at a 1.8% annual rate in the past three months, nearly identical to the 1.6% gain over the past year. Prices for unprocessed goods saw a sharp 2.7% decline in July and are down at a 13.7% annual rate in the past three months. But intermediate demand prices are highly volatile and we expect prices to move higher over the coming months. Taken as a whole, the trend in producer price inflation is hovering around 2%. In other recent news, trade prices showed little inflation in July. Import prices declined 0.2% and were unchanged excluding oil; export prices were unchanged overall, but up 0.3% excluding agriculture. In the past year, import prices are up 0.8% while export prices are up 0.4%. We expect more inflation in the year ahead given loose monetary policy.

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Posted on Friday, August 15, 2014 @ 9:32 AM • Post Link Share: 
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  Retail Sales Were Unchanged in July
Posted Under: Data Watch • Retail Sales

Implications: Retail sales were unchanged in July, ending a five month string of gains, and coming in below consensus expectations. There were no categories of sales with big gainers or any with big losers - a pretty blah report all around. Even though retail sales were flat in July, sales continue to grow at a healthy clip from a year ago, up 3.7%. Nonetheless, they have slowed recently. Over the past six months retail sales are up at a 7.6% annual rate, but over the past 3 months, sales are up 2.8% at an annual rate. While it may seem that the Plow Horse is slowing once again, we think this slowdown is temporary, especially given the fact that employment continues to improve. “Core” sales, which exclude autos, building materials and gas, increased 0.1% in July and have been positive in twelve of the last thirteen months. These sales are a key input into the GDP data and if unchanged in August and September, these sales will grow 2.0% at an annual rate in Q3 versus Q2. Once we include other spending (on services and durables), our expectation is that “real” (inflation-adjusted) consumer spending, goods and services combined, will rise at a 2.5% annual rate in Q3.

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Posted on Wednesday, August 13, 2014 @ 11:35 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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