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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Personal Income Increased 0.2% in May
Posted Under: Data Watch • PIC


Implications: In April, consumer spending grew at the fastest monthly pace since 2009, back during "cash for clunkers."  After a month like that, you might expect consumers to pull back a little if they felt nervous about the economy.  Instead, consumer spending grew 0.4% in May, the second fastest pace in the past year.  No signs of a recession here, not even close.  "Real" (inflation-adjusted) consumer spending grew 0.3% in May and is up 2.7% in the past year.  Although personal income grew a modest 0.2% in May, incomes are up 4% in the past year versus a 3.7% gain for consumer spending.  In other words, the recent strength of the American consumer has not been fueled by an unsustainable credit binge.  Instead, it reflects higher purchasing power by American workers; private-sector wages and salaries rose 0.2% in May and are up 4.9% from a year ago.  As the labor market keeps tightening, incomes will continue on their upward trend.  The one consistent dark cloud in these reports has been the data on government redistribution.  While unemployment compensation is hovering around the lowest levels since 2007, overall government transfers to persons were up 0.2% in May and are up 3.8% 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 and, among those getting the transfers, weakens work incentives.  That's why we have a Plow Horse economy, not a Race Horse economy.  On the inflation front, the PCE deflator, the Fed's favorite measure, increased 0.2% in May.  Although it's only up 0.9% from a year ago, it was up only 0.3% in the year ending in May 2015, so inflation is accelerating.  Meanwhile, the "core" PCE deflator, which excludes food and energy, is up 1.6% from a year ago.  That's also below the Fed's 2% inflation target, but we expect continued acceleration in the year-to-year change in the months ahead.  Together with continued employment gains, these data support the case for the Fed to hike rates again in 2016, in spite of fear-mongering by uber-doves.  On the housing front, pending home sales, which are contracts on existing homes, declined 3.7% in May after rising 3.9% in April.  Combined, the past two months suggests existing home sales, which are counted at closing should be roughly unchanged in June, staying around the highest level since 2007.

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Posted on Wednesday, June 29, 2016 @ 10:48 AM • Post Link Share: 
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  Brexit Conference Call Replay

A replay of First Trust Chief Economist Brian Wesbury's June 27th conference call discussing "Brexit" is now available.

To access the audio recording, call 1-888-203-1112
Passcode: 7788646

Posted on Tuesday, June 28, 2016 @ 1:42 PM • Post Link Share: 
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  Real GDP Growth in Q1 was Revised up to a 1.1% Annual Rate
Posted Under: Data Watch • GDP


Implications:  Today's final GDP report for the first quarter showed a slightly faster pace of growth and higher corporate profits compared to prior readings.  Real GDP grew at a 1.1% annual rate in Q1 versus last month's estimate of 0.8% and the initial Q1 reading of 0.5% annualized growth.  However, "final" never really means "final" when it comes to government reports – it will be revised in the years ahead.  This includes the annual "benchmark" revisions at the end of July, when the government will, once again, try to fix the seasonal distortions that have been buffeting the GDP data the past several years, where they underestimate growth in Q1 and overestimate growth in the middle quarters of the year.  Just like last year, we expect growth in Q2 and Q3 to rebound from Q1.  With just days left in the second quarter, it looks like the economy grew at around a 2% annual rate in Q2.  Today's report also provided a second look at overall corporate profits, and just like real GDP, the headline was revised higher. Corporate profits rose 1.8% in Q1, better than the originally reported 0.3% gain.  Although corporate profits are down 4.3% from a year ago, this movement has been led by the petroleum and coal industry and we expect these profits to rebound. Despite continued GDP growth, with unemployment under 5%, core inflation near 2%, and accelerating wage growth, the Fed keeps allowing market fluctuations and global factors to spook it away from taking the next step towards raising rates.  This is a mistake that could cost the economy over time, just like low interest rates eventually caused problems in the housing sector in the previous decade.  Nominal GDP growth – real GDP growth plus inflation – is up 3.3% from a year ago and up 3.6% annualized in the past two years, much too high for a short-term interest rate near zero.  In other news this morning, the national Case-Shiller price index increased 0.1% in April and is up 5.0% in the past year, an acceleration from the 4.3% gain in the year ending in April 2015. Price gains in the past twelve months have been led by Portland, Seattle, and Denver.  On the manufacturing front, the Richmond Fed index, which measures mid-Atlantic factory sentiment, fell to -7 in June from -1 in May, signaling a pullback in sentiment.  We expect the national ISM index to be roughly unchanged for June, remaining above 50, signaling continued modest growth.

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Posted on Tuesday, June 28, 2016 @ 11:55 AM • Post Link Share: 
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  Uncertainty Not All Bad
Posted Under: Europe • Government • Markets • Monday Morning Outlook

If you listen to elite policymakers around the globe, they all seem to agree on one thing: the need to avoid "uncertainty."  In their thinking the battle against uncertainty is a never-ending struggle, and if only the world were more certain the economy would be doing much better.

Which is kind of odd when you think about it, because if you really want certainty you couldn't get much more of it than in the old Soviet Union or present day North Korea.  Those economies minimize flexibility, choice, and freedom, while maximizing certainty.  It's the certainty of the prison cell, but it's certainty nonetheless.

By contrast, free-market capitalism is the opposite of a system built on certainty.  No one knows what will be invented or discovered next – otherwise it already would have been invented or discovered – or how consumer appetites will change in the future.  In free-market capitalism, uncertainty is a feature, not a bug.                  

Obviously, not all certainty is bad.  People are more industrious and more inventive when they can rely on the certainty that their property rights will be respected by both the government and their fellow countrymen.  That kind of certainty is good, and governments that respect the rule of law, while minimizing corruption and the impact of political correctness, help maximize the risk-taking that boosts standards of living.

In the end, it's really about "faith" more than "certainty."  If investors, entrepreneurs, and workers can operate with justifiable faith that the government will protect their freedom, they will always attempt to boost economic growth.              

That's why we think the recent vote by the UK to leave the European Union is not the problem some analysts and investors think.  The British people found themselves increasingly enmeshed in rules and regulations not of their own making, and lacking the representation of democratically elected leaders. 

For example, in the topsy-turvy world of bureaucratic double-speak, EU rules required the British government to treat immigrants seeking welfare similarly to British citizens seeking welfare, because to treat them differently was supposedly an infringement on the right of people to travel in the EU.

Yes, the coming weeks will bring angst over what the future holds.  But, ultimately, a freer and more independent Britain, one that has control over its own political destiny, is likely to be a more responsible and prosperous one as well.  The EU, which runs a large trade surplus with the UK, has every incentive to negotiate a free trade deal.  Meanwhile, the UK has an opening to expand free trade with the US and Canada, which the EU was making more difficult.

The recent sell-off in equities based on Brexit is a buying opportunity.  Look for the UK's position relative to the EU to evolve toward that of Norway or Switzerland, which have voted to not be members of the EU. So, the EU created a "social" membership in the European Economic Area, with free trade and easier border crossings, but a buffer from the political whims of Brussels.  The UK is bigger than Norway or Switzerland, which gives it more leverage.   The EU has created a bureaucracy which makes the costs of being a member greater than the benefits for the average citizen. Politicians, on the other hand, love big bureaucracies. This time the people spoke. And, that's why Brexit is good.

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

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Posted on Monday, June 27, 2016 @ 11:11 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 27, 2016 @ 7:43 AM • Post Link Share: 
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  New Orders for Durable Goods Declined 2.2% in May
Posted Under: Data Watch • Durable Goods • Europe


Implications: In case you missed it, the UK voted yesterday to leave the European Union.  As we wrote earlier this month, we view this as a positive development, a move towards freedom. The short-term volatility is a buying opportunity.  With that out of the way, on to the data. Durable goods orders declined 2.2% in May, following a combined 5.3% rise in March and April.  Military aircraft and motor vehicles led orders lower in May, although most major categories showed a pullback as well.  Even excluding the volatile transportation sector, orders fell 0.3% in May, coming in below the consensus expected rise of 0.1%.  Shipments of "core" capital goods - non-defense, excluding aircraft – declined 0.5% in May, but were down a more modest 0.2% including upward revisions to prior months. This is the measure that the government uses for calculating GDP.  If unchanged in June, these shipments will be down at a 0.8% annual rate in Q2 vs the Q1 average.  But that doesn't mean that we expect GDP growth slowed in the second quarter. The first estimate of Q2 growth is still a month off, but we are forecasting that the U.S. economy grew at around a 2.0% rate in the second quarter.  We also get a final reading on Q1 GDP next Thursday, which we expect will show the economy grew at a 1.1% annual rate, up from the 0.8% estimate released in May (the initial Q1 GDP release estimated growth of 0.5%).  Looking forward, we expect durable goods to rebound.  The biggest drag on orders in the past year has been machinery, but that should end soon given the bounce in energy prices.  In other words, business investment should pick up in the months ahead.  In addition, 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.  While the Fed may cite the May slowdown in orders along with the UK exit vote and market volatility as reasons to hold off on a July (and possibly even September) rate hike, we think this puts too much emphasis on short-term events. The plow horse economy continues to move forward.

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Posted on Friday, June 24, 2016 @ 11:36 AM • Post Link Share: 
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  New Single-Family Home Sales Fell 6.0% in May
Posted Under: Data Watch • Home Sales • Housing


Implications:  After surging in April to the fastest pace in eight years, new home sales took a breather in May, coming in slightly below consensus expectations, but still signaling continued strength.  In fact, even though sales of new homes fell 6% in May, today's number was still the second strongest reading since February 2008.  It's important to remember that home sales data are very volatile from month to month, so it's important not to get too carried away and to keep focusing on the trend, which remains positive.  We think there are a couple reasons to expect housing to remain a positive factor for the economy in the months ahead.  First, employment gains and the beginning of a thaw in mortgage financing.  Second, wage growth seems to be picking up, putting the prospect of buying a home in reach for more people.  Third, the homeownership rate remains depressed as a larger share of the population is renting, leaving plenty of potential buyers as conditions continue to improve.  And remember that, unlike single-family homes which are counted in the new home sales data, multi-family homes (think condos in cities) are not counted in this report.  So a shift back towards single family units will also serve to push reported sales higher.  The inventory of new homes rose 3,000 in May but remains very low by historical standards (see chart to right).  Moreover, the recent recovery in inventories has been led by homes where construction is still in progress, or has yet to begin.  As a result, homebuilders still have plenty of room to increase both construction and inventories. The median sales price of a new home fell 9.3% in May, but is still up 1.0% versus last year.  A change in the "mix" of homes sold toward the lower end of the market is hiding some of the increase in home prices. In other news this morning, new claims for unemployment insurance declined 18,000 to 259,000. Continuing claims fell 20,000 to 2.142 million. These figures suggest a rebound in job growth in June.

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Posted on Thursday, June 23, 2016 @ 11:55 AM • Post Link Share: 
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  Existing Home Sales Increased 1.8% in May
Posted Under: Data Watch • Home Sales • Housing


Implications:  Existing home sales continued to show strength in May, posting their third consecutive monthly gain, and coming in at the fastest pace since 2007.  Sales of previously owned homes rose 1.8% in May to a 5.53 million annual rate and are up 4.5% from a year ago. In a sign of a mild loosening of lending standards (finally!), non-cash purchases, where the buyer uses a mortgage loan, are up 7.3% from a year ago. This is encouraging, and we think the broader trend will continue to be upward, but there are still some headwinds. Tight supply and rising prices continue to hold back sales. While inventories rose 1.4% in May they are still down 5.7% from a year ago.  The months' supply of existing homes – how long it would take to sell the current inventory at the most recent selling pace – is only 4.7 months.  According to the National Association of Realtors® (NAR), anything less than 5.0 months is considered tight supply.  The good news is that demand was so strong in May that properties typically only stayed on the market for 32 days, the shortest duration since the NAR began tracking in May 2011!  In fact, 49% of properties in May sold in less than a month, pointing to further interest from buyers in the months ahead.  However, higher demand from the spring selling season also helped push the median price for an existing home to an all-time high, up 4.7% versus a year ago, and marking the 51st consecutive month of year-over-year price gains. While this may be pricing some lower-end buyers out of the market, it should help alleviate some of the supply constraints as "on the fence" sellers take advantage of higher prices and trade-up to a new home, bringing more existing properties onto the market.   Meanwhile, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.2% in April and is up 5.9% from a year ago.   In the year ending in April 2014, FHFA prices were up 5.6%.

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Posted on Wednesday, June 22, 2016 @ 11:47 AM • Post Link Share: 
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  Policy Stagnation
Posted Under: Government • Inflation • Monday Morning Outlook • Productivity • Fed Reserve • Interest Rates • Spending • Taxes

Back in the 1970s, President Jimmy Carter told us that we were just going to have to learn to live with less.  The mood among establishment economists in the late 1970s was gloomy.  The world was running out of oil; inflation was an odd phenomenon that was beyond our control.  Sure, we could get lower unemployment, but only by letting inflation get even higher.  Somehow, the US had lost its post-war economic mojo and just wasn't going to get it back.

And then came the 1980s and 1990s and these ideas were blown out of the water.  We had faster growth, lower unemployment, and lower inflation.

The real problem in the late 1960s and 1970s was a series of blunders by the government.  Monetary policy got too loose and social spending grew too high.  Inflation pushed more workers into higher marginal tax brackets.  The Great Society had laid some very bad eggs and eventually the chickens came home to roost.  The solution was tighter monetary policy, deregulation, and lower tax rates.      

But now, after several years of Plow Horse economic growth following a very deep recession, these theories about slow growth are making a comeback.  They're not exactly the same.  No serious economist claims we're about to run out of oil anymore; just the opposite, they worry fossil fuel prices are too cheap!  But they have theories about why the economy has been relatively slow and they think we may have to accept slower growth over the long run as a result. 

Combined, they go under the banner of "secular stagnation."  This was the spirit that animated last week's Fed meeting as well as Fed Chief Yellen's press conference that followed.  Productivity growth has fallen and it can't get up. 

Former Treasury Chief Larry Summers has been arguing that savings are just too great given available investment opportunities, making monetary policy ineffective.  Professor Robert Gordon says the good stuff has already been invented or discovered and we just have to settle for slower growth in living standards.  

Supporters of the secular stagnation theory do have one strong point.  The Baby Boom generation is retiring, which means the labor market is starting to lose many high-skilled workers.  But we think the main problem with growth has nothing to do with this demographic shift.  Instead, once again, the real culprit behind sub-par growth is wrongheaded government policies.      

In a world with extraordinarily low interest rates, the federal government should be enacting deep supply-side tax cuts.  Cutting taxes on capital investment should pay for itself and even if doesn't, financing it with very long-term debt would be easy.  The economy is already growing faster than the level of interest rates.  

The welfare state, in all of its forms, has become much too big again.  Disability benefits are too easily available.  For many workers, it's become a transition to retirement benefits rather than a response to a real physical need.  The expansion of Medicaid under Obamacare makes it easier for low-income workers to not work and creates a huge disincentive to earn more money.   

More states and local governments are "experimenting" with higher minimum wages that will only result in less hiring and lower economic growth.

In many states, our K-12 education system is under the hammerlock of government worker unions that think the schools operate for their benefit rather than the long-term interests of their students.  At the college level, subsidies supposedly meant to make it easier for students to pay for a higher education have become a way for the government to funnel money to college professors and administrators.  In turn, these colleges often teach subjects that don't increase their students' market value or, even worse, proselytize for a worldview hostile to the market and western civilization itself.    

So the next time you hear about limits to growth or about a new era of stagnation, think about all the hurdles to growth that political elites have set up.  Slow growth doesn't just happen; it's been a choice made by policymakers.  But just like in the early 1980s, eventually policymakers can get it right.  

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

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Posted on Monday, June 20, 2016 @ 11:32 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 20, 2016 @ 7:43 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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