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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Real GDP was Revised to a 2.2% Annual Growth Rate in Q4
Posted Under: Data Watch • GDP

Implications: Real GDP growth was revised down for the fourth quarter, but still beat consensus expectations and presented a better “mix” for growth in 2015. The reason today’s report is better for the economic outlook is that all of the downward revision came from inventories, which leaves more room to fill shelves and showrooms in future quarters. Meanwhile, business investment in equipment, intellectual property, and structures were all revised higher. Overall, what we have here is another plow horse report. Expect another report just like this for Q1, with unusually harsh East Coast weather and a West Coast port strike (now resolved) holding growth a little below what we think is a trend of 2.5% to 3%. Note that nominal GDP (real growth plus inflation) is up 3.6% from a year ago and up at a 4.1% annual rate in the past two years. These figures signal that a federal funds target rate of essentially zero is too loose. As a result, we think the Fed is still on track to start raising rates in June. In other news this morning, the Chicago PMI, a survey of manufacturing sentiment, fell to 45.8 in February from 59.4 in January. We think the drop reflects weather (a lot), the port strike (a little), and will rebound sharply next month. However, we’re now forecasting that Monday’s national ISM manufacturing report will decline to 52.0 from 53.5 in January. Also today, pending home sales, which are contracts on existing homes, increased 1.7% in January. Plugging this into our models suggests existing home sales (counted at closing) increase to 4.93 million in February.

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Posted on Friday, February 27, 2015 @ 10:08 AM • Post Link Share: 
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  New Orders for Durable Goods Increased 2.8% in January
Posted Under: Data Watch • Durable Goods

Implications: New orders for durable goods started off January on a positive note, increasing for the first time in three months. However, the gains were led by civilian aircraft, which are very volatile from month to month. Outside the transportation sector, orders were up a very Plow Horse-like 0.3%, led by machinery. Orders ex-transportation are up a healthy 4.5% from a year ago. The worst news in today’s report was that “core” shipments, which exclude defense and aircraft, declined 0.3% in January. However, these shipments are still up 5.3% from a year ago and unfilled orders for “core” capital goods rose 0.3% in January, hit a new record high, and are up 8.1% from a year ago. So the report suggests an impending rebound in shipments over the next few months. Although lower oil prices may hurt the Oil Patch, we expect to see higher production outside the oil sector. Orders and shipments for durables should accelerate 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 breaching long-term norms, leaving more room (and need) for business investment. In other news this morning, new claims for unemployment insurance rose 31,000 last week to 313,000. The four week average is now 294,500. Continuing claims for regular state benefits fell 21,000 to 2.40 million. Plugging these figures into our models suggests another solid month of job growth in February, with payrolls expanding around 250,000. On the housing front, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.8% in December, the largest gain since May 2013. In the past year, the FHFA index is up 5.4% versus a gain of 7.7% in the year ending in December 2013. We expect further gains in home prices in 2015, although at a slower pace.

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Posted on Thursday, February 26, 2015 @ 10:49 AM • Post Link Share: 
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  The Consumer Price Index Declined 0.7% in January
Posted Under: CPI • Data Watch • Inflation

Implications: With the exception of the Panic in late 2008, consumer prices fell in January at the fastest pace since 1949. As a result, the CPI is now lower than it was a year ago. Some analysts are going to use these data to warn about “Deflation” and say the Federal Reserve should hold off on raising rates. But the details of the report show we are not in the grips of deflation and the Fed should stay on track to start raising rates in June. True deflation – of the kind we ought to be concerned about – is caused by overly tight monetary policy and price declines that are widespread, not isolated to one sector of the economy. Think of the Great Depression. But we are not experiencing widespread declines in prices. The drop in consumer prices in January was all due to energy. Excluding energy, prices rose 0.1% in January and are up 1.9% from a year ago, very close to the Fed’s 2% inflation target. “Core” prices, which exclude food and energy, increased 0.2% in January and are up 1.6% from a year ago. Moreover, energy prices have turned higher in February, so this sector will soon be pushing the CPI up rather than holding it down. And, there are sectors where prices are rising faster. Food prices have risen 3.2% in the past 12 months, so if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and that “true” inflation is higher. If you love eating steak, you’ve been out of luck, with prices up almost 15% from a year ago. In addition, housing costs are going up. Owners’ equivalent rent, which makes up about ¼ of the CPI, rose 0.2% in January, is up 2.6% in the past year, and will be a key source of higher inflation in the year ahead. The best pieces of news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 1.2% in January, the fourth consecutive month of gains and the largest monthly rise since 2008. These earnings are up 2.4% from a year ago and up at a faster 4.9% annualized rate over the past six months, signaling that consumer purchasing power continues to grow.

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Posted on Thursday, February 26, 2015 @ 10:36 AM • Post Link Share: 
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  New Single-Family Home Sales Declined 0.2% in January
Posted Under: Data Watch • Home Sales • Housing

Implications: Yes, new home sales slipped 0.2% last month from December, but, at 481,000, January sales were still at the second fastest annualized pace since 2008. We view this as impressive, especially when we take into account the fact that new home sales in the Northeast fell 51.6% to a 15,000 annual rate, the lowest level for any month on record (since 1973) – blame snowstorms. Nonetheless, overall sales are up 5.3% from a year ago. Forgive us for sensing some good news in this report. New home sales have been depressed for a few reasons. 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 grown faster than multi-family starts, suggesting builders (the quintessential entrepreneur) see a larger appetite for homeownership and single-family home purchases. The inventory of new single-family homes rose 3,000 in January, but still remains very low, as the chart to the right shows. As a result, homebuilders still have plenty of room to increase both construction and inventories. Moreover, existing homes sales data show fewer all-cash buyers and more financed purchases. The median sales price of a new home in January was up 9.1% from a year ago. In other recent housing news, the Case-Shiller Index shows home prices up 0.7% nationwide in December, bringing the gain for 2014 to 4.6%. Home prices increased in 2014 for all of the 20 major metro area tracked by the index, with gains led by San Francisco, Miami, and Denver. The smallest increase was in financially-challenged Chicago. The Case-Shiller price index shows slower increases than earlier in the housing recovery, for example, the index showed home prices were up 10.8% in 2014. This makes sense as national home prices are now at historical norms relative to rents. We expect continued increases in home prices in 2015, but at a slightly slower pace than in 2014. In other recent news, the Richmond Fed index, which measures manufacturing sentiment in the mid-Atlantic, declined to zero in February from +6 in January. We’re guessing the drop is largely due to the unusually harsh weather in that region this month.

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Posted on Wednesday, February 25, 2015 @ 11:01 AM • Post Link Share: 
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  Existing Home Sales Declined 4.9% in January
Posted Under: Data Watch • Home Sales • Housing

Implications: Nothing shows the Plow Horse Economy better than housing. Sales of existing homes fell to a nine-month low in January, coming in below consensus expectations. However, the underlying fundamentals continue to improve. Sales have gained on a year-to-year basis for four consecutive months and are now up 3.2% from a year ago. And this gain comes in the face of a drop in distressed and all-cash-sales. Distressed homes (foreclosures and short sales) now account for only 11% of total sales, down from 15% a year ago. All-cash buyers are down to 27% of sales from a high of 35% in February 2014. As a result, even though total sales are up 3.2% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up 12.5%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace, closer to 12.5% per year rather than 3.2%. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. One of the reasons for the tepid recovery in existing home sales so far is a lack of inventory. Inventories are down 0.5% from a year ago and close to the lowest level in almost two years. In the year ahead, we expect the higher level of home prices to bring more sellers into the market, which should help generate additional sales. Either way, whether existing home sales are up or down, it’s important to remember these data, by themselves, should not change anyone’s impression about the overall economy. Existing home sales contribute almost zero to GDP, which counts “new” production, not re-sales of old property. In other news from last week, new claims for unemployment benefits declined 21,000 to 283,000. Continuing claims increased 58,000 to 2.43 million. It’s still early, but plugging these figures into our models suggests nonfarm payrolls will be up around 260,000 in February, another solid month and enough to keep the Fed on track for raising rates starting in June.

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Posted on Monday, February 23, 2015 @ 12:49 PM • Post Link Share: 
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  Strong Dollar: Good, Not Bad
Posted Under: Government • Markets • Monday Morning Outlook • Interest Rates • Stocks
In fifteen short days, the bull market will be six years old. And, we’ve never seen such a steep wall of worry. Nouriel Roubini called it a “dead cat bounce.” Many said the recession wouldn’t end until 2010, maybe 2011. Supply-siders said the “Fiscal Cliff” would do us in. Keynesians said “The Spending Sequester” would end the boom.

Don’t forget Dubai, commercial real estate loans, Obamacare, or the implosion of the Eurozone. It’s been a long six years, but the stock market keeps rising and the economy keeps growing.

So, the $64,000 question; why? We think this answer is simple – it’s profits from entrepreneurial activity driving stocks higher, not QE or government spending. We use 60-years of historical interest rates and profits data, and with the 10-year Treasury yield below 4%, the current level of corporate profits means equites are undervalued when compared to historical norms. That’s why equities keep rising. The market has been, and still is, undervalued. This will be true until corporate profits fall sharply, interest rates soar, or the stock market rises to a point that exceeds the current value of discounted earnings.

This is why we remained bullish through all the fears of the past six years and why we don’t think the latest fear, a rising dollar, is something that should cause investors to climb into a foxhole.

As the theory goes, a stronger US dollar (up almost 20% versus major world currencies since mid-2014) will hurt US equities by either reducing profits directly or hurting the US economy first and then profits down the road.

In theory, a stronger dollar translates into lower profits for US-based and listed multinational companies. But that’s only true if the dollar keeps rising. Otherwise, it’s a one-time hit that will end as soon as the dollar stops strengthening. But, we don’t think that will happen. Everyone knows the Fed is about to tighten policy and we expect any tightening to go very slowly. In other words, a key reason for a strong dollar is already priced in, maybe more than priced in.

And the theory also downplays other forces at work. The historical record shows little relationship between the strength of the dollar and corporate profits. Corporate profits grew rapidly in the first half of the 1980s and for much of the 1990s, even as the dollar soared.

One reason is something called the “J-Curve,” which says that it takes a while for a stronger currency to change a country’s appetite away from goods produced domestically and toward foreign goods. So, in the meantime, it takes fewer dollars to buy the foreign goods we were going to buy anyhow. As a result, the trade deficit shrinks even as the dollar is stronger, boosting US GDP.

Another idea to keep in mind is that a stronger US dollar can reflect weaker foreign currencies due to actions taken by those countries, like looser monetary policy designed to prevent deflation. If so, those policies may generate more real economic growth abroad, which helps everyone.

But the ultimate reason a stronger US dollar should not be seen as a negative for US equities is that the stronger dollar is itself a vote of confidence in the future of the US economy. It signals that the collective wisdom of currency traders is giving America a big thumbs up.

The US bull market will come to an end someday. But that day is still a long way away and a stronger US dollar won’t be the culprit.

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Posted on Monday, February 23, 2015 @ 10:39 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

Posted on Monday, February 23, 2015 @ 7:40 AM • Post Link Share: 
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  Brian Wesbury on Fox Business: Where is the wage growth?
Posted Under: Video • TV • Fox Business
Posted on Thursday, February 19, 2015 @ 9:04 AM • Post Link Share: 
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  Brian Wesbury on Fox Business: Housing industry’s struggles continue
Posted Under: Video • TV • Fox Business
Posted on Thursday, February 19, 2015 @ 9:01 AM • Post Link Share: 
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  Brian Wesbury on Fox Business: Impact of a combined West Coast oil, port workers strike
Posted Under: Video • TV • Fox Business
Posted on Thursday, February 19, 2015 @ 8:56 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.
Search Posts
Brian Wesbury on Fox Business: What to expect from the Fed minutes
Brian Wesbury on Fox Business: Is the Greek debt crisis really a big deal?
Industrial Production Rose 0.2% in January
Housing Starts Declined 2.0% in January
The Producer Price Index Dropped 0.8% in January
QE and Currency Wars: A Theory With No Evidence
M2 and C&I Loans
Apocalypse? Not a Chance!
Retail Sales Drop: Noise, Not News
Retail Sales Declined 0.8% in January
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