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   Brian Wesbury
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  The ISM Manufacturing Index Surged to 59.0 in August
Posted Under: Data Watch • ISM

Implications: A booming report from the manufacturing sector as the ISM Manufacturing index, which measures factory sentiment around the country, rose to 59.0 in August, the highest level in more than three years. The best news in today’s report came from the new orders index, which rose to 66.7, the highest reading in more than a decade, and a sign that factory activity should continue to pick up in the months ahead. According to the Institute for Supply Management, an overall index level of 59.0 is consistent with real GDP growth of 5.2% annually. While last week’s GDP report came in at a strong 4.2% for Q2, we don’t expect the growth rate to remain quite that fast over the remainder of the year. The long-term link between the ISM report and real GDP growth has tended to over-estimate real GDP growth in the past several years. On the inflation front, the prices paid index fell to a still elevated 58.0 in August from 59.5 in July. Along with broader measures of consumer and producer prices, inflation is showing signs of overly loose monetary policy. The employment index was essentially unchanged at 58.1 in August, just off the three year high reading of 58.2 in July’s report. With the data in today’s release, we are currently forecasting a gain of about 25,000 manufacturing jobs for this Friday’s employment survey. In other news today, construction increased 1.8% in July and 3.3% including upward revisions for May and June. The gain in July itself was led by state and local projects (like paving roads and building bridges). A large gain in commercial construction was led by power plants and manufacturing facilities. The upward revisions for May/June suggest real GDP will be revised up to a 4.4% annual growth rate in Q2 from a prior report of 4.2%.

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Posted on Tuesday, September 02, 2014 @ 11:34 AM • Post Link Share: 
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  Labor's Great, Capital is Key
Posted Under: Monday Morning Outlook
For centuries, the philosophical, economic and intellectual debate has swung back and forth between the creation of wealth and the redistribution of wealth. In politics, this debate often shows up as a battle between capital and labor.

Labor Day celebrates labor, and it’s really worth celebrating. Labor creates things; including self-worth. “Look what I accomplished” is a sentiment anyone who has labored to create something can relate to.

Unfortunately, many believe labor is undervalued, while capital is unjustly rewarded. But, labor and capital have a symbiotic relationship. One cannot prosper without the other.

Capital boosts productivity and productivity boosts living standards. Workers could seize this capital and redistribute it. But, without new capital to seize, the temporary lift to living standards would fade. Rapidly.

If labor wants higher living standards for a lifetime and their children’s as well, public policies must protect and nurture capital so it’s as plentiful as possible.

For example, auto workers in the Detroit-area often won contracts giving them more lifetime compensation (particularly health benefits) than the companies they worked for could consistently generate. The long-term result: a city that’s a rusted skeleton of its former self, bankrupt, with fewer jobs, and lower living standards relative to the rest of the country.

Attempts to redistribute wealth in Detroit ended up redistributing the capital to other states, and to the suburbs. In fact, when looking at wealth disparity look no further than the disparity between Detroit and its surrounding suburbs.

The best way to increase capital investment is to increase the after-tax return to capital, by cutting taxes on corporate profits, dividends, and capital gains, as well as hastening the ability to write-off the cost of buying new plant and equipment.

What doesn’t work is a modern mix of central planning and crony capitalism, where politicians grant favors or regulatory punishment. Think “green energy.”

Rather than making capital more plentiful, and creating jobs, subsidies siphon capital away from companies that would use it more effectively. Wind and solar may make it on their own someday, and we hope they do, but current policies result in less overall capital and lower retuns on average to all capital. The impact is fewer jobs and lower incomes.

We know a better set of capital friendly policies are not immediately on the way. As a result, we suspect that the medium-term future will look a lot like the most recent five years. States and industries that have higher returns to capital will flourish (be Race Horses), but places which treat capital more poorly, will flounder (call them Dead Horses). Make a Race Horse drag a Dead Horse, and you get a Plow Horse.

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Posted on Tuesday, September 02, 2014 @ 9:31 AM • Post Link Share: 
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  Personal Income Increased 0.2% in July
Posted Under: Data Watch • PIC

Implications: A Plow Horse report on personal income and spending in July. Income was up 0.2%, slightly less than the consensus expected. But income increased 0.3% including upward revisions for prior months and is up at a 4.5% annual rate in the past three months, slightly faster than the 4.3% gain in the past year. In other words, we don’t see a problem with consumer income, which has grown every month so far this year. Nor do we see a problem with consumer spending, despite the 0.1% decline in July. Consumer spending is still up 3.6% from a year ago, which is in the same 3% to 4% range it’s been in since early 2012. Some analysts will harp on recent gains in government transfer payments. Medicaid, for example, has been expanding quickly this year due to Obamacare and is up 9.9% from a year ago. Overall government transfer payments – like Medicare, Medicaid, Social Security, disability, unemployment compensation – are still an unusually large share of income. These transfers were roughly 14% of income before the recession and peaked at 18% right after the recession. But for the past few years, they’ve been hovering just below 17% of income. We’d like to see the share decline to where it was before the recession (or go lower!), but these payments have not been the driver behind income gains the past few years. Private-sector wages & salaries are up 6% from a year ago, which is faster than the 4.6% gain in government transfers. We expect both income and spending to accelerate in the year ahead. Job growth continues and, as unemployment gradually declines, employers will offer higher wages. In addition, consumers’ financial obligations are hovering at the smallest share of income since the early 1980s. (Financial obligations are money used to pay mortgages, rent, car loans/leases, as well as debt service on credit cards and other loans.) On the inflation front, the Federal Reserve’s favorite measure of inflation, the personal consumption price index, rose 0.1% in July. While these prices are still up only 1.6% in the past year, which is below the Fed’s 2% target, they’re up at a 2% annual rate in the past six months and a 2.2% annual rate in the past three months. We believe that, given loose monetary policy, the Fed is going to be struggling sooner than it thinks to keep inflation down at 2%.

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Posted on Friday, August 29, 2014 @ 9:39 AM • Post Link Share: 
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  Real GDP was Revised to a 4.2% Annual Growth Rate in Q2
Posted Under: Data Watch • GDP

Implications: Real GDP is at an all-time record high. It already was before today’s upward revision, but it’s at a new high now after being revised from an original estimate of 4.0% to 4.2% annualized growth. The “mix’ of growth in Q2 is now slightly better, with more business investment and net exports, while inventories were revised down, leaving more room for future growth. Most importantly, after declining in Q1, nominal GDP (real growth plus inflation) snapped back at a 6.4% rate in Q2, the fastest pace for any quarter since 2006. Nominal GDP is now up 4.2% from a year ago and up at a 3.7% annual rate in the past two years. These figures continue to signal that a federal funds rate of essentially zero makes monetary policy too loose. Also in today’s GDP report was our first glimpse at economy-wide corporate profits, which rebounded 8% in Q2 after falling 9.4% in Q1. These profits numbers are calculated by government statisticians and include “capital consumption and inventory valuation adjustments.” In the past two quarters, the BEA capital consumption adjustment, which converts depreciation from historical cost to replacement cost, has subtracted massively from profits. Excluding this adjustment, which doesn’t affect cash flow, corporate profits are at a record high. And if you want to understand why inversions are the rage these days, with the exception of only one other quarter, taxes on corporate profits are the highest share of GDP since the 1970s. In other news this morning, new claims for jobless benefits declined 1,000 last week to 298,000. Continuing claims rose 25,000 to 2.53 million. Eight days away from the official Labor report, our payroll models are signaling an August gain of 202,000 nonfarm, 190,000 private, with upward revisions likely over subsequent months. The last piece of good news reported this morning was a 3.3% gain in pending homes sales in July after a 1.3% decline in June. Pending home sales are contracts on existing homes and these figures suggest existing home sales, which are counted at closing are up again in August.

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Posted on Thursday, August 28, 2014 @ 10:45 AM • Post Link Share: 
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  New Orders For Durable Goods Boomed 22.6% in July
Posted Under: Data Watch • Durable Goods


Implications: Durable goods boomed 22.6% in July, the biggest increase on record going back to 1958. The entire gain in durable goods orders was due to the very volatile transportation sector, which rose 74.2% in July. In particular, civilian aircraft orders rose 318% as Boeing received 324 orders for new planes in July. Excluding transportation, new orders for durable goods declined 0.8% in July, but were revised up to a 3% gain in June (versus a prior estimate of 1.9%) and are up 6.6% versus a year ago. The best news today was that shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – rose 1.5% in July and June shipments were revised up to a 0.9% gain (versus a prior estimate of -0.3%). These shipments are now up 7.6% versus a year ago, a major acceleration from the 0.4% decline in the year ending in July 2013. Until recently, business investment had been unusually slow relative to other parts of the recovery, but it now looks like companies are finally updating their equipment and building out capacity more quickly. On the housing front; mixed news on home prices today. The FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.4% in June, and is up 5.2% from a year ago. However, the Case-Shiller index, which measures homes in 20 key metro areas around the country, declined 0.2% in June, with 13 of the 20 areas showing a decline, led by Minneapolis and Detroit. That’s the first overall decline since early 2012. Still, in the past year, the Case-Shiller index is up 8.1%, with gains led by Las Vegas, San Francisco, and Miami. Both the FHFA index and Case-Shiller show smaller price gains in the past twelve months than in the twelve months that ended in June 2013. We expect that trend to continue, with these measures generally moving up but showing smaller gains than in the recent years. In other news this morning, the Richmond Fed index, a measure of factory sentiment in the mid-Atlantic region, rose to +12 in August from +7 in July, signaling continued gains in industrial production in August.

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Posted on Tuesday, August 26, 2014 @ 10:22 AM • Post Link Share: 
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  Tapering Has Not Hurt The Economy
Posted Under: GDP • Government • Markets • Video • Fed Reserve • Stocks • Wesbury 101
Posted on Monday, August 25, 2014 @ 3:27 PM • Post Link Share: 
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  New Single-Family Home Sales Declined 2.4% in July
Posted Under: Data Watch • Home Sales • Housing

Implications: Another housing number, another Plow Horse report. New single-family home sales declined 2.4% in July, but this comes on the back of an upwardly revised June number. The recent slowdown in new home sales does not mean we are back in a housing recession; home construction remains in an upward trend and new homes sales are still up 12.3% from a year ago. Nonetheless, new home sales still remain at depressed levels and we believe there are a few key reasons for this. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. 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 the report. Third, financing is still more difficult than it has been in the past. The inventory of new homes rose 8,000 in July, but still remains very low as the chart to the right shows, and most of the inventory gains are for homes not started, instead of homes completed. Homebuilders still have plenty of room to increase both construction and inventories. On the pricing front, the median sales price for a new home fell 3.7% in July to $269,800, but this number is not seasonally-adjusted. Prices are still up 2.9% versus a year ago and we still expect a similar gain in the year ahead. Once again, the housing recovery remains intact, despite the fits and starts which are to be expected when the overall economy is a Plow Horse, not a Race Horse.

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Posted on Monday, August 25, 2014 @ 11:07 AM • Post Link Share: 
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  Money Won't Be Tight For A Long Time
Posted Under: Employment • Government • Monday Morning Outlook • Fed Reserve
World monetary policy leaders (including Fed Chair Janet Yellen and ECB President Mario Draghi) met, and spoke, in Jackson Hole, WY last week. It’s the equivalent of the Emmy Awards for central bankers.

But, what is most interesting about all of this is that the more central bankers talk, the less anyone understands them. Supposedly, all the speeches, minutes, transcripts and press conferences are making the Fed, and other central banks, more transparent. But, in the end, they are making everything more opaque.

The Fed, in particular, is becoming harder to understand. Instead of using the unemployment rate as an economic signal, Janet Yellen said the Fed is now using a 19-component “factor model” to measure the health of the labor market. If you really care about this – a Fed white paper describing the model, or something very close to what the Fed is using, can be found here.

The model shows the labor market has improved. But, this is what we already knew by looking at private payrolls, which have grown for 53 consecutive months. Nonfarm payrolls, which include government, are up by more than 200,000 per month for six months in a row – the first time that’s happened since 1997.

But, according to Janet Yellen, the improvement in labor markets is suspect and still far from assured. And this is the problem with using multiple components. There will always be some data that are strong and other data that can be viewed with suspicion.

More importantly, the Fed is assuming monetary policy is the right tool to “fix” the labor market. Some say the Fed is only doing what Milton Friedman suggested they do in his Nobel Prize winning analysis of the Great Depression.

But this is simply not true. What Milton Friedman said was that a contraction in the money supply during the 1930s caused the Great Depression. He said this contraction was a mistake and blamed the Fed for causing the Depression. But this is not the same as saying Friedman would have supported QE and zero percent interest rates.

Friedman focused on M2, and that measure of the money supply has not fallen since 1948. It certainly did not fall in 2007, 2008, 2009 or at any time since. So, using Milton Friedman’s ideas as support for what the Fed has done is misdirection.

So, it is impossible to blame money for our current problems, or the Panic of 2008 itself. The real reason the labor market (and overall GDP) is not preforming as well as it did in the 1980s and 1990s is that government spending, redistribution and regulation have become more burdensome. Like the 1970s, and exactly as in most of continental Europe, big government is a drag on growth, which monetary policy cannot overcome.

Evidence? Since Congress allowed “extended (99-week) unemployment benefits” to lapse in December, the median duration of unemployment has fallen from 17.1 weeks to 13.3 weeks – the fastest decline in history.

What does all this mean? The Fed, like it did in the 1970s, will continue to run policies that are looser than necessary. It will do this because it will try to fix under-utilized labor markets by using monetary policy. While the Fed will lift rates next year, it will do so very slowly and it will unwind QE slowly as well. In other words, don’t fret the Fed. Monetary policy is not going to get overly tight for a very long time.

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Posted on Monday, August 25, 2014 @ 9:49 AM • Post Link Share: 
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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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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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