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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Stocks Will Beat Bonds
Posted Under: Markets • Video • Bonds • Stocks • Wesbury 101
Posted on Friday, July 22, 2016 @ 12:28 PM • Post Link Share: 
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  Existing Home Sales Increased 1.1% in June
Posted Under: Data Watch • Home Sales • Housing


Implications:  Existing home sales continued to show strength in June, posting the fourth consecutive monthly gain and hitting the fastest pace since 2007.  Sales of previously owned homes rose 1.1% in June to a 5.57 million annual rate and are up 3% from a year ago.  Moreover, in a sign of a mild loosening of lending standards (finally!), the share of first-time buyers reached its highest level since 2012 in June, helping boost sales.  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.  Inventories fell 0.9% in June and are now down 5.8% 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 4.6 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 that 48% of properties in June sold in less than a month, pointing to further interest from buyers in the months ahead.  However, higher demand from the summer selling season also helped push the median price for an existing home to a new all-time high, up 4.8% versus a year ago.  While this may temporarily price 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 as well.   In other housing news this morning, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.2% in May and is up 5.6% from a year ago.  Another sign that supply remains limited and home builders have room to keep ramping up construction.  On the manufacturing front, the Philadelphia Fed index, a measure of sentiment among East Coast manufacturers, came in at -2.9 in July versus +4.7 in June.  However, more broadly, new claims for unemployment benefits declined 1,000 last week to 253,000, defying the consensus, and marking the 72nd consecutive week below 300,000. Continuing claims declined 25,000 to 2.13 million.  These figures are consistent with the kinds of job gains that should get the Fed back on track toward higher rates, possibly as early as September.

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Posted on Thursday, July 21, 2016 @ 12:32 PM • Post Link Share: 
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  Will the Yield Curve Invert?
Posted Under: Government • Video • Fed Reserve • Interest Rates • Wesbury 101
Posted on Wednesday, July 20, 2016 @ 3:12 PM • Post Link Share: 
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  Housing Starts Rose 4.8% in June
Posted Under: Data Watch • Home Starts • Housing


Implications:  Home building continues to be a bright spot for the US economy.  Housing starts rose 4.8% in June, beating consensus expectations. In fact, the pace of starts in the second quarter as a whole was the fastest since 2007.  While starts are 2% below a year ago, that's due to a surge in multi-family home building in June of last year, which made it the strongest month for overall home building in all of 2015.  Starts in June this year were a solid 7.3% higher than the average for all of 2015.  Moreover, the "mix" of homes being built is improving.  When the housing recovery started, multi-family construction generally led the way.  The number of multi-family units now under construction is the highest since the early 1970s.  But the share of all housing starts that are multi-family appears to have peaked in 2014-15 and single-family building is starting to climb more quickly.  This trend should continue.  Single-family building permits are up 5.1% from a year ago while multi-family permits are down 34.3%.  The shift in the mix of homes toward single-family units is a positive one 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 rise to about 1.5 million units per year, so a great deal of the recovery in home building is still ahead of us.   It won't be a straight line higher, but expect the housing sector to keep adding to real GDP growth in 2016-17.  In other recent housing news, the NAHB index, which measures sentiment among home builders, slipped to 59 in July from 60 in June.  However, 59 is still well above 50, showing that the index remains in healthy expansion territory.  More jobs and faster wage growth are making it easier to buy a home and builders are responding.

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Posted on Tuesday, July 19, 2016 @ 10:29 AM • Post Link Share: 
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  Real GDP Accelerating
Posted Under: GDP • Government • Monday Morning Outlook • Fed Reserve

Forecasting economic growth from quarter to quarter is a humbling experience. Even when you get the trend right – and it's hard to beat our forecast of Plow Horse growth – there's always a quarter here and there that will throw you for a loop. 

Trying to estimate growth in the second quarter is even tougher than others because that's the time of year when the government goes back and revises the GDP reports for the past few years.  Moreover, the government has had persistent problems seasonally adjusting GDP, tending to underestimate growth in the first quarter each year while overestimating growth in the middle two quarters.  Government statisticians say they're trying to fix that problem, but who knows how much they'll do this time.
With all this in mind, we're forecasting that the economy grew at a 2.2% annual rate in Q2, maintaining a Plow Horse pace.  However, there are important signs of improvement.  For example, it looks like "real" (inflation-adjusted) personal spending rose at the fastest pace in a decade.  And the key reason holding down overall growth in Q2 is an inventory correction that may end up overshooting, helping boost growth in the quarters ahead.
Meanwhile, the M2 measure of the money supply has grown at an 8.2% annual rate in the first six months of 2016, the fastest pace since 2012.  This is consistent with our forecast that both real GDP growth and inflation should be accelerating more than most investors expect in the next year or so, which, in turn, should be good for equities and bad for most bonds.        

Below is our "add-em-up" forecast for Q2 real GDP.

Consumption:  Auto sales declined slightly in Q2, but retail sales outside the auto sector rose at a 7.1% annual pace in Q2, and services, grew at about a 2.5% rate.  Overall, it looks like real personal consumption of goods and services, combined, grew at a 4.4% annual rate in Q2, contributing 3.0 points to the real GDP growth rate (4.4 times the consumption share of GDP, which is 69%, equals 3.0).

Business Investment:  Business equipment investment looks like it declined at a 1% annual rate in Q2 while commercial construction fell at a 10% rate. R&D probably grew around its trend of 5%.  Combined, we estimate business investment slipped at a 1% rate, which should subtract 0.2 points from the real GDP growth rate (-1.0 times the 13% business investment share of GDP equals -0.1).

Home Building:  Residential construction looks like it took a breather in Q2, dropping at an 8% annual rate.  Don't get worried, though.  This a temporary breather; builders still need to ramp up production to fill a shortage of homes.  In the meantime, the temporary drop in Q2 will trim 0.3 points off of the real GDP growth rate.  (-8.0 times the home building share of GDP, which is 4%, equals -0.3).

Government:  Military spending rose in Q2 while public construction projects declined.  On net, we're estimating that real government purchases rose at a 1% rate in Q2, which would add 0.2 percentage points to real GDP growth (1.0 times the government purchase share of GDP, which is 18%, equals 0.2).

Trade:  At this point, the government only has trade data through May, but the data so far suggest the "real" trade deficit in goods has gotten a little smaller.  As a result, we're forecasting that net exports add 0.3 points on the real GDP growth rate.

Inventories:  At present, we have even less information on inventories than we do on trade, but what we have suggests companies were surprised by the acceleration in consumer spending, resulting in a sharp slowdown in the pace of inventory accumulation during Q2.  We're forecasting inventories subtracted 0.9 points from real GDP growth in Q2.

Put it all together, and we get a forecast of 2.2% for Q2, another Plow Horse quarter.  However, the sharp inventory slowdown suggests production and, therefore, real GDP is likely to pick up in the third and fourth quarters.  Corporate profits and stock prices are likely to keep rising as well.  We expect this to affect the Fed and Fed speakers to become more hawkish, letting investors know a rate hike is a serious possibility by September.

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

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Posted on Monday, July 18, 2016 @ 9:51 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 18, 2016 @ 9:48 AM • Post Link Share: 
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  Industrial Production Increased 0.6% in June
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production surged at the fastest pace since 2014, erasing May's decline, and demonstrating strength in an industrial sector that that has begun to find its footing. While the headline number is still down 0.8% from a year ago, it is up 0.2% in the past six months and up at a 2.7% annual rate in the past three months, a recent acceleration that signals the sector may be leaving behind the headwinds related to the drop in oil prices in the past couple of years.  However, industrial output is not going to grow every month and some of the brightest spots in June are also the most volatile categories.  The single biggest factor affecting today's report came from motor vehicle manufacturing, which surged 5.9% and is now up 7.8% versus last year. This helped push manufacturing up at its fastest pace since January and points to strong auto sales numbers in the months ahead.  Meanwhile, utility output jumped 2.4% in June, reflecting unusually warm June weather in the lower 48 states.  On a surprising note, mining production posted its first consecutive gain since last year, up 0.2% in June after a 0.3% gain in May.  This month's gain was driven primarily by coal mining, as well as small uptick in oil and gas well drilling. While mining (and energy in general) has been a drag on production over the past year, we expect activity in that sector to stabilize in the months ahead as energy prices are well off the lows from earlier this year.  Based on other commodity prices, oil prices should average at higher levels over the next several years.  Although we don't expect overall production to boom any time soon – weak overseas economies will continue to be a headwind – we do expect a gradual pick-up in activity in 2016.  In other news this morning, the Empire State index, a measure of manufacturing sentiment in New York, fell to a still positive +0.6 in July from +6.0 in June, the fourth positive reading in five months. In other words, factory activity should remain in a growth mode for the foreseeable future.

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Posted on Friday, July 15, 2016 @ 11:54 AM • Post Link Share: 
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  The Consumer Price Index Increased 0.2% in June
Posted Under: CPI • Data Watch • Inflation


Implications:  Fed officials, take note, inflation is on the rise.  The consumer price index rose 0.2% in June, but more importantly the pace of inflation has been steadily on the rise. While up a modest 1.0% in the past year, consumer prices have risen at a 1.6% annualized in the past six months and at a 3.4% annual rate in the past three months.  Energy prices rose 1.3%, as rising prices for gasoline and fuel oil more than offset declining electricity costs.  Excluding energy, consumer prices are up 2.0% in the past year, which means that as energy prices rise, the headline index will follow at a faster pace than many are expecting.  Food prices fell 0.1% in June, led lower by declining costs for meats and dairy products, but "core" consumer prices, which exclude the volatile food and energy components, rose 0.2% in June and show annualized readings above 2% over the past three-, six-, and twelve-month periods.  While the Fed continues to kick the can down the road, this consistent pace of "core" inflation around 2% – paired with continued employment gains and a clear acceleration in the headline consumer price index – shows the economy is ready for the next rate hike.  The increase in the core CPI in June was led by housing rents, medical care and education.  Owners' equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in June, is up 3.2% in the past year, and will be a key source of higher inflation in the year ahead.  One negative piece of news in today's report is that "real" (inflation-adjusted) average hourly earnings declined 0.2% in June.  However real wages are up 1.5% in the past year and we think wages will rise faster than prices in the year ahead as employment continues to grow at a healthy clip.  Consumers are ready, the economy is ready, and the data shows that a "data dependent" Fed should be ready to make monetary policy a little less loose.

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Posted on Friday, July 15, 2016 @ 11:46 AM • Post Link Share: 
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  Retail Sales Increased 0.6% in June
Posted Under: Data Watch • Retail Sales


Implications:  The consumer finished out the second quarter strong.  Retail sales grew 0.6% in June, beating the most optimistic forecast by any economics group.  We hope the Fed is paying attention.  Inflation is starting to build, consumer spending is accelerating, and wages are rising.  It's time to start raising rates again.  Building materials led the gain in overall sales in June, up 3.9%, but eleven of the thirteen major categories showed growth in June.  Overall sales are accelerating too, up a whopping 8.4% annualized over the past three months versus 2.9% annualized in the past six months and 2.7% from a year ago.  Sales at gasoline stations rose 1.2% in June, and are up at a 27.1% annualized rate in the past three months.  Still even with the gain in June, sales at gas stations are down 9.6% from a year ago.  Non-store retail sales rose 1.1% in June and are up 14.2% in the past year, the largest yearly gain since 2006.  That's why you hear about old-line brick-and-mortar department stores doing poorly.  "Core" sales, which exclude autos, building materials, and gas, rose 0.4% in June.  Core sales are up a very respectable 4.3% from a year ago, and were up at a 6.8% annualized rate in the second quarter, the best quarter in two years.  We now estimate that "real" (inflation-adjusted) consumer spending on goods and services, combined, grew at a 4.4% annual rate in Q2, the fastest growth for any quarter in a decade.  As a result, we're now forecasting that real GDP grew at a 2.0% annual rate in Q2.  Look for continued growth in both real GDP and real consumer spending in the months ahead.  Employment continues to expand, while wage growth is accelerating and consumer debt service obligations remain very low by historical standards.  Overall, the economy remains a Plow Horse, but consumer purchasing power and, therefore, spending, is one of the brightest spots. 

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Posted on Friday, July 15, 2016 @ 11:37 AM • Post Link Share: 
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  The Producer Price Index Increased 0.5% in June
Posted Under: Data Watch • Inflation • PPI


Implications:  Today's data are a clear signal that the Fed goofed by not raising rates.  Producer prices rose in June at the fastest pace in nearly four years and are up at a 4.5% annual rate in the past three months.  The rise in prices was broad based. Prices for final demand services increased 0.4% in June, led by a 0.4% rise in prices for services less trade, transportation, and warehousing, while goods prices rose 0.8%. More than three-quarters of the increase in final demand goods was attributable to final demand energy, up 4.1% in June.  Food prices jumped in June, up 0.8%.  "Core" prices, which exclude the volatile food and energy components, increased 0.4% in June and are up 1.3% in the past year.  This "core" measure is where the Fed places greater weight when making their decisions on monetary policy, and while the 1.3% increase in prices in the past year is modest, it represents the fastest annual growth since January of 2015 and is showing steady acceleration.   And with rising energy prices, the headline measure of inflation is also showing a clear trend higher, up at a 4.5% annualized rate in the past three months compared to a 2% annual rate in the past six months and a 0.3% rise from a year ago. So while inflation remains modest, the U.S. is certainly not experiencing deflation, and rising energy prices may push inflation up at a faster pace than many are expecting. In other inflation news, import prices rose 0.2% in June but remain down 4.8% from a year ago.  The drop is mostly from petroleum, but not all of it; import prices are down 2% from a year ago even excluding petroleum.  Export prices rose 0.8% in June but remain down 3.5% from a year ago. In other news this morning, new claims for unemployment benefits were unchanged at a very low 254,000, while continuing claims rose 32,000 to 2.15 million.  Plugging these figures into our models suggests July will show further strong job gains, though at a slower pace than the booming June report.

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Posted on Thursday, July 14, 2016 @ 10:04 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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