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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  New Orders for Durable Goods Were Unchanged in August
Posted Under: Data Watch • Durable Goods


Implications: After large swings in June and July, durable goods orders were unchanged in August as rising defense and motor vehicle orders offset declines in most other categories.  While orders have remained subdued in the past year - new orders are down 1.3% in the past twelve months – we think the decline is largely the result of efficiency improvements and falling prices for technology (the device you are reading this on now costs a fraction of what equivalent technology would have cost just years ago), not signs of a wider breakdown in economic activity.  The largest gains in August came from the volatile transportation sector, where a rise in orders for defense aircraft and autos more than offset declining commercial aircraft orders.  Exclude the transportation sector, and orders declined 0.4% in August.  But taking a look at the trend in orders - up 1.6% at an annual rate in the past three months compared to a 0.9% annual rate in the past six months and a decline of 1.1% from a year ago - and it's clear that orders outside the transportation sector are slowly rising.  This may be in part a sign of improvement in the energy sector (next week's factory orders report will have more details), which had been pulling down machinery investment since oil prices started declining in mid-2014.  As a whole, orders have been relatively flat in 2016, in contrast to the continued gains in employment, rising wages, a pick-up in inflation, and steady expansion in the service sector.  What could be causing the divergence in readings?  First, companies are becoming more efficient, making better use out of existing equipment.  Second, companies may be cautious with spending due to the slowdown in global growth and uncertainty regarding international operations.  If that's the case, expect orders to pick up in the months ahead.  Shipments of "core" capital goods - non-defense, excluding aircraft – declined 0.4% in August, and if unchanged in September, will be a drag on Q3 GDP growth.  But core capital goods orders have risen in each of the last three months, and are up at the fastest three-month pace in nearly two years. In other words, expect shipments to follow suit higher in the months ahead.  On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment rose to -8 in September from -11 in August.  On the housing front, the national Case-Shiller price index rose 0.4% in July and is up 5.1% from a year ago.  Price gains in the past year have been led by Portland, Seattle, Denver, and Dallas.   

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Posted on Wednesday, September 28, 2016 @ 11:24 AM • Post Link Share: 
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  New Single-Family Home Sales Declined 7.6% in August
Posted Under: Data Watch • Home Sales • Housing


Implications:  After soaring in July to the fastest pace since 2007, new home sales slipped back in August.  However, the pace of sales in August was still relatively strong.  Excluding July, it was the fastest sales pace since 2008 and sales were up 20.6% versus a year ago.  Look for even faster sales in the year ahead.  Although the inventory of unsold homes rose 4,000 in August, it remains very low by historical standards (see chart in PDF).  Moreover, the gain in inventories in August was due to homes where construction has yet to start.  In fact,  the majority of sales in August came from these same properties that have yet to break ground, marking a shift from a year ago when completed homes represented the majority.  This illustrates how builders are falling behind the demand for new homes and signals there is plenty of room to increase both construction and inventories.  Despite today's drop it's important to remember that home sales data are very volatile from month to month. In fact, we think there are a few reasons to expect housing to remain a positive factor for the economy.  First, employment gains continue and wage growth is accelerating.  Second, the mortgage market is starting to thaw.  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.  Unlike single-family homes which are counted in the new home sales data, multi-family homes (think condos in cities) are not counted.  So a shift back toward single family units will also serve to push reported sales higher.  Even though the median sales price of a new home is now down 5.4% from last year, this is likely due to a shift in the "mix" of homes sold, as other measures of home prices show continued gains.

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Posted on Monday, September 26, 2016 @ 11:35 AM • Post Link Share: 
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  It’s Still the Fed, And It’s Not Magic
Posted Under: CPI • Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates
We hate to do this and we hope we don't put you to sleep so early in the week, but it's time to talk about monetary policy.  Specifically, the "transmission mechanism" of monetary policy.

The Federal Reserve has convinced itself, and many others, that it has ultimate control over the economy.

But there is little evidence this is true.  There is absolutely no reason to think the monetary transmission mechanism – the one taught to us by Milton Friedman and Irving Fisher – has changed.  Interest rates and the yield curve are not monetary policy.  Monetary policy is about money creation, and that's it.

The Fed either creates or destroys bank reserves.  It does this by buying or selling bonds, to or from, banks.  When the Fed buys bonds, it pays banks for those bonds by creating new deposits.  Banks then take those reserves, and through the money multiplier lending process, create growth in the money supply.  If the Fed sells bonds to banks, the process reverses and money tightens.

Adding reserves to the system drives their cost, short-term interest rates, down.  If the Fed makes reserves scarce, short-term rates are driven up.

This is why so many people think rising short-term interest rates signal tight money, while falling short-term rates signal easy money.  But, it's not the rates that really matter, it's the money.  When the Fed prints money, it boosts spending because there is more money to spend, not because interest rates are lower.  It's the money that matters, not the rates.

A perfect example of this is happening right now.  The Fed is close to its second rate hike since starting quantitative easing.  But rate hikes don't tighten monetary policy these days, because the Fed is not shrinking the actual amount of bank reserves.

Even if the Fed hikes rates this year, it has signaled it has no intention of selling any of the bonds it owns.  As a result, banks will have $2.2 trillion in excess reserves before the Fed hikes rates and $2.2 trillion in excess reserves after it hikes rates.

Yes, it is more costly to borrow at 0.75% or 1.0% rates than at 0.5%, but who really believes that these still low rates will inhibit borrowing?  After all, the "core" consumer price index is up 2.3% in the past year.  Real rates are negative.

The same is true for the long-end of the yield curve, where yields are very, very low as well.

The Federal Reserve is currently involved in one of its most protracted periods of "mission creep" in its 103-year history.  It has printed massive amounts of new money, but it has also supported an incredible array of new bank regulations at the same time.  As a result, all that new money has been clogged up in the system and has not created inflation or an acceleration in economic activity.

In other words, monetary policy has become less effective as the Fed's balance sheet has grown.  This is also true for the European and Japanese Central Banks, as well.  Negative interest rates are back-firing because you can't force banks to lend when few good loans are available and as consumers choose to hold cash instead of bank deposits.

The bottom line is that the Fed has no new power over the money supply.  Like gravity or the speed of light, wishing things were different doesn't make it true.  Even though the Fed has new found political powers, it has no more "actual" power over the economy than it did in the 1960s.  It's about money, not rates, and the debate about when rates may rise is basically a waste of time.

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Posted on Monday, September 26, 2016 @ 9:18 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, September 26, 2016 @ 7:49 AM • Post Link Share: 
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  What’s the fallout on Clinton’s 65% top estate-tax rate?
Posted Under: Government • Video • Spending • Taxes • TV • Fox Business
Posted on Friday, September 23, 2016 @ 12:17 PM • Post Link Share: 
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  Existing Home Sales Declined 0.9% in August
Posted Under: Data Watch • Home Sales • Housing


Implications:  Sales of existing homes weakened modestly in August as inventories continue to decline and prices trend higher.  Sales of previously owned homes fell 0.9% in August to a 5.33 million annual rate but are still up 0.8% from a year ago.  Despite today's sales pace being the second slowest of the year, we do not think this is the end for the housing market.  Housing is volatile from month to month, and we think the broader trend will continue to be upward, although there are still some headwinds.  Tight supply and rising prices continue to hold back sales.  Inventories fell 3.3% in August, and have now fallen for fifteen consecutive months on a year-over-year basis.  Further, 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 46% of properties in August 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 up 5.1% versus ago.  While this may temporarily price some lower-end buyers out of the market, it should ultimately 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 0.5% in July and is up 5.8% from a year ago.  Another sign that supply remains limited and home builders have room to keep ramping up construction.  More broadly, new claims for unemployment benefits declined 8,000 last week to 252,000, marking the 81st consecutive week below 300,000. Continuing claims declined 36,000 to 2.11 million.  It's still early, but plugging these figures into our models suggests a September payroll gain of about 175,000, more than enough to keep the Fed back on track for higher rates in December.

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Posted on Thursday, September 22, 2016 @ 11:56 AM • Post Link Share: 
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  Rate Hike Looks Set for December
Posted Under: Government • Research Reports • Fed Reserve • Interest Rates


The Federal Reserve kicked the rate hike can down the road once again, but looks very likely to raise rates in December. 

The biggest news today wasn't the Fed's unwillingness to raise rates; if the Fed has been seriously considering a rate hike they would have made that clear to investors in the past few weeks.  Instead, today's biggest news was that three members dissented from the (lack of) policy action, all preferring a quarter-percentage point rate hike at today's meeting. 

How can we be confident about a December rate hike given how often the Fed has punted on rate hikes so far this year?  Because the new dot plot released today from the Fed shows that, with only two meetings left this year, fourteen of seventeen policymakers think rates will rise by at least 25 basis points by the end of 2016, with only three thinking rates will finish 2016 without any rate hike at all.  In addition, Fed Chief Yellen said at her post-meeting press conference that "most" policymakers (you can bet this group included her!) already think the time is appropriate for a rate hike, but that it wouldn't hurt to wait a little while before doing so.

Another way to think of it is that the three who dissented today will likely dissent in November as well, and then the Fed will swap dissenters in December, with the three who want to wait until at least next year for any rate hikes, finally finding themselves on the losing end of the policy decision.

So if the Fed is ready to raise rates, why not do it at the next meeting in November?  Because it's only six days before the election and we think the Fed would prefer to stay out of the limelight so close to Election Day.  

Other notable shifts by the Fed in its policy statement include:
(1) Recognizing a pick up in the growth of the economy,
(2) Saying the near-term risks to the outlook are "roughly balanced," rather than a "diminished" risk of downside developments, and
(3) Adding that the case for rate hikes has strengthened.

The Fed also made slight downward revisions to its projection for real GDP growth, both this year and for the long-term average.  As a result, the projection for the long-term average annual growth rate for nominal GDP (real GDP growth plus inflation) is now 3.8%. 

In terms of the pace of rate hikes, the median projection from policymakers is only two rate hikes in 2017.  With the long-term average remaining at 3.00%, that means more rate hikes in 2019-20, instead. 

In our view, economic fundamentals warranted a rate hike at the start of the year, and even more so today.  The economy can handle higher short-term rates. The unemployment rate is already very close to the Fed's long-term projection of 4.8% and nominal GDP – real GDP growth plus inflation – has grown at a 3.3% annual rate in the past two years.  Moreover, we are starting to see early signs of accelerating inflation.  "Core" consumer prices are up 2.3% versus a year ago, tied with the largest increase since 2008.  Average hourly earnings are up 2.4% from a year ago, despite many highly paid and productive Baby Boomers exiting the workforce.
Slightly higher short-term rates are not going to derail US growth, but will help avoid the misallocation of capital that's inevitable if short-term rates remain artificially low.   

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

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Posted on Wednesday, September 21, 2016 @ 3:48 PM • Post Link Share: 
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  Housing Starts Declined 5.8% in August
Posted Under: Data Watch • Home Starts • Housing


Implications:  Home building fell by more than expected in August as a large drop in construction in the South more than offset gains around the rest of the country.  Housing starts declined 5.8% to a 1.142 million annual rate in August, after robust months in June and July.  This is nothing new, home building often moves in a seesaw pattern.  To get rid of the monthly volatility and reveal underlying trends, we look at the 12-month moving average, which is now the highest since 2008.  The reason for the decline in starts in August was a 14.8% drop in the South, which will be short-lived for a couple of reasons.  First, the lower 48 states had more rain this August than any August since 1977, with much concentrated in the Southern states like Louisiana.  Second, permits for future single-family construction in the South rose 3.6% to a 404,000 annual pace in August, the strongest since 2007.  The general rise in home building that started in 2011 is far from over.  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 obviously 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, boomed to 65 in September from 59 in August. The September reading of 65 matches the highest level for the index so far in the economic recovery.  More jobs and faster wage growth are making it easier to buy a home and builders will respond in the months and quarters to come.

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Posted on Tuesday, September 20, 2016 @ 10:47 AM • Post Link Share: 
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  The Glass Half Empty
Posted Under: Monday Morning Outlook

We get called perma-bulls, wrongly we think, because we were late to call 2008 a Panic, and because we've pushed back against the doom and gloom of the past 7 1/2 years.  Time and again over the past several years, we've argued the Plow Horse economy would continue to grow.

Remember fears about adjustable-rate mortgage re-sets, or the looming wave of foreclosures that would lead to a double-dip recession?  Remember the threat of widespread defaults on municipal debt?  Remember the hyperinflation that was supposed to come from Quantitative Easing?  Or how about the Fiscal Cliff, Sequester, or the federal government shutdown?  Or the recession we were supposed to get from higher oil prices...and then from lower oil prices?  How about the recession from the looming breakup of the Euro or Grexit or Brexit?

In the end, none of these were reasons to fear a recession or to bail out of stocks.

But this doesn't mean we are "perma-bulls." It doesn't mean we will never be concerned about the prospects for recession.  Sooner or later, the US will have another recession.  And even though we've consistently pushed back against others' recession theories the past several years, we are always on the lookout for recession theories that make sense. 

And although we don't think a recession will happen anytime soon, there are some data we're concerned about.

In the past fifty years, one of the best signals of an impending recession has been medium and heavy truck sales.  Anytime that's dropped substantially – and the 31% drop since June 2015 certainly qualifies – a recession has started within two years of the peak in sales.  If that holds this time around, we'd be due for a recession starting by the middle of 2017.

Given the traditional role of these vehicles to the flow of commerce around the country, a drop should never be casually dismissed.  So, normally the drop since mid-2015 would give us serious concerns about the economy.     

This time, however, the drop in medium and heavy truck sales has come during a time of falling oil prices and less mining activity.  In addition, sales before mid-2015 may have been artificially high due to a new regulation on trucks' antilock braking systems.  Some sales appear to have been accelerated to avoid the new rule, which then went into effect.  There have been other regulations on emissions that affected sales as well.

Another data series we're watching closely is what we call "core" industrial production, which is industrial production excluding utilities, mining, and autos, all of which are very volatile.  The core measure is down 0.9% from a year ago.  Normally a decline of nearly 1% only happens in recessions or right after they end, but it also happened back in January 2014, so we think it's important to wait and see.  Once again, the absorption of lower oil prices and the huge drop in drilling activity in the energy sector may be holding down production.     

If truck sales and core industrial production continue to show weakness it would certainly get more of our attention.  But, for now, we think the weight of the data show continued Plow Horse growth.

Job growth continues at a healthy clip.  Initial unemployment claims have averaged 261,000 over the past four weeks and have been below 300,000 for 80 straight weeks.  Consumer debt payments are an unusually low share of income and consumers' seriously delinquent debts are still dropping.  Wages are accelerating.  Home building has risen the past few years even as the homeownership rate has declined, making room for plenty of growth in the years ahead.

Meanwhile, there haven't been any huge shifts in government policy in the past two years.  Yes, policy could be much better, but the pace of bad policies hasn't shifted into overdrive lately.
In other words, our forecast remains as it has been the past several years, for more Plow Horse economic growth.  But you should never have any doubt that we are constantly on the lookout for something that can change our minds.           

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

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Posted on Monday, September 19, 2016 @ 10:23 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, September 19, 2016 @ 7:38 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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