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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Existing Home Sales Rose 0.7% in September
Posted Under: Data Watch • Home Sales • Housing


Implications:  After falling for three straight months, existing home sales eked out a gain in September, despite continued downward pressure from hurricanes and low inventory levels.  Sales of previously-owned homes rose 0.7% in September to a 5.39 million annual rate, but are still down 1.5% from a year ago.  All of September's gain was due to single-family home sales, with closings for coops/condos down slightly for the month.  For the time being, it's tough getting a read on the underlying trend in existing home sales.  Existing home sales are counted at closing and, by making it tougher to look for homes in the South in August and September, Hurricanes Harvey and Irma may keep putting downward pressure on closings through November.  That's why we're not concerned that closings are down 1.5% from a year ago.   Once we start getting "clean" reports again, we expect an upward trend in sales to re-emerge.  That said, a major headwind for sales has been the decline in inventories, which have now fallen on a year-over-year basis for 28 consecutive months and are down 6.4% from a year ago.  This has also affected the months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – which was 4.2 months in September, down from 4.5 months a year ago.  According to the NAR, anything less than 5.0 months is considered tight supply, a benchmark which hasn't been exceeded since November 2015.  Despite the lack of options, demand for existing homes has remained remarkably strong, with 48% of homes sold in September remaining on the market for less than a month.  Higher demand and a shift in the "mix" of homes sold toward more expensive properties has also driven up median prices, which have now risen for 67 consecutive months on a year-over-year basis.  The strongest growth in sales over the past year is heavily skewed towards the most expensive homes, signaling that supply constraints may be disproportionately hitting the lower end of the market.  Tough regulations on land use raise the fixed costs of housing, tilting development toward higher-end homes.  Although some analysts may be concerned about the impact of higher mortgage rates, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is eventually going to move higher again. On the employment front, initial jobless claims fell 22,000 last week to 222,000, the lowest reading since 1973.  Continuing claims fell 16,000 to 1.89 million.  These figures suggest a very strong rebound in job creation in October.  In other news, the Philly Fed Index, a measure of sentiment among East Coast manufacturers, rose to +27.9 in October from +23.8, signaling further optimism in the factory sector. 

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Posted on Friday, October 20, 2017 @ 12:03 PM • Post Link Share: 
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  Brian Wesbury on the 1987 market crash: 30 years later
Posted Under: Bullish • Markets • Video • Stocks • TV • Fox Business
Posted on Thursday, October 19, 2017 @ 12:58 PM • Post Link Share: 
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  Housing Starts Declined 4.7% in September
Posted Under: Data Watch • Home Starts • Housing


Implications:  Housing starts came in weaker than the consensus expected for September, but we expect a sharp rebound in the months ahead.  Two key factors held down starts:  First, multi-unit starts (apartments), which are normally very volatile, dropped 5.1%.  Second, single-family starts plummeted in the South, dropping 15.3%, in large part due to storm impacts from Hurricanes Harvey and Irma.  In fact, the South represented 54,000 of the 56,000 decline in starts in September.  Strip out that region, and total starts were essentially unchanged from August.  According to the Census Bureau, the counties affected by the hurricanes accounted for 26% of new construction authorized in the southern region in 2016, signaling the outsized effect these areas have on headline numbers.  Notably, single-family starts rose in every other region in September – the Northeast, Midwest, and West – which supports our view that the fundamentals powering the housing recovery are still in place.  In spite of the overall drop in starts for the month, they're still up 6.1% from a year ago.  Although overall permits dropped 4.5% in September - and are now down 4.3% versus a year ago - this was entirely due to a decline in multi-family permits.  Permits for single-family units, which are more stable from month to month, rose 2.4% in September and are up 9.3% in the past year.  Multi-family construction led the way in the early stages of the housing recovery (2011-15).   By 2015, 35.7% of all starts were in the multi-family sector, the largest share since the mid-1980s, when the last wave of Baby Boomers was growing up and moving to cities.  Since then, the multi-family share of starts has been trending down, currently standing at 26.4%.  We expect this trend to continue and view the shift toward single-family construction is a positive sign for the economy 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 eventually rise to about 1.5 million units per year.  And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark. 

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Posted on Wednesday, October 18, 2017 @ 11:24 AM • Post Link Share: 
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  Industrial Production Increased 0.3% in September
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  After suffering significantly from Hurricane Harvey's landfall in August, industrial production rebounded in September, posting broad-based gains despite Hurricane Irma hitting Florida.  Industrial production rose 0.3% in September and is now up 1.6% versus a year ago.  One reason the effects of Irma were less severe is that Florida's industrial sector isn't as concentrated as in Houston with Harvey, which hit the oil and gas industry heavily in August.  Looking forward, expect further gains in overall production as the economy recovers from the effects of the two hurricanes.  One source of strength in September was utilities, which bounced back 1.5% after an unusually mild August on the East Coast.  Mining also rebounded in September, rising 0.4%, led by crude petroleum and natural gas extraction.  Oil and gas-well drilling struggled due to the storms, but is still up a massive 77% from a year ago.  Look for a surge in drilling activity in the months ahead once the effects of the storms pass.  In other recent news on the factory sector, the Empire State index, a measure of New York manufacturing sentiment, increased to 30.2 in October from 24.4 in September.  At 30.2, the index tied the highest level since late 2009.  On the inflation front, import prices rose 0.7% in September, 0.3% excluding oil.  Export prices rose 0.8% in September.  In the past year, import prices are up 2.7% while export prices are up 2.9%, both in stark contrast to the price declines in the twelve months ending in September 2016.  Another reason why the Federal Reserve should raise rates in December.  In other news this morning, the NAHB index, which measures homebuilder sentiment, rose to 68 in October from 64 in September, moving back to pre-hurricane levels and signaling continued optimism from developers.

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Posted on Tuesday, October 17, 2017 @ 11:26 AM • Post Link Share: 
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  GDP Growth Looking Good
Posted Under: Bullish • GDP • Monday Morning Outlook

Next week, government statisticians will release the first estimate for third quarter real GDP growth.  In spite of hurricanes, and continued negativity by conventional wisdom, we expect 2.8% growth. 

If we're right about the third quarter, real GDP will be up 2.2% from a year ago, which is exactly equal to the growth rate since the beginning of this recovery back in 2009.  Looking at these four-quarter or eight-year growth rates, many people argue that the economy is still stuck in the mud.

But, we think looking in the rearview mirror misses positive developments.  The economy hasn't turned into a thoroughbred, but the plowing is easier.  Regulations are being reduced, federal employment growth has slowed (even declined) and monetary policy remains extremely loose with some evidence that a more friendly business environment is lifting monetary velocity.

Early signs suggest solid near 3% growth in the fourth quarter as well.  Put it all together and we may be seeing an acceleration toward the 2.5 – 3.0% range for underlying trend economic growth.  Less government interference frees up entrepreneurship and productivity growth powered by new technology.  Yes, the Fed is starting to normalize policy and, yes, Congress can't seem to legislate itself out of a paper bag, but fiscal and monetary policy together are still pointing toward a good environment for growth.  

Here's how we get to 2.8% for Q3.

Consumption:  Automakers reported car and light truck sales rose at a 7.6% annual rate in Q3.  "Real" (inflation-adjusted) retail sales outside the auto sector grew at a 2% rate, and growth in services was moderate.  Our models suggest  real personal consumption of goods and services, combined, grew at a 2.3% annual rate in Q3, contributing 1.6 points to the real GDP growth rate (2.3 times the consumption share of GDP, which is 69%, equals 1.6).

Business Investment:  Looks like another quarter of growth in overall business investment in Q3, with investment in equipment growing at about a 9% annual rate, investment in intellectual property growing at a trend rate of 5%, but with commercial constriction declining for the first time this year.  Combined, it looks like they grew at a 4.9% rate, which should add 0.6 points to the real GDP growth.  (4.9 times the 13% business investment share of GDP equals 0.6).

Home Building:  Home building was likely hurt by the major storms in Q3 and should bounce back in the fourth quarter and remain on an upward trend for at least the next couple of years.  In the meantime, we anticipate a drop at a 2.6% annual rate in Q3, which would subtract from the real GDP growth rate.  (-2.6 times the home building share of GDP, which is 4%, equals -0.1).

Government:  Military spending was up in Q3 but public construction projects were soft for the quarter.  On net, we're estimating that real government purchases were down at a 1.2% annual rate in Q3, which would subtract 0.2 points from the real GDP growth rate.  (1.2 times the government purchase share of GDP, which is 17%, equals -0.2).

Trade:  At this point, we only have trade data through August.  Based on what we've seen so far, it looks like net exports should subtract 0.2 points from the real GDP growth rate in Q3.  

Inventories:  We have even less information on inventories than we do on trade, but what we have so far suggests companies are stocking shelves and showrooms at a much faster pace in Q3 than they were in Q2, which should add 1.1 points to the real GDP growth rate.

More data this week – on industrial production, durable goods, trade deficits, and inventories – could change our forecast.  But, for now, we get an estimate of 2.8%.  Not bad at all. 

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

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Posted on Monday, October 16, 2017 @ 11:36 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, October 16, 2017 @ 7:49 AM • Post Link Share: 
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  Retail Sales Increased 1.6% in September
Posted Under: Data Watch • Retail Sales


Implications: Retail sales boomed in September as Hurricanes Harvey and Irma roiled consumer spending.  Everyone already knew auto sales rebounded sharply in response to vehicles destroyed by Harvey, so there should not be much surprise at the 1.6% gain in overall September sales.  However, sales were also revised higher for prior months and there was considerable strength for "core" sales, which grew 0.4% in September, a solid number, and are up 3.1% from a year ago.  We're at least a couple of months away from being able to see sales data that reflect the underlying trend and expect sales to continue to remain above trend in the coming months, both due to temporary pent-up demand from the hurricanes plus the purchase of replacements for what was destroyed.  For example, due to the hurricanes, carmakers reported sales at a 16.1 million annual rate in August, the slowest pace for any month since 2014.  But sales surged to 18.6 million annualized pace in September as vehicles totaled in the storm got replaced.  Gas station sales also rose substantially in September as gas prices rose due to Harvey and Irma.  Expect them to drop in the coming months as refineries get back to full speed and pump prices decline.  When all is said and done and the effects of the hurricanes are fully behind us, we expect the data to show continued Plow Horse growth in consumer spending.  Jobs and wages are still moving up, consumers' financial obligations are an unusually small part of their incomes, and serious debt delinquencies are down substantially from seven years ago.

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Posted on Friday, October 13, 2017 @ 10:33 AM • Post Link Share: 
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  The Consumer Price Index Rose 0.5% in September
Posted Under: CPI • Data Watch • Inflation


Implications:  Prices surged 0.5% in September as Hurricanes Harvey and Irma caused a 13.1% jump in gasoline prices.  While it will take another month or two to get a clean reading on consumer prices outside the storm impacts, a look at "core" prices – which excludes food and energy – shows the usual suspects continue to push prices higher.  Housing costs rose 0.2% in September and are up 2.8% in the past year, while auto insurance prices rose 0.5% in September and are up 8.2% in the past year.  In the last twelve months, consumer prices are up 2.2%.  This was boosted by the September storm impacts, but "core" prices, which are less impacted by the temporary factors, are up 1.7% in the past year.  That is only slightly below the Federal Reserve's 2% target, but, as yesterday's report on producer prices shows, a continued pickup in prices is in the pipeline.  And the trend in prices has been in place for a while now. For the twelve months ending September of 2015, overall consumer prices were unchanged, while the twelve months ended September of last year showed a 1.5% rise.  Taking this into consideration shows why the Fed has reason for confidence that the inflation picture is finally firming around their target and provides further justification for a December rate hike. Markets are currently pricing in a roughly 75% chance for a hike in December, with just one to two hikes priced in for 2018.  It is yet to be seen who will take over the Fed Chair position from Janet Yellen, but the two leading candidates at the moment – Jerome Powell and Kevin Warsh - are both likely to continue a slow but steady rate hike cycle, with three to four hikes likely if economic data continue to show modest but healthy growth in the year ahead. The most disappointing news in today's report is that real average hourly earnings declined 0.1% in September.  However, these earnings are up 0.7% over the past year and data from the Bureau of Labor Statistics employment report show overall worker earnings (which takes into account both wage gains and increased hours worked) are rising at around a 4% annual rate. Along with healthy household balance sheets, consumers have room to increase spending.

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Posted on Friday, October 13, 2017 @ 10:13 AM • Post Link Share: 
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  The Producer Price Index Rose 0.4% in September
Posted Under: Data Watch • Inflation • PPI


Implications:  The impact of Hurricane's Harvey and Irma can be felt throughout today's report on producer prices.  The most significant impact from the storms was on supply chains, where increased demand for machine and equipment parts, paired with a limited supply, pushed up margins to wholesalers.  Meanwhile storm-related refinery shutdowns along the Gulf Coast led energy prices 3.4% higher in September, including a 10.9% jump in gasoline prices.  Food prices, however, showed little impact, unchanged in September and down at a 0.5% annual rate in the past six months.  Looking beyond food and energy, "core" prices rose 0.4% in September.  In addition to higher wholesaler margins, most major categories of goods and services also rose in September.  In the past year, producer prices have increased 2.6%, the largest twelve month rise since early 2012.  This is certainly elevated in September by the hurricanes, but producer prices have been at or above 2% on a year-to-year basis in seven of the last eight months.  And a look further down the pipeline shows the trend higher should continue in the months to come.  Intermediate processed goods rose 0.5% in September and are up 4.3% from a year ago, while unprocessed goods declined 0.4% in September but remain up 7.0% in the past year.  In other words, the "data dependent" Fed has clear evidence that inflation has met or exceeded their 2% target. In employment news this morning, new claims for unemployment benefits declined 15,000 last week to 243,000, while continuing claims fell 32,000 to 1.89 million, the lowest level since 1973. The temporary storm-related dip in employment looks to have passed, and we expect a very strong rebound in payrolls in October.

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Posted on Thursday, October 12, 2017 @ 10:17 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, October 9, 2017 @ 12:52 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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