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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Nonfarm Payrolls Increased 142,000 in September
Posted Under: Data Watch • Employment

Implications: No two ways about it, today's employment report was weak by the standard of the past few years. Job growth was slow, wages were flat, hours fell, and the labor force dropped. As a result, a rate hike in October is extremely unlikely. Payrolls expanded by a tepid 142,000 in September, falling short of even the most pessimistic forecasts. Moreover, instead of being revised upward, which usually happens this time of year, recent months were instead revised down by 59,000. Meanwhile, civilian employment, an alternative measure of jobs that includes small business start-ups, dropped 236,000. Although the jobless rate remained at 5.1%, it's nothing to celebrate as the labor force participation rate fell to 62.4%, the lowest since 1977. Worker earnings took a hit as well, due to a combination of flat earnings per hour and a slightly shorter workweek for those with jobs. As a result, total earnings slipped 0.2%. However, not all the news was soft. Despite the decline in September, workers' total earnings are up 4.5% versus a year ago and the expansive U-6 unemployment rate fell to 10.0% from 10.3%, as those working part-time for economic reasons fell to the lowest level since 2008. The bottom line is that today's report does not spell doom for the US economy; we are not facing an impending recession. The third quarter of each of the past five years (2010-2014) has had slower job growth than each of those years as a whole, and it looks like 2015 will be no different. The job market never moves in a straight line, either up or down. There are always months that are slower or faster than the underlying trend and we just got two in a row that are slower. This has happened before and will happen again, just like we'll get months like November/December 2014 when job growth averaged 376,000 per month. Remember not to get too excited when that happens again, just like you shouldn't get depressed today; the underlying trend is still about 200,000 per month. Other recent news supports this theme. Yesterday, automakers reported that cars and light trucks sold at an 18.2 million annual rate in September, up 9.9% from a year ago and the fastest pace since 2005. However, like a mirror image of job growth, don't look for auto sales to stay at that level. Sales should stay strong, but not stay as hot as the past two months.

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Posted on Friday, October 02, 2015 @ 11:32 AM • Post Link Share: 
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  No Recession in Sight
Posted Under: Bullish • GDP • ISM • Retail Sales • Video • Wesbury 101
Posted on Thursday, October 01, 2015 @ 11:44 AM • Post Link Share: 
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  The ISM Manufacturing Index Declined to 50.2 in September
Posted Under: Data Watch • ISM

Implications: We said it last month, but it bears repeating. Yes, today's report from the ISM showed the lowest reading for the headline index going back to 2012, but it is important to remember that the index measures the pace of expansion and contraction. Levels above 50 represent expansion, so while September's reading of 50.2 is lower than August's reading of 51.1, that does not mean that activity has declined. Instead, it continues to expand at a slightly slower pace than in recent months. It should also be noted that the September reading represents a 33rd consecutive month above 50. On the inflation front, the prices paid index declined to 38.0 in September from 39.0 in August, as falling prices for crude oil and gasoline helped push prices lower for fourteen of the eighteen industries reporting. The prices paid index has now shown contraction in prices for eleven consecutive months. Taken as a whole, today's report is about as plow horse as they come. Each of the major measures of activity moved lower in September, but all remained above 50, signaling continued expansion. The modest readings from the ISM manufacturing report in 2015 may have some worried that a slowdown could be the early signs of a downturn in the economy, but we disagree. While the overall index remains below the peak of 58.1 seen in August 2014, we don't believe this is anything to worry about. Data on employment, housing, and consumer spending continue to show strength, while the weaknesses in economic data have almost all come from surveys, which can reflect sentiment as much as actual economic activity. When looking at the fundamentals of the broader economy, there remains no recession in sight. In other news this morning, new claims for unemployment insurance increased 10,000 last week to a still low 277,000. Claims have been below 300,000 for seven consecutive months. Continuing claims dropped 51,000 to 2.19 million, the lowest since November 2000. Also on the labor market, yesterday's ADP report showed a gain of 200,000 in private-sector payrolls in September. Plugging these figures into our models suggests tomorrow's official employment report will show nonfarm payrolls up 192,000 in September. We expect that to be accompanied by upward revisions for August and that September will be revised up in future reports as well. Meanwhile, construction rose 0.7% in August, led by home building. In other recent housing news, the national Case-Shiller home price index increased 0.4% in July and is up 4.7% in the past year. Price increases in the past twelve months have been led by San Francisco, Denver, Dallas, and Portland.

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Posted on Thursday, October 01, 2015 @ 11:39 AM • Post Link Share: 
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  Chinese Auto Stimulus
Posted Under: Autos • Government
A tax cut? In China? We couldn't believe our ears! In the wake of a myriad of other measures to shore up its slowing economy, China announced Tuesday that the auto industry would be the focus of its latest stimulus measures. Starting Oct 1st, and continuing through the end of 2016, China will cut the sales tax on cars with engines of 1.6 liters or less from 10% to 5%.

Now don't get us wrong, we aren't usually on team China when it comes to economic and monetary policy making, but it's refreshing to see the Chinese forego QE (at least for now) in favor of tax cuts for consumers. If we had our way, the tax cuts would be across the board, not just for the auto sector, and permanent. But we will give credit where credit is due. A tax cut is a tax cut, and, even if it is limited to one area of the economy, it boosts the real spending power of consumers. And, according to Bloomberg, the market for these incentive eligible vehicles makes up 68% of total Chinese vehicle sales, meaning the benefits of this stimulus will be felt by a broad swath of its citizens.

So why is China acting now? Bloomberg reports vehicle sales have fallen for five consecutive months, and SAIC Motor Corp, China's largest auto manufacturer, recently cut its industry growth forecast for the year to 0%. With these worrying trends afoot (and a government looking to boost consumption driven growth), the state-backed China Association of Automobile Manufacturers took the opportunity to lobby the government for the tax cut.

It isn't every day that we agree with Chinese policy makers, and we certainly haven't agreed with many of their economic management efforts to date, but when compared with continuing zero interest rate policies in the U.S. and the ongoing European QE, this latest move by Beijing is a net positive. Tax breaks like these improve living standards by making goods more affordable, and we hope to see more policies like these in the future. China is undertaking a difficult transition to an economy that relies more broadly on domestic consumers rather than one based on overdone infrastructure investment and exporting to the rest of the world.

Before you think we have lost our minds by supporting China in this, we have some quibbles. Targeted tax cuts distort resource allocation. Cutting sales taxes across the board would have been better and would have respected the autonomy of the consumer. Nonetheless, we never argue with tax cuts. As a result, we view this as a positive move.

Posted on Thursday, October 01, 2015 @ 9:07 AM • Post Link Share: 
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  Bond Spreads Won't Sink the Economy
Posted Under: Government • Markets • Interest Rates • Bonds

A story in today's Wall Street Journal suggests yet another bogeyman for investors to fear: the widening spread in yields between corporate bonds and to the 10-year Treasury.

After bottoming at about 220 basis points last year, the yield spread between the typical Baa-rated corporate bond and the 10-year treasury has since widened to 320 bp. Supposedly, this widening is a harbinger of economic problems because it signals "that investors are less confident about companies' business prospects and financial health."

As usual a look at some history helps clarify matters. As the chart above shows, although the yield spread has widened, it has merely returned to where it was in 2010-12. In other words, the US has been through these "risk off" periods before without any real economic problems. This is nothing out of the ordinary for the Plow Horse recovery. We would need to see a much higher yield spread before we would consider this a truly worrisome condition.
Posted on Monday, September 28, 2015 @ 3:18 PM • 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 28, 2015 @ 12:34 PM • Post Link Share: 
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  Personal Income Increased 0.3% in August
Posted Under: Data Watch • PIC

Implications: Incomes and spending continued to move higher in August, led again by strong growth in wages & salaries. Payrolls are up almost three million from a year ago, helping push private-sector wages & salaries up a robust 4.1% in the past year. Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.3% in August and is up 4.2% in the past year, faster than the 3.5% gain in consumer spending. In other words, recent gains in consumer spending have been driven by higher incomes, not consumers getting into potential financial trouble with too much debt. The only real negative news in today's report was the failure to make any progress against government redistribution. Although unemployment compensation is hovering around the lowest levels since 2007, overall government transfers to persons are up 4.5% in the past year, largely driven by Obamacare. Before the Panic of 2008, government transfers – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp – were roughly 14% of income. In early 2010, they peaked at 18.5%. Now they're around 17%, but not falling any further. Redistribution hurts growth because it shifts resources away from productive ventures. This is why we have a Plow Horse economy instead of a Race Horse economy. The PCE deflator, the Fed's favorite measure of inflation, was unchanged in August. Although it's only up 0.3% from a year ago, it continues to be held down by falling energy prices. The "core" PCE deflator, which excludes food and energy, is up 1.3% from a year ago. That's still below the Fed's 2% inflation target, but it's up a faster 1.6% annualized rate in the past six months. As soon as energy prices stop falling, inflation is going to pick up, supporting the case for starting rate hikes before year-end. In other news today, pending home sales, which are contracts on existing homes, declined 1.4% in August after rising in July. Our models project that existing home sales, which are counted at closing, should rise slightly in September.

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Posted on Monday, September 28, 2015 @ 12:24 PM • Post Link Share: 
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  A Shutdown Would Be Positive
Posted Under: GDP • Government • Monday Morning Outlook • Spending • Taxes
Sometimes, news really is important. The Pope's visit to the U.S. was big, but the resignation of House Speaker John Boehner, effective October 30, was huge.

If you were worried about a government shutdown this fall, now it's less likely. Boehner is free to work with Democrats, ignoring conservatives who want to defund Planned Parenthood, and pass a "continuing resolution." This will keep the current budget fully funded through early December.

Just avoiding vetoes infuriates conservatives (and most of the GOP presidential field). They say the "establishment GOP" is ignoring Congress's Constitutional power of the purse and capitulating to Democrats. The GOP leadership says it has to give in to "get something done." It also says this will help elect a Republican president, who will then work in tandem with a Republican Congress to make drastic changes in fiscal policy.

The problem with this strategy is that the last time the GOP controlled the White House, it enacted No Child Left Behind, which federalized primary education, expanded Medicare, passed TARP (instead of changing mark-to-market accounting) and spent big during 2001-08. In other words, the GOP does not have a good track record on spending.

But Boehner's resignation means a government shutdown is more likely in the longer-run. The GOP majority now has a chance to elect a speaker who will be more combative on spending and deficits. These budget battles will take place later this year, and if Republicans want to cut spending, they probably can't avoid a government shutdown.

If Congress passes bills that cut spending, President Obama will veto them and a more combative Republican majority will get "blamed" by the media and Democrats for causing a fight that results in a government shutdown.

In that scenario, instead of trying to "avoid the blame," conservatives should "take the credit" for any shutdown.

Yes, that's right, take the credit. Shutdowns are not as scary as they're portrayed. Money still flows into the Treasury Department and money still flows out, for Social Security or to make interest payments on the debt, for example. The military, border control, food inspections, air traffic, prisons, weather service, and post office, all keep running.

The downside is that if you need a passport or want to get into a national park, you are out of luck. Non-essential services stop and non-essential federal workers get furloughed. Meanwhile, the budget deficit drops.

Some say a shutdown will hurt the economy, but history doesn't agree. The longest shutdown was from mid-December 1995 to early January 1996. Real GDP grew 2.7% in the year before the shutdown, and then at a 2.8% annualized rate in Q4-1995 and Q1-1996, in spite of the shutdown and a massive East Coast Blizzard. And after the shutdown, the U.S. passed welfare reform and moved to budget surpluses.

The government shut down in October 2013 and the economy grew at a 3.8% rate that quarter. Again, no problem.

The U.S. faces a future of trillion dollar annual deficits if we don't cut spending. If shutting down the government helps alter that path, the U.S. economy will not only survive the short-term, but thrive in the longer term. So, if Boehner's resignation finally makes that possible, a shutdown will be a positive for the U.S. economy.

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

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Posted on Monday, September 28, 2015 @ 12:10 PM • Post Link Share: 
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  The BIG Correction
Posted Under: Employment • Government • Inflation • Markets • Video • Fed Reserve • Interest Rates • Spending • Stocks • Wesbury 101
Posted on Friday, September 25, 2015 @ 2:26 PM • Post Link Share: 
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  Real GDP Growth in Q2 was Revised to a 3.9% Annual Rate
Posted Under: Data Watch • GDP

Implications: Economic growth was revised upward in the second quarter, beating consensus expectations and leaving a little more room for growth in the year ahead. Real GDP grew at a 3.9% annual rate in Q2 versus a prior estimate and consensus expected 3.7%. Remember, only two months ago, the original report for the second quarter was that the economy grew at only a 2.3% rate, which shows why investors should not over-react to the first glimpse of data for a particular month or quarter. In addition, the revisions show the "mix" of growth was also more favorable in Q2, as consumer spending and business investment were revised higher, while inventories were revised lower. That leaves more room for growth in future quarters. Real GDP is up 2.7% in the past year and the same annualized rate in the past two years. Meanwhile, nominal GDP (real growth plus inflation) rose at a 6.1% annual rate in Q2, is up 3.7% from a year ago and up at a 4.1% annual rate in the past two years. These figures show that short-term interest rates should be higher than essentially zero and bolster the case of those at the Fed who want to raise rates this year. It will be at least a couple of years before the Fed gets "tight" rather than "less loose." The other piece of good news today was that economy-wide corporate profits were revised up and climbed 3.5% in Q2. This profit number is calculated by government statisticians and includes "capital consumption and inventory valuation adjustments." (Sorry for the jargon, but that's what they call it.) The important thing to recognize is that these adjustments don't affect cash flow. Excluding the adjustments, corporate cash flow climbed 6.3% in Q2 to a new record high. These figures support the case for optimism for equities in general as well as business investment.

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Posted on Friday, September 25, 2015 @ 9:57 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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