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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Where's the Hyper-Inflation?
Posted Under: CPI • Data Watch • Government • Inflation • Fed Reserve • Interest Rates
If we had a dollar for every time we’ve heard about the threat of hyperinflation, we’d probably have enough money to never worry about it.

The Federal Reserve’s balance sheet has ballooned to an unprecedented size. In August 2008, the balance sheet was $870 billion. Today, after Quantitative Easing I, II, and III, it stands at $4.4 trillion. Between 1995 and 2008, the balance sheet expanded at a 6% rate. If it had simply continued to grow at this pace, it would be about $1.3 trillion right now.

This expansion in the Fed’s balance sheet led to a proliferation of forecasts for hyperinflation. We don’t have to tell you who they are; you’ve probably seen their videos on the internet multiple times already. And yet, here we are, with the consumer price index down 0.1% from a year ago. Excluding energy, the CPI is up just 1.8% in the past year.

Of course, certain items have gone up faster. Beef and veal prices are up 13% from a year ago, but make up only 0.6% of the typical consumer budget. And we’re sure government statisticians sometimes miss minor changes to packaging that can hide inflation. But the statisticians also have a tough time measuring the true value of improvements to cell phones and other high-tech devices as well. Streaming radio, free maps, and GPS everywhere are nearly impossible to value.

In other words, the inflation data from the government aren’t perfect, but we think offsetting errors leave them very close to the truth. In other words, hyperinflation fears were totally overblown and are likely to remain that way.

The huge expansion in the Fed’s balance sheet has been due to the Fed’s purchase of trillions in bonds. This pumped cash into the banking system, which the banks have chosen to hold as excess reserves. Banks are sitting on these excess reserves, not because rates are low, but because the economy has not demanded all this cash. In other words, the money multiplier has fallen sharply.

Another way to think about the situation is to imagine that you’re heating your house and have the furnace cranked up to the max; it’s pumping out as much heat as it can. But you also have the windows wide open and it’s only ten degrees outside. Normally, if the furnace is working that hard, you’re going to heat and then overheat your house. But, with the windows open, the temperature doesn’t rise much.

Higher capital standards for banks, Dodd-Frank, stress tests, and the threat of “macro-prudential” regulation are like open windows. No wonder GE wants out of the banking business. At the same time, a large increase in government redistribution, which can weaken the incentive to work and invest, just like higher tax rates is also holding the economy back. Note: none of these policies look likely to change much anytime soon. However, banks now have excess capital to go along with their excess reserves. In recent months, both the M2 measure of money and bank loans have started to accelerate. And don’t forget that companies have lots of cash, too.

All this is to say that “liquidity” is plentiful, while at the same time, these open windows are keeping inflation subdued.

We understand the temptation to believe in doom and gloom. The Panic was painful. But, the comparisons of the US economy today, to 1937, to Japan, or to the Weimar Republic, are entirely too simplistic.

The bottom line is that the Fed is accommodative; the heater is cranked up. But the economy is flexible and resilient. Hyper-inflation and deflation are not in the cards. Carry on.

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Posted on Monday, April 27, 2015 @ 9:17 AM • Post Link Share: 
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  Responses to "One Man Against the 1%"
Posted Under: Press
Below is a compilation of responses we have received in regard to Brian's review of "The Great Divide" by Joseph Stiglitz in yesterday's Wall Street Journal which can be found here. These comments have been gathered from both First Trust and WSJ readers, we hope you enjoy them.

Yeah, the last 50 years of prosperity were sooooo awful. The right hasn’t had a good run either…burning up a surplus and increasing government size…

Brian, you are on my top 5 list of economists/market gurus. As a past business owner, I believe in capitalism and don’t dispute anything you write (I particularly liked the 10 fishermen story….easy for anyone to understand). I’m curious what your thoughts are on having balance between capitalism and caring for those who weren’t born with our IQ and business sense. I’d love to see a Westbury 101 on that subject. Over the years I’ve come to believe that much of my success in life was due to being born with certain talents and ability to learn. Fortunately I didn’t have to make my living singing or playing music……I’d be dirt poor without any motivation because I was born with no musical talent and no amount of hard work would get me anywhere close to people born with even minimal musical talent. So, when I read your writings and many other successful business people which seem to have such black and white views, I always wonder if they have ever given any thought to how lucky people like you and I are to be born with brains that allow us to succeed at business and enjoy such a great life. 100% capitalism will definitely provide the fastest economic growth, but is there a balance that provides for those not born as lucky?

Brian, good thoughts. I read this in the WSJ. Stiglitz is a very scary guy! He exemplifies the liberal point of view where emotions trump brain power. There is NO understanding of human nature and how it plays into human out comes. If you do not deal with the culture that does not respect family, education, hard work and personal responsibility you cannot make changes. You cannot level the playing field. And the Big Gov. solutions of throwing money at the symptoms (think the 1965 Welfare Act) you then just create unintended consequences with disastrous outcomes!

Your review was astonishingly one sided. We are all paid to accept approved political and economic views. You went overboard. You lost credibility.
Semper Fi

Love the commentary in general, but please leave the politics out of it. Unless your goal is to be another outlet for Fox News…

Sorry, but just don't buy the political rhetoric.

Prof. Stiglitz blames Bush for the financial crisis. But Bush championed changes in Fannie Mae and Freddie Mac that could have made a difference, but those changes were rejected. Prof. Stiglitz places his faith in the very elements of our political economy that have failed time and time again; regulation combined with command and control of the many by the few. Enormously unimpressive and disappointing.

"Conservatives said that our current fiscal path would be bad for the economy; liberals insisted that it would be good."
While I agree with all that Mr. Wesbury says about Stiglitz's inequality dogma, in fairness, conservatives said that the doubling in "prosperity-sharing government spending"...Medicare and Medicaid...would be bad for the economy. It hasn't been.
But Wesbury is right, "Liberals are the like the dog that finally caught the car. Now what will they do?" The coming election will show that the liberals have no second act.

You know, I wish there were some way to short-sell bad books... Stiglitz could actually then be a source of wealth generation...
Posted on Friday, April 24, 2015 @ 1:39 PM • Post Link Share: 
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  New Orders for Durable Goods Rose 4.0% in March
Posted Under: Data Watch • Durable Goods

Implications: Don’t get too excited about the big headline 4% gain in new orders for durable goods in March; the underlying details of the report were tepid, signaling that the economy is still a Plow Horse. Although the increase in orders for durables was much stronger than the 0.6% the consensus expected, the gain was all due to the very volatile transportation sector. Orders excluding transportation declined 0.2% in March and have dropped for six consecutive months. However, we think much of the recent decline is directly and indirectly due to the huge drop in energy prices and the resulting drop in drilling activity. But, now that energy prices have stopped falling, orders for durables outside the transportation sector should soon start moving up again. In the meantime, we don’t have to fear the onset of a recession. These orders fell for five straight months back in 2012, yet real GDP accelerated in 2012 from 2011. The other piece of soft news in today’s report was that “core” shipments, which exclude defense and aircraft, declined 0.4% in March. “Core” shipments were down at a 2.2% annual rate in Q1 versus the Q4 average and it looks like the equipment component of real GDP declined at about a 5% annual rate in Q1. Plugging these data into our models for overall real GDP keeps our forecast for Q1 at a 0.7% annual rate versus a consensus expected growth rate of 1.0%. Moving forward, we expect to see a rebound in orders and shipments as temporary headwinds recede. Consumer purchasing power is growing with more jobs and higher incomes, while debt ratios remain very low, leaving room for an upswing in big-ticket spending. Meanwhile, profit margins are high, corporate balance sheets are loaded with cash, and capacity utilization is near long-term norms, leaving more room (and need) for business investment.

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Posted on Friday, April 24, 2015 @ 10:29 AM • Post Link Share: 
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  One Man Against the 1%
Posted Under: GDP • Government • Housing • Fed Reserve
For the past 50 years, liberals have gotten almost exactly the policies they’ve wanted. So why are they still complaining?

Along with Greece and Detroit, the modern liberal economic argument has gone completely bankrupt. That’s what Joseph E. Stiglitz proves in “The Great Divide.”

Click here to read Brian’s WSJ book review (WSJ Subscription Required)
Posted on Thursday, April 23, 2015 @ 11:33 AM • Post Link Share: 
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  New Single-Family Home Sales Declined 11.4% in March
Posted Under: Data Watch • Home Sales

Implications: Don’t get bent out of shape about the big decline in new home sales in March; the upward trend in home sales is still intact and we expect higher home sales in the year ahead. New home sales boomed well above trend in February, defying nasty winter weather to beat even the most optimistic forecast from any economics group. A good “rule of thumb” for forecasting new home sales is that they average about 70% of single-family housing starts. (Some single-family starts are on properties already owned by the person who will occupy the home, so they aren’t connected to sales. Think voluntary knockdowns as well as replacements for homes destroyed by fires, floods, hurricanes, tornadoes,…etc.) But, in February, new home sales were over 90% of single-family starts. As a result, we were forecasting a return toward the 70% norm and, with an estimate of a 474,000 annualized pace, came very close to the actual 481,000. In spite of the decline in March, sales are up 19.4% from a year ago, and have clearly been improving as the chart to the right shows. The inventory of new homes increased 4,000 in March, but still remains very low. As a result, homebuilders still have plenty of room to increase both construction and inventories. But sales still remain depressed relative to history. We think there are a few reasons for this. First, a larger share of the population is renting. 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 this report. Third, although we may be starting to see a thaw, financing is still more difficult than it has been in the past. Each of these is beginning to change. Recently, single-family housing starts have showed some signs of picking up relative to multi-family starts, suggesting builders (the quintessential entrepreneur) see a larger appetite for homeownership and single-family home purchases. Meanwhile, while rents keep rising, the median sales price of a new home in March was down 1.7% from a year ago. Lower prices, and more supply for new homes may help draw in more buyers in the months to come. In other news this morning, initial claims for unemployment insurance rose 1,000 last week to 295,000. The four-week moving average is 284,500 and this is now the 7th consecutive week below 300,000. Continuing claims for regular state benefits increased 50,000 to 2.33 million. It’s still early, but our models are tracking a payroll gain of 280,000 in April, a very solid month.

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Posted on Thursday, April 23, 2015 @ 11:27 AM • Post Link Share: 
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  Existing Home Sales Increased 6.1% in March
Posted Under: Data Watch • Home Sales

Implications: Sales of existing homes rebounded nicely in March, coming in at a 5.19 million annual rate, the best level since September 2013. Sales are up 10.4% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 14% a year ago. All-cash buyers are down to 24% of sales from 33% a year ago. As a result, even though total sales are up 10.4% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up 25.3%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. Another good sign is that the inventory of existing homes increased 100,000 in March, the largest for any March since 2006. More supply should help sales growth in the months ahead. The median sales price of an existing home rose to $212,100 in March, up 7.8% from a year ago. In other housing news this morning, the FHFA price index, which measures homes financed with conforming mortgages, increased 0.7% in February and is up 5.4% from a year ago. That’s a mild deceleration from the 7.1% price gain in the year ended in February 2014. Expect more of the same in the year ahead, with price gains continuing at a slower pace as more home building increases supply.

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Posted on Wednesday, April 22, 2015 @ 11:34 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, April 20, 2015 @ 3:36 PM • Post Link Share: 
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  Rear-View Mirror Shows Ugly Q1
Posted Under: GDP • Monday Morning Outlook
We know Plow Horses don’t have rearview mirrors, but economists do. So, let’s not beat around the bush: the economy barely grew last quarter. Right now, we’re forecasting that real GDP expanded at a 0.7% annual rate in Q1. That’s a little below the consensus expected 1.0% growth rate, although above the 0.1% estimate by the Atlanta Fed’s GDPNow Model.

Anytime a forecast for real GDP growth is so slow, it’s well within the realm of possibility the economy actually shrank. That’s exactly what happened a year ago. After a horrible winter, the consensus estimate was that real GDP grew at a 1.2% annual rate in the first quarter of 2014, while we were forecasting 0.5%. The first report showed growth of only 0.1%, which was later revised to negative growth and now the government says real GDP shrank at 2.1% rate in Q1-2014.

At that time, the weak data was interpreted by some as the leading edge of a new recession. The conventional wisdom, was that the weather surely played some role in holding down growth, but an outright contraction that bad couldn’t possibly all be due to the weather. Of course, that was before the economy rebounded sharply in the middle two quarters of last year, growing at a 4.8% rate, thereby underscoring that it really was the weather all along.

In other words, don’t get caught up in the angst about the first quarter, whether the number is slightly positive or even negative. Although the weather was not as bad this year as in 2014, this February was the coldest for the most Americans since 1979. In addition, we had prolonged West Coast port strikes that disrupted both trade and production pipelines. Meanwhile, the huge drop in oil prices appears to have curtailed production in the Oil Patch faster than consumers have translated their savings into purchases in other sectors.

But these issues are all temporary and, like last year, the economy will rebound. In the meantime, below is our “add-em-up” forecast for Q1 real GDP.

Consumption: Auto sales declined at a 3.6% annual rate in Q1 while “real” (inflation-adjusted) retail sales outside the auto sector were down at a 3.2% rate. But services make up more than 2/3 of personal consumption and those were up at about a 4.3% rate. So it looks like real personal consumption of goods and services, combined, grew at a 1.6% annual rate in Q4, contributing 1.1 points to the real GDP growth rate (1.6 times the consumption share of GDP, which is 68%, equals 1.1).

Business Investment: Business equipment investment looks like it declined at a 3% rate while commercial construction fell at a 10% pace. But R&D probably grew, so we estimate overall business investment shrank at a 3% rate, which should subtract 0.4 points from the real GDP growth rate (-3.0 times the 13% business investment share of GDP equals -0.4).

Home Building: Somehow home building continued to grow in Q1. Burned last year, maybe builders arranged to make sure they were doing inside work this winter. It looks to us like residential construction grew at a 3% rate, which should add 0.1 point to real GDP (3 times the home building share of GDP, which is 3%, equals 0.1).

Government: Falling outlays for national defense and less activity on public construction projects suggest real government purchases declined at a 1% rate in Q1, which would subtract 0.2 percentage points from real GDP growth (-1 times the government purchase share of GDP, which is 18%, equals -0.2).

Trade: At this point, the government only has trade data through February – and the end of the port strikes in late February make March data a wild card – but the data so far suggest the “real” trade deficit in goods has gotten a little bigger. As a result, we’re forecasting that net exports are a drag of 0.2 points on the real GDP growth rate.

Inventories: At this point, we have even less information on inventories than we do on trade, but what we do have suggests companies piled up inventories at a slightly faster pace in Q1, adding 0.3 points to the growth rate of real GDP.

Put it all together, and we get 0.7% as a forecast for Q1. Some may say this is the end for the Plow Horse Economy. But, as we saw last year, even a Plow Horse varies its speed a little bit. Any temporary slowness will be offset by a faster pace for the rest of the year. Most importantly, don’t forget that all of this is in the rearview mirror. It is data for April and May that the Fed, and investors, should watch.

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

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Posted on Monday, April 20, 2015 @ 11:24 AM • Post Link Share: 
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  The Two Americas
Posted Under: Video • Wesbury 101
Posted on Friday, April 17, 2015 @ 10:56 AM • Post Link Share: 
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  The Consumer Price Index increased 0.2% in March
Posted Under: CPI • Data Watch • Inflation

Implications: Add another check to the list of data points suggesting the economy is ready for the Fed to lift rates in June. Almost every category showed rising prices for the month, but the largest contributors were energy and housing. “Core” prices, which exclude food and energy, increased 0.2% in March, the largest (unrounded) monthly gain since May of last year. With “core” prices up 1.8% in the past twelve months, the Federal Reserve should remain concerned about future increases in inflation even though overall consumer prices are slightly negative from a year ago. The reason overall consumer prices are depressed is that energy prices have dropped 18.3% in the past year. Excluding energy, prices are up 1.8%, very close to the Fed’s 2% target for inflation. Some analysts will use the fact that overall prices are down slightly from a year ago to warn about “Deflation.” But true deflation – of the kind we ought to be concerned about – is caused by overly tight monetary policy and price declines that are widespread, not isolated to one sector of the economy. Think of the Great Depression. Food prices held back inflation in March, as a bountiful growing season has translated to falling prices for fruits and vegetables. However, food prices are still up 2.3% in the past 12 months, so if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and “true” inflation is higher. In addition, housing costs are going up. Owners’ equivalent rent, which makes up about ¼ of the CPI, rose 0.3% in March, is up 2.7% in the past year, and will be a key source of higher inflation in the year ahead. Finally, “real” (inflation-adjusted) average hourly earnings rose 0.1% in March. These earning are up a healthy 2.2% in the past year and have been growing at a faster 4.3% over the past six months, signaling that consumer purchasing power continues to grow. If it weren’t for the decline in energy prices, inflation would be very close to the Fed’s two percent target. And with oil prices stabilized and moving higher in April, the Fed should get the confirmation they need in next month's report to justify a first rate hike in June.

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Posted on Friday, April 17, 2015 @ 10:48 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.
Search Posts
Housing Starts Increased 2.0% in March
Industrial Production Declined 0.6% in March
Retail Sales Increased 0.9% in March
The Producer Price Index Increased 0.2% in March
June Rate Hike Still on Tap
M2 and C&I Loan Growth
The Triple Mandate
M2 and C&I Loan Growth
The ISM Non-Manufacturing Index Declined to 56.5 in March
Don't "Dread" The Plow Horse
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