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   Brian Wesbury
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  Dow 36,000
Posted Under: Bullish • Markets • Video • Stocks • Wesbury 101
Posted on Wednesday, December 07, 2016 @ 8:54 AM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $42.6 Billion in October
Posted Under: Data Watch • Trade

 

Implications: The trade deficit was larger than the consensus expected in October, as imports grew and exports declined.  While trade added significantly to GDP growth in Q3, the strong gain in exports in Q3 looks to have been temporary.  Expect trade to be a drag on GDP in Q4 as a stronger dollar and tepid global growth continue to be factors.  The good news is that, so far, there's been no visible effect of Brexit on trade, and we don't expect there to be any.  Exports to the UK declined in October, while imports rose, but both remain in line with the levels seen before the June referendum.  We didn't buy into the fear mongering surrounding the "leave" vote and believe Brexit will prove to be a long-term positive, as the UK uses its increased flexibility to make better trade agreements with the U.S., Mexico, and Canada, boosting global trade.  Another ongoing factor affecting trade with the rest of the world is the trend decline in US petroleum product imports. Recently, petroleum product imports have grown as they increased 3.4% in October, and are now up 12.1% from a year ago. But we don't expect this to last.  Since OPEC came to a decision to cut oil production, oil prices have increased to north of $50. Expect more oil production to come back online in the Unites States, and the petroleum import trend to revert lower.  Back in 2005 US petroleum and petroleum product imports were eleven times exports.  In October, these imports were 1.8 times exports.  This is also why oil prices have not spiked back to old highs even though the Middle East is in turmoil.  The US has become an important global petroleum producer, bringing a stabilizing effect to the world.  Overall, we expect real GDP growth to accelerate in the coming year and expect some widening in the trade deficit as US consumers buy imports with their healthy gains in income.

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Posted on Tuesday, December 06, 2016 @ 11:07 AM • Post Link Share: 
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  Nonfarm Productivity Increased at a 3.1% Annual Rate in the Third Quarter
Posted Under: Data Watch • Productivity

 

Implications:  Nonfarm productivity growth was unrevised at a 3.1% annual rate in the third quarter.  That may seem odd given the upward revisions to real GDP growth for Q3, but the number of hours worked were revised up as well, leaving output growth per hour unchanged.  Still, that 3.1% annualized gain in productivity for the third quarter represents the fastest gain in two years, a break from the trend in declining productivity readings over the prior three quarters, and a clear improvement from the 2% annualized pace of productivity growth seen over the past twenty years.  But despite the healthy rise in Q3, productivity remains unchanged from a year ago. We believe government statistics underestimate actual productivity growth.  Have you ever had to call a cab or a limo to come pick you up on short notice? Now, with the press of a button, UBER sends a car directly to your door. And it's faster, easier, and often cheaper than ever before.  Meanwhile Yelp gives you instant restaurant reviews and Facetime lets you talk face-to-face with people thousands of miles away.  The benefits from these technologies have been immense. But because many of these incredible new technologies are free, they aren't directly included in output measures, making their impact on productivity difficult to measure.  So while our quality of life continues to rise, it's not completely showing up in the government statistics.  As the tax and regulatory environment improves, expect productivity growth to pick up in the next couple of years.  In particular, a lower tax rate on corporate America will encourage greater efficiency.  In addition, continued employment gains are pushing down the unemployment rate and putting rising pressure on wages, which give companies a greater incentive to take advantage of the efficiency-enhancing technology that entrepreneurs have been inventing in troves.

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Posted on Tuesday, December 06, 2016 @ 10:54 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 Tuesday, December 06, 2016 @ 7:55 AM • Post Link Share: 
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  Caution on Dollar-Meddling
Posted Under: Europe • Government • Monday Morning Outlook • Trade • Taxes
If there's one theme tying together many of the policies President-Elect Trump and Congress will try to enact, it's making the US a better place to invest.  This includes peeling back Obamacare, drastically cutting the top tax rate on corporate profits, moving from the depreciation of business investment to immediate and full expensing, and allowing more investment in energy infrastructure. 

In addition, policymakers are seriously considering making the corporate tax code "border-adjustable."  Right now, US companies are taxed on their total income, no matter where they earn their profits.  (They get a reprieve on their foreign profits, but only as long as they leave that money outside the US.)  A border-adjustable tax system would only tax income companies earn on sales in the US; income earned from exports would not be taxed. 

Meanwhile, companies operating in the US would not be able to deduct the cost of imported inputs. In effect, companies located outside the US would be taxed on their US sales (our imports).  Border adjustment is a feature the US would borrow from European-style VAT taxes, but without other unpopular parts of the VAT, like the inability of companies to deduct labor costs. 

In theory, all this is supposed to encourage exports and discourage imports, in turn leading to a much smaller trade deficit.  It also gives Trump a way to say he's fulfilled his campaign promises on trade issues without having to enact any special tariffs.  Instead, the "tariff" would be buried inside the corporate income tax code.   

So, just for the sake of discussion, let's say Trump and Congress enact all these policies and, in addition, thanks to more energy infrastructure, the US becomes a net petroleum exporter to the rest the world.  Many voters and politicians would expect these changes to mean the US trade deficit would be on its way to extinction. 

But this may not be so.  In spite of these changes, the trade deficit could actually expand.  Why?  These policies will certainly make the US a better place to invest.  Capital inflow will increase and this could, and should, boost the value of the US dollar versus other currencies, giving Americans more purchasing power to buy more foreign products.  Meanwhile, the foreign capital sent to the US would mean foreigners would have less money to buy our products.  The result could be that some foreign products become even more competitive.

This is not to say that these policy measures are worthless or self-defeating; they're certainly not.  Cutting the tax rate on capital and making the US a better place to invest is a good policy regardless of the impact on the trade deficit. 

But here's the problem.  Policymakers will have a choice.  One would be to accept better economic and wage growth and a lower unemployment rate and simply "declare victory," even if the trade deficit is at wider than current levels.  That's the better choice. 

But, throughout history, politicians have viewed a strong dollar and trade deficits as problems to solve.  This is exactly what happened in 1985 with the Plaza Accord, when major currency countries agreed to generate a dollar decline after a large increase in the dollar's value in the early 1980s, after Ronald Reagan cut tax rates and reduced regulation.

The Plaza Accord lowered the value the dollar, led to more market volatility and eventually caused the Fed to ratchet up interest rates higher than it otherwise would have.  It could turn into a recipe for a recession, which would be a shame given all the other positive changes that may be made. 

Let's be clear, though.  None of this is on the horizon, yet.  At the earliest, it's a potential 2019-20 issue, not a 2017-18 issue, and may never happen at all.  With the banking system still chock full of excess reserves, more economic growth may not lead to a prolonged dollar surge like in the early 1980s or late 1990s.  And this time, hopefully, politicians will accept good economic news as a reason to let the market work.  

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Posted on Monday, December 05, 2016 @ 11:58 AM • Post Link Share: 
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  The ISM Non-Manufacturing Index Rose to 57.2 in November from 54.8 in October
Posted Under: Data Watch • Employment • Government • Inflation • ISM Non-Manufacturing • Fed Reserve • Interest Rates

 
Implications:  Sentiment in the service sector hit the highest level in more than a year in November and has signaled growth for 82 consecutive months.  The high level in November was broad-based, with fourteen of eighteen industries reporting expansion.  Meanwhile, all major measures of activity remain above 50, signaling expansion as well. New orders continue to grow, but at a slightly slower pace than in October, while all other major indexes showed a pickup in pace.  Business activity and employment both showed the fastest pace of expansion in more than a year, as companies work to fill the steady flow of new orders arriving.  The healthy readings on new orders and business activity both suggest the service sector should continue to grow in the months ahead.  While employment has been a weak spot in the manufacturing sector, the much larger service sector continues to expand, in-line with the 188,000 monthly nonfarm jobs growth seen over the past year.  And while the pace of job growth may slow modestly as the labor market tightens, employment gains should put continued downward pressure on the unemployment rate while pushing up wage growth.  No matter how you cut it, the labor market looks very close to the Fed's "full employment" target.  On the inflation front, the prices paid index was essentially unchanged at 56.3 in November from 56.6 in October, representing the second highest reading in more than two years (behind only October's).  Rising costs for airfare, copper, and fuels more than offset declining prices for beef and dairy.  With a strong employment reading and inflation showing a pickup in pace over recent months, today's report from the service sector points full steam ahead for a rate hike at next week's Fed meeting.

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Posted on Monday, December 05, 2016 @ 11:25 AM • Post Link Share: 
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  Nonfarm Payrolls Increased 178,000 in November
Posted Under: Data Watch • Employment

 

Implications:  Today's report should lock the Fed into its path for a rate hike later this month.  Payrolls rose 178,000 in November, almost exactly what the consensus expected and close to the average of 188,000 in the past year.  Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 160,000 in November and is up 220,000 per month in the past year.  However, today's report is not the last word on payroll growth in November.  In recent years, the initial report for November has been revised up in later months, sometimes substantially.  So don't be surprised if November eventually shows payrolls growing 200,000+.  Due to both job growth and a drop in the labor force, the unemployment rate dropped to 4.6% in November, the lowest since 2007 and lower than the Fed's long-term forecast of 4.8%, another reason the Fed will raise rates very soon.  No, we are not saying a drop in the labor force is "good."  But regardless of the reason for the drop, it means the Keynesians at the Fed will view the labor market as tighter.  It's also important to note that labor force data are volatile from month to month; in the past year, the jobless rate has dropped from 5.0% as the labor force has grown by 2.1 million.  An additional factor the Fed will keep in mind is the rise in the share of voluntary job leavers among the unemployed, which hit 12.5% in November, the most since 2001.  In the past, Janet Yellen has said this figure is a measure of labor-market tightness, that a higher share shows workers have more confidence they can quit their jobs and quickly find new ones.  Although some analysts will say part-timers accounted for all the net gains in employment in September – November, the data on full-timers and part-timers are extremely volatile from month to month.  In the past year, part-time employment is up only 43,000 per month.  Although average hourly earnings slipped 0.1% in November, they're still up 2.5% in the past year, while total hours worked are up 1.4%.  Combined, total cash earnings (which exclude fringe benefits and irregular bonuses/commissions) are up 3.9% in the past year, which is plenty of fuel to push consumer spending higher.  The labor market is a still far cry from where it would be with a better set of policies, and we hope those policies are on the way.

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Posted on Friday, December 02, 2016 @ 10:05 AM • Post Link Share: 
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  Populist Uprising or Conservative Revival?
Posted Under: GDP • Government • Press • Research Reports • Spending

 

Steve Moore, economic advisor to President-Elect Donald Trump told a DC-newspaper, The Hill, and the Republican leadership; "Just as Reagan converted the GOP into a conservative party, Trump has converted the GOP into a populist working-class party." (The Hill, Jonathan Swan, 11/23/2016)

According to the Merriam-Webster dictionary, a Populist is, "a member of a political party claiming to represent the common people."  The opposite of populist is elitist.  We don't think Mr. Moore was calling President Reagan an elitist, so what was he saying?  What does "populism" mean when it gets translated into economic policy?

We would rather ignore all this political stuff, but government has become so large and intrusive that its decisions make a huge difference for the economy and investors.  Our constituents are investors, so we think it is important to answer this question.  After all, Mr. Moore is a key economic adviser to the new President.

Having lived in the Midwest since the 1970s we've seen up close the Rust Belt's economic troubles that Trump tapped into throughout his campaign.  He resonated so much with these voters that he won Wisconsin, Pennsylvania, Ohio, Indiana, and Michigan.  Moore said that traveling the Rust Belt states with the Trump campaign "altered his politics."

"It turned me more into a populist," he said, expressing frustration with the way some in the Beltway media dismissed the economic concerns of voters in states like Ohio, Pennsylvania and Michigan. "Having spent the last three or four months on the campaign trail, it opens your eyes to the everyday anxieties and financial stress people are facing," Moore added. "I'm pro-immigration and pro-trade, but we better make sure as we pursue these policies we're not creating economic undertow in these areas." (The Hill, Jonathan Swan, 11/23/2016)

After reading this we wonder why it takes traveling in the Midwest to understand this.  Is the rest of the country that out of touch?  Have they simply ignored the economic data?  Incomes in the Midwest have been growing slowly, Detroit went bankrupt, blue collar jobs have suffered in the region, and population growth has slowed.

What we find worrisome is that the new Trump Administration seems to think the economic problems of this region (and the rest of the country) are due to trade and immigration.  We do agree that there are issues in both categories.  Illegal immigration is a problem.  And, free trade bills should be one page, not thousands, filled with such complexity that it requires ever-increasing government involvement.  In addition, everyone knows that China violates patents and subsidizes their industry – currency manipulation is more complex and merits very careful consideration.

But are these really the causes, or is slow economic growth a symptom of a different set of problems?  A bad diagnosis can lead to the wrong treatment.  So if Populism is in the business of blaming elites for the problems of the common people, should it blame foreign elites, or domestic elites, for today's issues?

We could focus an entire piece on the problems of the Rust Belt – high taxes, unions, regulations, and failing schools. But these problems are just the tip of the iceberg.  The real reason the US is growing so slowly, the real reason incomes aren't rising as rapidly as they have in the past - is simple.  Government is just too darn big.

Contrary to popular thought, the US is not growing slowly because technology is stealing jobs.  It is not growing slowly because productivity isn't improving.  It is not stuck in a secular stagnation because of China, Mexico or inequality.  The US is growing slowly because it is carrying the burden of a massive government.  See the chart above to get a sense of how large the US federal government has become.

All government spending is financed by borrowing or taxing from the private sector.  The more the government spends and the more it redistributes the more it "crowds out" economic growth.  The bigger the government, the slower the economy, jobs and incomes grow.

Federal Government spending, excluding defense, has risen from around 6% of GDP to over 17% of GDP in the past 60 years.  We use non-defense spending to highlight the "core" cost of government and redistribution.  The only decades since the 1950s where "core" spending (as a share of GDP) fell were the 1980s and 1990s.  Actual government spending grew, but it grew at a slower pace than GDP, which meant every year the private sector was able to hold onto more of its profits and incomes.

The result was a booming stock market, job market and rising incomes.  A complete turnaround from the malaise of the 1970s.  No wonder Ronald Reagan (who the media tagged as person not up to the task of being President) was beloved by so many when he left office.

In the past 15 years, under President Bush, President Obama and a Republican Congress that ended the Sequester, non-defense federal government spending has increased by 3% of GDP from 14.8% to 17.9%.  What that means is that 3% of GDP has shifted from productive to non-productive areas of the economy.  It's not a coincidence that real GDP and productivity growth have slowed.

If the Trump Administration wants to call itself populist instead of conservative, who cares?  But if it really wants to improve living conditions for the average American, not just in Rust Belt states, but everywhere, what it needs to do is reduce the size and scope of the federal government.  We would call that a Conservative revival, and it would be Populist too. 

Brian S. Wesbury, Chief Economist

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Posted on Thursday, December 01, 2016 @ 2:40 PM • Post Link Share: 
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  The ISM Manufacturing Index Rose to 53.2 in November
Posted Under: Data Watch • ISM

 

Implications: Manufacturing activity firmed for a third consecutive month in November, and matched the highest reading for the index in 2016.  While not booming, the November reading continues the trend of improvement in the factory sector, which has lagged growth in the much larger service sector over recent years.  Both the production and supplier delivery indices hit 2016 highs, while an uptick in the pace of new orders suggests the manufacturing sector should see continued growth in the months ahead.  And given President-Elect Trump's focus on the manufacturing sector, there is an added tailwind that should push the index higher in 2017.  Employment was the only major indicator to soften in November (remember, the employment reading of 52.3 represents continued expansion in hiring, just at a slower pace than in October), but don't expect this reading to affect the Fed's outlook on the labor market.  Manufacturing remains a small portion of total employment, and other signals of labor force strength (initial claims, earnings growth, and consumer spending) continue to show healthy improvement.  On the inflation front, the prices paid index was unchanged at 54.5 in November, signaling a continued rise in prices at a modest pace.  As a whole, today's report shows the plow horse manufacturing sector picking up a bit as the year nears a close.  In other news this morning, initial jobless claims rose 17,000 last week to 268,000.  Continuing claims increased 38,000 to 2.08 million.  Using these numbers, our models are projecting that tomorrow's official jobs report will show a payroll increase of 188,000 for November (with upward revisions over the next couple of months).  This morning's report on construction showed spending increased 0.5% in October (+2.0% including revisions to September).  New home building led the way, while public construction - boosted by schools and road paving - more than offset a decline in commercial construction (power plants and manufacturing facilities).  Yesterday, the National Association of Realtors reported that pending home sales, which are contracts on existing homes, eked out a 0.1% gain in October.  As a result, we're forecasting that existing home sales will be roughly flat for November, although we still expect overall gains in both new and existing home sales over the next year.

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Posted on Thursday, December 01, 2016 @ 11:08 AM • Post Link Share: 
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  Personal Income Increased 0.6% in October
Posted Under: Data Watch • PIC

 

Implications: Another solid month of income and spending gains for consumers, with incomes up 0.6% and spending up 0.3%.  Incomes are up 3.9% in the past year and up at a 5% annual rate in the past six months, suggesting a strong Christmas.  We expect continued strong gains in the year ahead as the labor market tightens.  In turn, consumer spending, up 4.2% in the past year, will continue to grow as well.  Perhaps the biggest news in today's report was on inflation.  The PCE deflator, the Fed's favorite measure of inflation, rose 0.2% in October.  Although it's only up 1.4% from a year ago, it was up only 0.3% in the year ending in October 2015, so inflation has clearly accelerated.  In fact, in the past six months PCE prices are up at a 1.9% annual rate, very close to the Fed's long-term target of 2%.  In the past three months, these prices are up at a 2.4% rate.  Meanwhile, the "core" PCE deflator, which excludes food and energy, is up 1.7% from a year ago.  We expect continued acceleration in year-ago comparison measures of inflation over the next several months.  Together with continued employment gains, these figures support the case for the Fed to raise short-term rates in December.  The one consistent dark cloud in the income reports has been government redistribution.  While unemployment compensation is the lowest since 2001, overall government transfers to persons are up 4% in the past year.  Before the Panic of 2008, government transfers – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment insurance – 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 and, among those getting the transfers, weakens work incentives.  That's why we have a Plow Horse economy, not a Race Horse economy.  In other news this morning, the ADP report said private payrolls were up 216,000 in November.  Plugging all these figures into our models suggests Friday's report on nonfarm payrolls will show a gain of about 188,000 for November.  We'll be finalizing our payrolls forecast after tomorrow morning's report on jobless claims.  However, keep in mind that initial reports on November payrolls are usually revised up in later months, so future reports will likely show payrolls up more than 200,000 for the month.  

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Posted on Wednesday, November 30, 2016 @ 10:26 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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