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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  The Producer Price Index (PPI) Rose 0.2% in June
Posted Under: CPI • Data Watch • Government • Inflation • Markets • PPI • Fed Reserve • Interest Rates • Bonds • Stocks
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Implications:   Following a breather in May, producer prices were back on the rise in June, cutting a contrast to the consumer price index report out yesterday.  Producer prices rose 0.2% in June, are up 2.6% in the past year (the highest twelve month reading since early 2023), and the pace of producer price inflation has accelerated since the start of the year, up at a 3.2% annualized rate over the past six months.  The June rise came despite a 2.6% decline in energy prices in June, and a 0.3% drop in food prices.  Stripping out these typically volatile food and energy components shows “core” prices jumped 0.4% in June and are up 3.0% in the past year.  That also represents the highest twelve month increase in more than a year, and a clear shift from the moderation in producer price inflation in 2022 and 2023.  Year-ago comparisons have been moving higher each and every month so far this year, which may serve to give the Fed some pause as they consider the start to rate cuts.  Diving into the details of today’s report shows services prices lead the index higher, rising 0.6% in June and up 3.5% in the past year.  The June increase was almost entirely attributable to a 1.9% jump in margins received by wholesalers.  Goods prices declined in June, led by the aforementioned drop in energy and food prices.  The direction of inflation moving forward is very likely to continue being dictated by the services side of the economy, which suffered heavily during the COVID shutdowns but has since returned to the forefront in consumer demand.  Further back in the supply chain, prices in June fell 0.2% for intermediate demand processed goods but rose 1.4% for unprocessed goods. We do anticipate easing in inflation will come should the Fed have the patience to let tighter monetary policy do its work, and weakening economic data show higher rates and the delayed impact of the decline in the M2 supply starting to bite. But inflation risks an eventual re-acceleration should the Fed panic and ease policy too quickly at signs of economic trouble.

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Posted on Friday, July 12, 2024 @ 10:39 AM • Post Link Print this post Printer Friendly
  Three on Thursday - S&P 500 Index 1H
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This week’s edition of “Three on Thursday” focuses on the S&P 500 Index’s performance in the first half of 2024. As a widely respected barometer for the overall stock market, the S&P 500 Index tracks the performance of 500 of the largest companies listed on U.S. stock exchanges. In the first half of the year, the S&P 500 Index achieved a remarkable total return of 15.3%, reaching all-time highs 31 times during this period, with a maximum drawdown of only 5.8%. 

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Posted on Thursday, July 11, 2024 @ 3:02 PM • Post Link Print this post Printer Friendly
  The Consumer Price Index (CPI) Declined 0.1% in June
Posted Under: CPI • Data Watch • Employment • Government • Inflation • Markets • Fed Reserve • Interest Rates • Bonds • Stocks
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Implications:   Inflation came in softer than expected for the third straight month in June, posting the first outright monthly decline since the early months of COVID.  This will add to the Federal Reserve’s confidence that inflation, still running at 3.0% on a year-ago comparison basis, is eventually heading back down to the 2.0% target, which means cuts in short-term interest rates are likely to start in September.  Looking at the big picture, there was considerable progress against inflation from mid-2022 to mid-2023: consumer prices were up 9.1% in the year ending in June 2022 and then dropped rapidly back to 3.0% in the year ending in June 2023, leading many to believe the end of “temporary” pandemic inflation problems was in sight.  But then inflation pressures reignited in the first quarter of this year, casting doubt on the Fed’s ability to cut rates in 2024.  Now it appears that inflation has resumed its downward trend, a lagged response to the drop in the M2 measure of money compared to early 2022.  Looking at the details of today’s report, June inflation was held down by energy prices, which declined 2.0% on the back of lower prices for gasoline (-3.8%).  Stripping out energy and its often-volatile counterpart (food), “core” prices also came in softer than expected, rising 0.1% for the month, the smallest advance since August 2021.  Within the core categories, the most notable movement came from a slowdown in housing rents. The two categories that make up housing rents – those for actual tenants as well as the imputed rental value of owner-occupied homes – increased 0.3% in June, their smallest advances since 2021.  Housing rents have been a key driver of inflation over the last couple years and their trajectory will have important implications for the future path of inflation as they make up a third of the overall index.  Meanwhile, a subset category of prices the Fed has told investors to watch closely and is a useful gauge of inflation in the service sector – known as the “Supercore” – which excludes food, energy, other goods, and housing rents, declined 0.1% in June. That is the first outright decline since August 2021, a welcome sign for the Fed as Supercore has showed little sign of abating since the Fed began hiking rates.  Other notable categories to decline in June include prices for airfare (-5.0%), hotels (-2.5%), used vehicles (-1.5%), and new vehicles (-0.2%).  In other news today, initial unemployment claims declined 17,000 last week to 222,000.  Continuing claims decreased 4,000 to 1.852 million.

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Posted on Thursday, July 11, 2024 @ 11:28 AM • Post Link Print this post Printer Friendly
  How Strong is the Labor Market?
Posted Under: Employment • Government • Markets • Monday Morning Outlook

We aren’t naturally cynical about economic data, but there are things that don’t add up about the job market.

On the surface, Friday’s report was solid, with nonfarm payrolls up more than 200,000 in June, another good month.  However, downward revisions to the prior two months reduced the net gain in total payrolls to just 95,000, with a net gain of only 50,000 for the private sector.

Now for the strange parts.  Nonfarm payrolls are up 2.6 million versus a year ago.  But civilian employment, an alternative measure of jobs that includes small business start-ups is up a grand total of only 195,000 in the past year!  Not 195,000 per month, but a total of just 195,000 over the past twelve months.  Weird, right?

It's entirely possible that one of the major reasons for this gap is the recent surge in immigration.  Immigrants who get jobs at one of the companies included in the payroll survey should be counted because it is filled out by employers.  But the civilian employment figures (the weak one) are based on a survey of individual households and it’s hard to survey households in the US that are brand new or that are skittish about filling out a survey sent by the government, particularly if they are here illegally.

It's also important to point out that a gap between the two surveys this large may be highly unusual, but it has happened before.  As a share of the labor force, the gap was briefly larger in the mid-1980s, the late 1990s, in 2013, and during COVID

Another oddity is the consistent negative revisions for the past few years.  Back in 2022, the third report for payrolls for a particular month averaged 6,000 less than the initial report for that month.  For 2023, the revisions averaged -30,000.  So far this year they’ve averaged -49,000.  In the past few decades, negative revisions are more likely to happen around recessions than when growth is strong.  So maybe it’s a symptom of weakness to come.

But there’s also a more benign explanation.  Remember, the payroll report is based on a survey of employers.  In the ten years prior to COVID, the government was getting an on-time response rate of 75% from the employers it surveys; but in the past three years the timely response rate has averaged only about 65%.

So maybe the companies that don’t fill out the survey on time for the first payroll report are having more business trouble than their peers (compared to normal).  A struggling company would have more important issues to deal with than filling out a government survey.  Eventually, the statisticians will get used to that pattern and make adjustments, but the data are looking funny in the meantime.

Another oddity is the gap between full-time and part-time jobs.  The civilian employment report shows full-time jobs down 1.6 million in the past year while part-time is up 1.8 million.  That kind of loss of full-time positions is normally linked to a recession and declining payrolls, not continued strong economic growth.

Do these anomalies show the government is cooking the books?  We wouldn’t go that far.  If the Labor Department is cooking the books, presumably for political reasons, then why are they letting the unemployment claims reports show an increase and why don’t they cook the civilian employment report to show more job gains closer to what the payroll report shows?

The problem is that it’s hard to argue at this point that government officials haven’t abused their authority to advance a narrative they’ve found useful, including the “slam dunk” case for Iraq having Weapons of Mass Destruction, or COVIDs “six-foot” rule, school closings, and masks, or even whether the measure of deaths from COVID were “from” COVID or “with” COVID.   It’s not just the CDC and NIH that have lost luster in the eyes of average investors, but other government agencies as well.  More people are skeptical of government reports than we have seen in our careers.

Putting it altogether, we think the job market is poised somewhere between the still strong picture painted by the payroll report and the soft reports on civilian employment.  No recession yet, but some early signs of a slowdown.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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Posted on Monday, July 8, 2024 @ 10:27 AM • Post Link Print this post Printer Friendly
  Nonfarm Payrolls Increased 206,000 in June
Posted Under: Data Watch • Employment • Government • Markets • Fed Reserve • Interest Rates • Bonds • Stocks
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Implications:  In spite of the headline payroll increase of 206,000 in June, there are clear signs the job market is decelerating.  Revisions for prior months subtracted 111,000 from recent payroll gains.  In the private sector, payrolls rose 136,000 in June itself but were revised down by 86,000 in prior months, bringing the net gain to 50,000.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 116,000 in June but is up only a grand total of 195,000 from a year ago.  No wonder then that the unemployment rate has crept upward, now at 4.1% versus 3.6% a year ago.  Notably, the household survey also shows employment among full-time workers down 1.55 million versus a year ago, with all the household job gains among part-time workers.  Another emerging flaw in the labor market is that it’s taking longer for unemployed workers to find new jobs.  The median duration of unemployment hit 9.8 weeks in June, the highest since January 2023 and compared to 8.8 weeks a year ago in June 2023.  The rise in the amount of time it takes to find a new job is consistent with the recent upward creep in continuing jobless claims.  We like to follow payrolls excluding government (because it's not the private sector), education & health services (because it rises for structural and demographic reasons, and usually doesn’t decline even in recession years), and leisure & hospitality (which is still recovering from COVID Lockdowns).  That “core” measure of payrolls rose only 47,000 in June, which is slower than the average of roughly 70,000 per month in the first half of the year.  The good news for the Federal Reserve (but maybe not workers) is that wage growth continues but at a slower pace.  Average hourly earnings increased 0.3% in June and are up 3.9% versus a year ago.  Back in June 2023, average hourly earnings were up 4.7% from the prior year.  Given a target of 2.0% inflation plus productivity growth of around 1.5% per year, the Fed probably wants to see wage growth in the vicinity of 3.5%, and it’s now getting closer.  Unfortunately, we think a monetary policy tight enough for the Fed to reach its inflation goals is likely tight enough to slow the economy further in the months ahead.

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Posted on Friday, July 5, 2024 @ 12:41 PM • Post Link Print this post Printer Friendly
  The ISM Non-Manufacturing Index Declined to 48.8 in June
Posted Under: Data Watch • Government • Inflation • ISM • Fed Reserve • Interest Rates
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Implications:  The ISM Services index surprised sharply to the downside in June, falling to the lowest level in more than four years and – outside of the COVID lockdown months – the lowest since July 2009.  With June’s abrupt decline, activity in the U.S. service sector has now contracted in two out of the last three months, adding to the growing pile of evidence that the U.S. economy is running out of steam.  Looking at the details of the report, eight out of the eighteen major service industries reported growth for the month while an equal amount reported contraction and two reported no change.  The drop in the overall index was a result of much lower business activity in June as well as slower new orders.  Notably, both of the indexes for new orders and business activity fell into contraction territory, the first time they have been below 50 since December 2022 and May 2020, respectively.  Meanwhile, service hiring remains muted, as the employment index fell deeper into contraction territory to 46.1, the sixth time in the last seven months below 50.  Finally, the worst piece of the report came from the highest reading of any category – the prices index – which declined to a still-elevated 56.3 in June.  Although the index is lower than the back-breaking pace from 2021-22 – make no mistake – prices are still rising in the service sector and inflation remains a major problem.  Notably, the majority of survey comments from June’s report were focused on continued inflation pressures rather than slowing activity or orders.  The service sector has been a main driver for stubbornly high inflation this year and – unfortunately for the Fed – it doesn’t seem to be abating.  Meanwhile, the service sector – which has been a lifeline for the US economy the last couple years – is starting to crack.  How the Federal Reserve responds in the coming months could determine whether we repeat the stagflationary 1970s.

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Posted on Wednesday, July 3, 2024 @ 11:40 AM • Post Link Print this post Printer Friendly
  The Trade Deficit in Goods and Services Came in at $75.1 Billion in May
Posted Under: Data Watch • Markets • Trade
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Implications:  The trade deficit in goods and services grew to $75.1 billion in May as exports fell by more than imports.  However, we prefer to focus on the total volume of trade, imports plus exports, as it shows the extent of business and consumer interaction across the US border. This measure fell in May, declining by $3.0 billion, although total trade volume is up 5.4% from a year ago, with exports up 4.3% and imports up 6.2%.  Notably, there is a major shift going on in the pattern of US trade.  Through the first five months of the year, imports from China were down 2.5% versus the same period in 2023 and down 26.3% versus the same period in 2022.  China used to be the top exporter to the US.  Now the top spot is held by Mexico; China has fallen to number three with Canada now in second place.  Meanwhile, global supply chain pressures have eased substantially over the past few years.  This was confirmed by the New York Fed’s Global Supply Chain Pressure Index in May, with the index -0.48 standard deviations below the index’s historical average. For some perspective, two years ago in the month of May the index sat 2.71 standard deviations above the index’s historical average.  Expect some temporary volatility though as Yemen’s Houthi rebels continue to deter container ships from transiting the Red Sea and Bab-el-Mandeb Strait, adding volatility to shipping costs.  Also in today’s report, the dollar value of US petroleum exports exceeded imports once again.  This marks the 24th consecutive month of the US being a net exporter of petroleum products. In other news today, initial unemployment claims rose 4,000 last week to 238,000.  Continuing claims increased 26,000 to 1.858 million.  Also on the employment front, ADP’s measure of private payrolls increased 150,000 in June versus a consensus expected 165,000. Plugging this into our models finalizes our forecast for the official nonfarm payroll report for June (to be announced Friday morning) at 194,000. Expect payroll growth to slow down further in the months ahead.  In other recent news, cars and light trucks were sold at a 15.3 million annual rate in June, down 4.0% from May and 4.8% lower than a year ago.  Expect a bounce back in sales in July as dealerships get past problems related to cyberattacks.

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Posted on Wednesday, July 3, 2024 @ 11:34 AM • Post Link Print this post Printer Friendly
  The ISM Manufacturing Index Declined to 48.5 in June
Posted Under: Data Watch • ISM • Markets
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Implications:  The ISM Manufacturing index closed out the first half of 2024 worse off than it began, as the index missed consensus expectations once again in June and fell deeper into contraction territory to 48.5.  Activity in the US manufacturing sector has now contracted for nineteen out of the last twenty months.   Looking at the details of the report, only eight of the eighteen major manufacturing industries reported growth in June, while nine reported contraction, and one reported no change.   Production softened in June and fell into contraction territory for the first time in four months.  While that index has bounced around 50 since the Federal Reserve began their current tightening cycle in the first quarter of 2022, the new orders index (the other forward-looking piece of the report) has remained below 50 for twenty out of the last twenty-two months.  With weakening demand, companies have turned to reducing their order backlog. That index, which declined to 41.7 in June, has been in contraction for twenty-one consecutive months.  Survey comments from manufacturing companies warned of dwindling backlogs and have started furloughing workers in response.  This can be seen from movement in the employment index, which fell back into contraction territory in June, the eighth month below 50 in the last nine.  Looking at the big picture, goods-related activity was artificially boosted during the COVID lockdowns, but then the economy reopened, and consumers started shifting their spending preferences back to services and away from goods. The ISM index peaked in the last month federal stimulus checks were sent out (March 2021) and has been weaker ever since.  Expect to see continued manufacturing weakness in the second half of 2024 as the bill for reckless and artificial spending by our government from the COVID years comes due.  In other news this morning, construction spending declined 0.1% in May, as drops in homebuilding, office projects, and power facilities more than offset an increase for manufacturing facilities.

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Posted on Monday, July 1, 2024 @ 11:56 AM • Post Link Print this post Printer Friendly
  America's 3.5-Second Miracle
Posted Under: Government • Markets • Monday Morning Outlook • Bonds • Stocks

In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."

He, obviously knew about the Magna Carta (1215) and the English Parliament’s Bill of Rights (1689), which created a separation of powers between the King and elected representatives. What he didn’t pay much attention to was how the United States had improved upon these documents or he would have seen a country of entrepreneurs that had freedom and property rights along with a constitution so well thought out that it has only been amended twenty-seven times in 235 years. No one puts it better than Ronald Reagan; the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

"This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers – fifty-six men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.”

“They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.”

“This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days – maybe on leap years we could have an intermission – this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”

America has proven that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. Happy 4th of July to you all.  Let’s take time this week to step back and realize just how fortunate we are to live in a time and place where the fire of invention still burns hot, course corrections (however messy they may be) still take place, and the future remains as bright as ever.  May we continue to honor the legacy of those who came before us by striving to uphold the principles that have made this country a beacon of hope and freedom for the world.

(We first published a version of this same Monday Morning Outlook in celebration of July 4th, 2023.) 

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist 

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Posted on Monday, July 1, 2024 @ 11:22 AM • Post Link Print this post Printer Friendly
  Personal Income Rose 0.5% in May
Posted Under: Data Watch • Government • Home Sales • Inflation • Markets • PIC • Fed Reserve • Interest Rates
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Implications:  The Fed will welcome today’s personal income and spending report showing healthy consumer activity and a breather on inflation, but we wouldn’t get too caught up on a single month’s report. PCE prices – the Federal Reserve’s preferred measure of inflation – were unchanged in May, bringing the twelve-month comparison to 2.6%.  But don’t go popping Champagne quite yet, remember that PCE prices rose by 0.3% or more in each of the prior four months, and prices are running above a 3% annualized pace this year through May.  “Core” prices, which exclude the ever-volatile food and energy categories, rose 0.1% in May and are also up 2.6% versus a year ago.  The Fed has prioritized a subset of inflation dubbed the “Supercore,” which is services only (no goods), excluding food, energy, and housing.  That measure rose 0.1% in May, is up 3.4% versus a year ago, and has remained stubbornly around 3.5% on a year-ago basis for the past seven months.  No matter which measure they choose, or how they try to spin it, inflation remains above the Fed’s target.  Transitioning to a focus on how consumers fared in May shows some positive momentum.  Personal income rose 0.5% in May and is up 4.6% in the past year.  Private-sector wages and salaries led the way, up 0.7% on the month and up 4.5% in the past year.  Unfortunately government activity continues to run hot as well, with government transfer payments rising 0.3% in May while government pay rose 0.5% and is up 8.5% in the past year, matching the largest twelve-month increase in more than three decades. We don’t think the growth in government pay – or massive government deficit spending – is sustainable or good for the US economy.  Consumer spending rose a more modest 0.2% in May, with both good and services showing gains.  When adjusting for inflation, consumption rose 0.3%.  We are closely watching the service sector as the driver of consumer activity both now and in the near future, and we expect activity to temper as higher interest rates and continued inflation pressures take their toll.  In other recent news on the manufacturing front, the Kansas City Fed Manufacturing Index, a measure of factory activity in that region, fell to -8 in June from -2 in May, following similar negative readings earlier this week from the Dallas and Richmond Feds. On the housing front, pending home sales, which are contracts on existing homes, fell 2.1% in May following a 7.7% decline in April.  Plugging these figures into our model suggests existing home sales, which are counted at closing, will drop in July, probably to the lowest level so far this year.

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Posted on Friday, June 28, 2024 @ 11:18 AM • Post Link Print this post Printer Friendly

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