Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  New Orders for Durable Goods Rose 1.4% in February
Posted Under: Data Watch • Durable Goods • Government • Housing • Fed Reserve • Interest Rates
Supporting Image for Blog Post

 

Implications:  Durable goods orders rebounded partially in February, gaining 1.4%, after a steep drop in January.  The largest gain came for orders of commercial aircraft, up 24.6% in February, while motor vehicles and parts rose a solid 1.4%.  After factoring in downward revisions to January, orders rose a more modest 0.6%. Strip out the typically volatile transportation sector and orders rose 0.5% in February (+0.6% including revisions), more than offsetting the 0.3% drop in January.   Looking at the details of the report shows rising orders across most major non-transportation categories – led by machinery (+1.9%) and primary metals (+1.4%) – which were partially offset by declining orders for computers and electronic products (-1.4%) as well as electrical equipment (-1.5%).  The most important number in the release, core shipments – a key input for business investment in the calculation of GDP – declined 0.4% in February.  If unchanged in March, these orders would be up at a 1.9% annualized rate in Q1 versus the Q4 average.  Shipments have been trending lower since the start of 2022, and we expect this trend to continue as the economy feels the lagged effects of the Federal Reserve’s actions to tighten monetary policy.  Consistent with other economic data, orders and shipments for durable goods have been very choppy of late, and we expect a number of factors will keep the path forward rocky as we move through 2024: monetary policy from the Federal Reserve, the withdrawal symptoms following the COVID-era economic morphine that artificially boosted both consumer and business spending, and the return toward services that likely means goods-related activity will continue to soften in the year ahead, even as some durables that facilitate services remain healthy.  In other manufacturing news this morning, the Richmond Fed index, a measure of mid-Atlantic factory activity, fell to -11.0 in March from -5.0 in February.  Meanwhile, on the housing front, home prices were mixed in January, with the national Case-Shiller index up 0.4% while the FHFA index ticked down 0.1%.  In the last twelve months, these indices are up 6.0% and 6.3%, respectively.

Click here for a PDF version

Posted on Tuesday, March 26, 2024 @ 10:27 AM • Post Link Print this post Printer Friendly
  New Single-Family Home Sales Declined 0.3% in February
Posted Under: Data Watch • Government • Home Sales • Housing • Fed Reserve • Interest Rates
Supporting Image for Blog Post

 

Implications:  Not much to get excited about in the new home sales market, which took a breather in February following two consecutive gains. The good news is that the worst of the headwinds for new home sales are in the rearview mirror. The main issue with the US housing market has been affordability, so it’s not surprising that 30-yr fixed mortgage rates recently falling roughly one percentage point due to anticipation of Fed rate cuts in 2024 has helped sales activity over the past few months.  That said, higher financing costs are still taking a bite out of buyer’s purchasing power. Assuming a 20% down payment, the rise in mortgage rates since the Federal Reserve began its current tightening cycle amounts to a 19% increase in monthly payments on a new 30-year mortgage for the median new home.  The good news for potential buyers is that the median sales price of new homes has fallen nearly 20% from the peak in 2022.  However, it’s important to note that this drop in median prices is likely due to the mix of homes on the market including more lower priced options as developers complete smaller properties. Supply has also put more downward pressure on median prices for new homes than existing homes.  The supply of completed single-family homes is up nearly 175% versus the bottom in 2022.  This contrasts with the market for existing homes which continues to struggle with an inventory problem, often due to the difficulty of convincing current homeowners to give up the low fixed-rate mortgages they locked-in during the pandemic.  But this does not mean that housing is getting more affordable per square foot, with the Census Bureau reporting median prices on this basis up 45% from 2019 to 2022, the most recent data available. Though not a recipe for a significant rebound, more inventories giving potential buyers a wider array of options will continue to put a floor under new home sales.  One problem with assessing housing activity is that the Federal Reserve held interest rates artificially low for more than a decade.  With rates now in a more normal range, the sticker shock on mortgage rates for potential buyers is very real.  However, we have had strong housing markets with rates at current levels in the past, and as long as the job market remains strong, homebuyers will eventually adjust.

Click here for a PDF version

Posted on Monday, March 25, 2024 @ 11:31 AM • Post Link Print this post Printer Friendly
  Welcome to State-Run Capitalism
Posted Under: Employment • GDP • Government • Inflation • Markets • Monday Morning Outlook • Press • Fed Reserve • Interest Rates • Bonds • Stocks

We’ve mentioned this before, but it bears repeating.  It seems that investors pay as close attention to what the government is doing, as they do to actual business news.  We don’t think investors are wrong to do this, but it’s only because government has become so big.

The US has moved from a simple Keynesian-type model to what we call “State-Run Capitalism.”  When the economy turns soft, a typical “Keynesian” (demand-side) response would be to boost the budget deficit or print more money.

Now, the government is running permanent, and very large, deficits and using its budget to fund semiconductors, EVs, solar and wind energy generation, as well as redistributing more money to immigrants and students who are in debt.  This all smells and looks like central planning…or State-Run Capitalism.

At the same time, because the Fed is now using an abundant reserve monetary policy, it has taken the financial system out of the process of determining short-term interest rates.  Banks no longer need to trade excess reserves, so the federal funds rate has no real market.  The Fed just makes that rate up.

So, here we sit in 2024, and a Wall Street Journal economics reporter, Greg Ip, just wrote a piece titled “The Economy is Great…”.  We don’t think that’s really true, but real GDP did grow more than 3% last year and job growth has been robust. 

A typical Keynesian response to this, the one most people were taught in economics class, would be for the government to run a surplus, or at least substantially shrink the deficit, and the Fed to be at least slightly worried about over-heating the economy.

Instead, Congress just pushed through a $1.2 trillion spending bill with a deficit that will approach $1.6 trillion, and the Fed announced that it was likely to cut rates three times in 2024.

What the heck?  Why?  Especially with inflation reports so far in 2024 coming in hot.  The Cleveland Fed median price index is up 4.6% from 12 months ago, “supercore” CPI is up 4.3% over 12 months, and nearly 7% annualized over the past three months.  With inflation this high, and the economy “great,” no traditional Keynesian would support these policies.

We don’t blame investors for reading the tea leaves and realizing that all this stimulus is probably good for the markets in the short run.  Lower rates mean more growth and higher price-earnings ratios.  The market seemingly (and perhaps correctly) has decided that the Fed, and the Federal Government, can manage the economy to keep stocks up.

But all of this will come with a price.  No centrally-managed economy has been permanently made to go only one way.  It can look good for a time, but eventually the sheer size of the government and the mishandling of monetary policy catches up.  On a smaller scale, the US tried this in the 1970s, and the result was stagflation.  Russia, Venezuela, and a host of other countries have all failed.

But it doesn’t happen overnight.  More importantly, because the Fed has separated the growth of the money supply and the level of interest rates, rate cuts may not mean what many people think they do.  Yes, rates may come down this year, but the money supply has contracted in the past year.  A contraction in the money supply is never a good sign.

We still expect a recession this year.  The US will have an irresponsible deficit, but it will be slightly less irresponsible than it was last year.  Add in a decline of M2, and the morphine pumped into the system over the past few years has worn off.

If the Fed is cutting rates because it is an election year, and if the government is spending money in an effort to entice some voters to see it as personally beneficial to vote for big government, it’s a recipe for lousy economic outcomes.

When the government pushes money in directions that are politically beneficial, they are often not efficient in a true economic sense.  This means less growth and more inflation.  We are very worried about stagflation in the years ahead.

Between now, and whenever that is, the market may completely ignore it.  And, investors will think the government has found a recipe for permanent prosperity.  But after thousands of years of trying, and never making it happen, we bet against even this new version of State-Run Capitalism.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

Click here for a PDF version

Posted on Monday, March 25, 2024 @ 11:17 AM • Post Link Print this post Printer Friendly
  Three on Thursday - CPI Explained: Breaking Down the Basics
Supporting Image for Blog Post

 

In this week’s edition of “Three on Thursday,” we take a deeper look at the Consumer Price Index (CPI). The CPI is a key measure of inflation, measuring the average change in price over time of a market basket of consumer goods and services. Its broadest and most widely used index, the Consumer Price Index for All Urban Consumers (CPI-U), represents over 90% of the U.S. urban population. To further the discussion, click the link below.

Click here to view the report

Posted on Thursday, March 21, 2024 @ 2:30 PM • Post Link Print this post Printer Friendly
  Existing Home Sales Increased 9.5% in February
Posted Under: Data Watch • Government • Home Sales • Housing • Inflation • Markets • Fed Reserve • Interest Rates
Supporting Image for Blog Post

 

Implications:  Existing home sales surprised to the upside in February, beating even the most optimistic forecast of any economics group surveyed by Bloomberg. Notably February’s gain was the biggest in a year and comes on the heels of a healthy increase in January as well. It looks like sales activity has finally bottomed and is beginning to recover after two years of declines. Looking at the details, two of the most significant headwinds for the housing market seem to be abating.  First, recent optimism around inflation and rate cuts from the Federal Reserve has led to a rapid decline in interest rates across the board. For example, though 30-year mortgage rates remain around 7%, they are down since peaking above 8% at the end of October.  That said, affordability is still a big concern for buyers.  Assuming a 20% down payment, the rise in mortgage rates since the Federal Reserve began its current tightening cycle in March 2022 amounts to a 31% increase in monthly payments on a new 30-year mortgage for the median existing home.  Eventually, the housing market can adapt to these increases but continued volatility in financing costs will cause some indigestion.  The other major headwind for sales has been that many existing homeowners are reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022.  This continues to limit future existing sales (and inventories).  However, there are signs of progress with inventories rising 10.3% in the past year.  That said, the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) was 2.9 in February, well below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market.  A tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate to a big decline in prices.  In fact, home prices appear to be rising again, although modestly, with the median price of an existing home up 5.7% from a year ago.  Putting this together, we expect a modest recovery in sales in 2024.  In manufacturing news this morning, the Philadelphia Fed Index, a measure of factory sentiment in that region, declined to +3.2 in March from +5.2 in February. Finally, on the employment front, initial claims for jobless benefits declined by 2,000 last week to 210,000, while continuing claims rose by 4,000 to 1.807 million. These figures suggest continued job growth in March.

Click here for a PDF version

Posted on Thursday, March 21, 2024 @ 11:56 AM • Post Link Print this post Printer Friendly
  Rate Expectations
Posted Under: Employment • GDP • Government • Inflation • Markets • Press • Research Reports • Fed Reserve • Interest Rates • Bonds • Stocks
Supporting Image for Blog Post

 

There was zero chance the Fed was going to cut rates today; instead it was all about what today’s meeting, the dot plot, and the press conference meant for the timing and pace of rate cuts in the months ahead.      

Starting with today's statement, there was only one change from January, and it was a minor one. While prior language stated that job gains “have moderated since early last year but remain strong” today’s statement removed language concerning moderation and simply stated that “job gains have remained strong.” That – along with a slight adjustment lower to the unemployment rate forecast for 2024 –suggest that a stronger than anticipated job market has weakened Fed confidence that inflation will trend sustainably towards 2.0%. 

The survey of economic projections provided more clarity.  Forecasts for real (inflation-adjusted) GDP growth in 2024 rose to 2.1% from 1.4% in December. And with that outlook for stronger growth, their unemployment rate expectation shifted down to 4.0% from 4.1% while core inflation expectations rose to 2.6% from 2.4%.  It's worth noting that with unemployment at 3.9% and core inflation at 2.8%, this suggests the FOMC members see very little movement in either category over the remaining nine months of the year.

While the combination of faster growth, higher inflation, and a stronger job market didn’t shift the Fed’s expectation for the equivalent of three 25 basis point cuts between now and year end, the distribution of forecasts shows that only one FOMC participant now expects more than three rate cuts will be appropriate this year, down from five members at the December meeting. And rate cut expectations for 2025 shifted to three cuts from four.

Beyond rate cuts, markets have been wondering when the Fed will start to taper back the pace of quantitative tightening (QT).  During today’s press conference, Powell wouldn’t confirm or deny that the process could begin as soon as the next Fed statement on May 1st, but he did say that it would be appropriate to start “fairly soon” with plans to gradually cut the pace of roll-offs.  In other words, May looks to be on the table.  

We expect the Fed will start cutting rates in June.  That said, the Fed should take a cautious approach once the process begins, with a primary focus on not cutting rates too aggressively or prematurely, which could re-ignite the inflation problem like the Fed did on multiple occasions under Chairman Arthur Burns in the 1970s.  The economy is still growing, but we think it falls into recession before the year is out and that real GDP growth significantly lags the predictions of the FOMC members.  This, in turn, heightens the risk that the Fed takes a more aggressive path on rate cuts in response to economic weakness, bringing the threat of re-accelerating inflation to the forefront in the years ahead.  

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

Click here for a PDF version

Posted on Wednesday, March 20, 2024 @ 4:08 PM • Post Link Print this post Printer Friendly
  Housing Starts Increased 10.7% in February
Posted Under: Data Watch • Government • Home Starts • Housing • Interest Rates
Supporting Image for Blog Post

 

Implications:  Good news all around on home building in February, although some one-off factors probably juiced the report.  Home building surged back in February after dropping in January, crushing consensus expectations, while previous months’ activity was revised higher, as well.  Home completions also soared, rising 19.7% to a 1.729 million annual rate: the highest level since the beginning of 2007.  Meanwhile, building permits rose a solid 1.9% and beat consensus expectations.  It’s important to note a couple one-off factors that could be influencing this blowout report.  First, February included Leap Day, meaning builders had one more day than usual.  If this was not accounted for in the seasonal adjustment (and it looks like it was not) then that would have made activity look stronger than it really was.  Second, the weather was milder in February versus normal temperatures, which likely helped activity.  While the data have been very choppy of late, it appears developers have finally found their footing in what has been a challenging environment for sales. Case in point, housing starts are up 16.6% from the bottom last August.  That said, they are still below December’s level, and 15.6% off the peak in April 2022 (the month after the Fed began their current tightening cycle).  Another recent theme is the split between single-family and multi-family development.  Over the past year, the number of single-family starts is up 35.2% while multi-unit starts are down 34.8%.  Permits for single-family homes are up 29.5% while multi-unit home permits are down 29.0%.  This huge gap in the data is due to the unprecedented nature of the last four years since COVID began.  With 30-year mortgage rates still hovering near multi-decade highs, the mortgage lock-in phenomenon for homeowners is real, which has limited the supply of homes on the market and forced homebuyers to look to new builds as their best option.  That is why the best news in today’s report for homebuyers was that fresh supply is on the way, as home completions rose to the fastest rate since 2007.  While we don’t see housing as a major driver of economic growth in the near term, we don’t expect a housing bust like the 2000s on the way, either.  As the Fed eventually begins to cut rates, mortgage rates should trend lower as well, helping support housing later in 2024.  In other housing news, the NAHB Housing Index, a measure of homebuilder sentiment, rose to 51 in March from 48 in February.  This is the fourth gain in a row and the first time the index is above 50 since last Summer, signaling that a greater number of builders view conditions as good versus poor.

Click here for a PDF version

Posted on Tuesday, March 19, 2024 @ 11:06 AM • Post Link Print this post Printer Friendly
  Focused on the Fed
Posted Under: CPI • Government • Inflation • Markets • Monday Morning Outlook • Retail Sales • Fed Reserve • Interest Rates • Spending • Bonds • Stocks

The Fed meets this week, which means investors and analysts will be sifting through Wednesday’s FOMC statement, updated economic projections, the “dot plots,” and Powell’s press conference searching for any signal – real or imagined – about what our central bank will do next.  In particular, the market is on tenterhooks about when rate cuts will start, how fast those rate cuts will come, or if the Fed will simply hit the “pause” button on the prospect of rate cuts until deep into 2024.

We think this obsession with the Federal Reserve is unhealthy.  Instead of an obsession with slight policy shifts out of Washington, DC, we think investors need to be focused on more important matters, like the process of innovation, entrepreneurial risk-taking, and corporate profits.  In the end, it’s these factors that will drive stock market valuations the most, not the vagaries of the short-term interest rate target by the mandarins of money.

Things have changed a great deal since the last Fed meeting on January 31.  Back then, the futures market expected about six rate cuts of 25 basis points each this year, with the first cut coming in March.  As of Friday’s close, the market was expecting only three rate cuts this year, with the first one coming in either June or July.

No wonder the shift in rate expectations given recent reports on inflation.  The two CPI reports since then show consumer prices up at a 4.6% annual rate in the first two months this year.  And no, this was not food and energy; “core” prices, which exclude those two volatile categories were also up at a 4.6% annual rate so far this year.

Even worse for the Fed is that the newly made-up slice of the CPI that the Fed and others call the “Super Core” measure of inflation, which includes services only (no goods) but also excludes food, energy, and housing rents, rose 0.8% in January and 0.5% in February.  That’s a growth rate of 8.2% annualized so far this year.  Notice how you used to hear a lot about this measure a year or so ago when it was indicating lower inflation and now few dare speak its name when it shows inflation re-accelerating!  Meanwhile, overall producer prices are up 5.4% so far this year and “core” producer prices are up at a 4.5% annual rate.

None of these figures are remotely close to the 2.0% inflation goal the Fed claims it’s still targeting.

The problem for the Fed is that there are signs that the economy may be slowing.  Although retail sales rose 0.6% in February, after factoring in downward revisions to prior months, retail sales rose a tepid 0.1%.  “Core” sales, which exclude volatile categories such as autos, building materials, and gas stations — and is a crucial measure for estimating GDP — increased by 0.1% in February, but was revised significantly lower for previous months, down 0.5%.  If unchanged in March these sales will be down at a 0.7% annual rate in Q1 versus Q4, which would be the first quarterly decline since the COVID lockdowns.

Industrial production rose a tepid 0.1% in February but that follows declines of 0.3% and 0.5% in December and January, respectively.  We like to follow manufacturing output excluding the auto sector (which is volatile) and that is down 0.9% from a year ago.  Not a good sign.

As always, we will be watching the press conference following Wednesday’s meeting for any mention of the Fed looking more closely at the money supply, but we won’t get our hopes up.  The M2 measure of money is down 2.0% in the past year, which would not be good for the economy if these figures are accurate and if they continue.

Another key issue is whether the Fed will publicly abandon it’s 2.0% target to make it easier on themselves to achieve their goal.  We think that will happen eventually, but that’s several years from now, not soon.  The Fed likely thinks it would lose credibility if it announced a higher target for inflation, and could send long-term interest rates spiraling upward; that’s not a risk the Fed would take, particularly in an election year.

Our advice to investors: listen to and watch the Fed but don’t obsess about it.  The changes in monetary policy from meeting to meeting don’t matter nearly as much as the productive capacity of the American people.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

Click here for a PDF version

Posted on Monday, March 18, 2024 @ 11:16 AM • Post Link Print this post Printer Friendly
  Industrial Production Increased 0.1% in February
Posted Under: Data Watch • Industrial Production - Cap Utilization • Inflation • Markets
Supporting Image for Blog Post

 

Implications:  Industrial production rebounded in February, with the underlying details coming in stronger than the headline gain of 0.1%.  The Federal Reserve highlighted that February’s winter weather was milder than January’s, boosting production.  The manufacturing sector was the biggest source of strength in today’s report, with activity rising 0.8%.  Non-auto manufacturing (which we think of as a “core” version of industrial production) posted a gain of 0.8% in February, the largest in more than a year. Meanwhile, auto production jumped 1.9%, as well.  Notably, the production of high-tech equipment also rose for the thirteenth month in a row and is up 18.6% in the past year, by far the strongest growth of any major category.  This likely reflects investment in AI as well as the reshoring of semiconductor production, which remains temporarily strong due to the CHIPS Act, despite broader weakness in the industrial sector.  The mining sector rebounded in February, too, increasing 2.2%, also the largest monthly gain in over a year.  Broad-based strength in oil and gas extraction as well as mineral extraction contributed.  Finally, the utilities sector (which is volatile and largely dependent on weather) was the big source of weakness in today’s report.  Activity plummeted 7.5% in February, the largest monthly decline since 2006, as the end of unusually cold weather in January rapidly reduced demand for home heating.  In other news this morning, the Empire State Index, a measure of manufacturing sentiment in the Northeast, dropped unexpectedly to -20.9 in March from -2.4 in February, while import prices increased 0.3% in February and export prices jumped by 0.8%.  In the past year, import prices are down 0.8% while export prices are down 1.8%.

Click here for a PDF version

Posted on Friday, March 15, 2024 @ 11:11 AM • Post Link Print this post Printer Friendly
  Three on Thursday - How is the Financial Health of U.S. Households?
Supporting Image for Blog Post

 

In this week’s edition of “Three on Thursday,” we look at the current overall financial health of households in the United States. Quarterly, the Federal Reserve Board of Governors releases a report officially known as the “Z.1 Financial Accounts of the United States,” which provides comprehensive data on the flow of funds and levels of financial assets and liabilities for various sectors of the U.S. economy. This report provides a look at the overall health of all households combined but does not look at households on an individual basis. To further the discussion, click on the link below.

Click here to view the report

Posted on Thursday, March 14, 2024 @ 2:28 PM • Post Link Print this post Printer Friendly

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.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.