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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Housing Starts Declined 9.4% in September
Posted Under: Data Watch • Home Starts • Housing


Implications:  After hitting a twelve-year high in August, housing starts took a breather in September, falling 9.4% to a 1.256 million annual rate.  That said, all of September's decline was due to the volatile multi-family sector where starts fell 28.2%, the biggest monthly drop since 2016.  Meanwhile, single-family starts eked out a gain of 0.3% in September, posting a fourth consecutive monthly increase.  It's important to note that single-family starts have been on a general upward trend since bottoming in February and are in spitting distance of new highs.  Meanwhile, multi-family starts have been range bound since 2015 when an upward trend ended.  On average, each single-family home contributes to GDP about twice the amount of a multi-family unit, so a continued shift back towards single-family construction will be a boon for economic growth.  Building permits showed a similar story to starts in September, falling 2.7% after hitting a post-recession high in August. And just like with starts, this decline was entirely driven by multi-family permits. Single family permits rose 0.8% in September, the fifth consecutive gain, and now sit just below a new post-recession high. It looks like developers are becoming more optimistic about their prospects following an all-around tepid year for housing in 2018. This higher sentiment also showed up in yesterday's release of the NAHB index which hit a twenty-month high in October. It looks like sustained increases in the strength of fundamentals for potential buyers have been driving sentiment for builders.  Mortgage rates have dropped roughly 100 basis points since the peak late last year, and wages are now growing near the fastest pace in a decade, boosting affordability.  Our outlook on housing hasn't changed: we anticipate a rising trend in home building in the next few years.  Based on fundamentals – population growth and scrappage – the US needs about 1.5 million new housing units per year but hasn't built at that pace since 2006. Finally, in employment news this morning, initial jobless claims rose 4,000 last week to 214,000, while continuing claims fell 10,000 to 1.679 million. Plugging this data into our models suggests nonfarm payrolls will continue to grow at a healthy pace in October.

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Posted on Thursday, October 17, 2019 @ 11:24 AM • Post Link Share: 
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  Industrial Production Fell 0.4% in September
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production pulled back in September as the GM strike weighed on auto production.  That said, the slowdown in activity was broad-based, with nearly every major category showing declines.  With the strikes, autos led industrial production lower in September, declining 4.2%, while manufacturing excluding autos had a more muted decline of 0.1%.  Putting the two series together shows overall manufacturing declined 0.5% in September and is down 0.9% from a year ago.  This represents a considerable slowdown in the twelve-month growth rate since the end of 2018, and the same pattern can be seen in overall industrial production as the chart to the right shows.  However, the slowdown has begun to taper off, and there is evidence that manufacturing activity may be turning a corner. Over the past five months, manufacturing has risen at a 1.2% annualized rate, a stark reversal from an annualized decline of 5.8% during the first four months of 2019.  Despite all the recent doomsday predictions related to the US-China trade dispute, it's important to remember that we also saw a similar slowdown in 2015-16 during the oil price crash, and no recession materialized.  And keep in mind that manufacturing is only responsible for about 11% of GDP and is much more sensitive to global demand than other sectors of the economy.  Outside the manufacturing sector, mining activity fell 1.3% in September due to a slowdown in oil extraction and well drilling.  But mining remains up 2.6% in the past year, with the fastest year-over-year growth of any major category.  There were two exceptions to the slowdown in September, with utilities and high-tech equipment both continuing to show gains. Utilities rose 1.3% in September as unseasonably warm weather boosted demand for electricity. Utilities are up 1.1% in the past year.  High-tech equipment production is up 2.5% in the past year, and up at a faster 7.9% annualized rate over the past three months.  In other manufacturing news this morning, the Philly Fed Index, a measure of East Coast factory sentiment, dropped to still positive +5.6 in October from +12.0 in September.

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Posted on Thursday, October 17, 2019 @ 11:14 AM • Post Link Share: 
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  Retail Sales Declined 0.3% in September
Posted Under: Data Watch • Retail Sales


Implications:  Retail sales fell in September for the first time in seven months. This should pretty much solidify a rate cut by the Fed in two weeks, as the financial markets fully anticipate. But should it? No! Yes, overall retail sales declined 0.3% in September, but including revisions to prior months, sales were only down 0.1%, and remain up a solid 4.1% from a year ago.  Sales declined in seven of thirteen major categories with autos, which are very volatile from month to month, leading the way lower, declining 0.9% in September. Still auto sales are up 5.6% from a year ago. Non-store sales which have been a real bright spot, fell for the first time in nine months but are still up 12.9% from a year ago. The largest gain in sales in September was for clothing & accessory stores which grew 1.3%. "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) increased 0.1% in September, were up at a 6.8% annual rate in Q3 and are up 4.9% from a year ago.  "Core" sales are up 8.6% at an annualized rate since the start of 2019, the fastest year-to-date growth we have seen since record keeping began in 1992!   Jobs and wages are moving up, companies and consumers continue to benefit from tax cuts, consumer balance sheets look healthy, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  For these reasons, expect continued solid gains in retail sales in the year ahead.  In other news earlier this week, the Empire State Index, which measures factory sentiment in the New York region, rose to +4.0 in October from +2.0 in September, beating the consensus expected decline to +1.0. On the housing front today, the NAHB index, which measures homebuilder sentiment, rose to 71 in October from 68 in September, the highest reading since February of 2018. This represents a significant and consistent rebound in optimism following the collapse in the index at the end of 2018.

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Posted on Wednesday, October 16, 2019 @ 11:01 AM • Post Link Share: 
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  Trade Clouds Parting
Posted Under: Monday Morning Outlook • Trade

Trade disputes have been an ongoing soap opera since President Trump took office.  From steel tariffs to trade skirmishes with China, Japan, Canada, Mexico, South Korea, and the European Union, among others,  it's been hard to keep track! 

But over the past few months we think a trend toward settlement of these disputes has emerged.  Congress must still act on the new version of NAFTA with Mexico and Canada – USMCA – but as Democrats in the House of Representatives consider impeaching the president, they should also become more interested in showing they're not only interested in all scandal, all the time.  Passing some broad bi-partisan legislation and USMCA would be a good start.  Look for it to get passed by early 2020, putting our disputes with our two largest export markets behind us.
From the perspective of US economic growth, the relationship with China has received way too much attention in the past couple of years.  Even before the trade dispute started, US exports to China were a smaller share of our GDP than exports to Japan were before the Japanese economy went into a long-term funk in the early 1990s.  If the US could prosper in the 1990s in spite of Japan's problems, the US economy overall should be able to absorb softer demand for our products coming from China, which lags well behind Canada and Mexico as an export market.

But last week's news indicates a deal is getting close.  It will not be a huge deal that comprehensively puts all our trade issues with China to rest; not even close.  But it will likely mean no new additional restrictions from now through 2020, and some rolling back of tariffs put in place in the last couple of years.

Meanwhile, the US recently concluded a trade deal with Japan.

None of this suggests we are fully out of the woods on trade issues.  We doubt China will stop its theft of intellectual property, and so, expect a trade dispute with China to re-emerge in 2021 no matter who wins the presidential election next year.  In the meantime, tariffs and the threat of other economic sanctions on China were always more damaging to China than the US.  That's why we never worried as much as the conventional wisdom.      

But nothing that's happened in the last few years suggest we are entering some sort of Smoot-Hawley-like downward spiral in international trade.  US merchandise imports dropped 70% from 1929 to 1932 while exports dropped 69%.  That's a downward spiral!  US imports didn't reach 1929 levels again until 1946.

By contrast, even before the recent trade deals with Mexico, Canada, and Japan have been implemented, US trade with the rest of the world has been rising.  In the past twelve months, exports and imports of goods and services combined have been $5.65 trillion, versus $5.63 trillion in calendar 2018, $5.26 trillion in 2017, and $4.93 trillion in 2016.  Even without deals, trade could be hitting a record high this year.      

The US economy has been and will continue to be much more resilient than many think.  Trade has increased uncertainty, but was never as big a threat as feared.  And, as trade relations improve, stocks will make up lost ground.  We were never as worried as the conventional wisdom, and now it will come around. 

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

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Posted on Monday, October 14, 2019 @ 11:33 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, October 14, 2019 @ 8:24 AM • Post Link Share: 
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  The Consumer Price Index was Unchanged in September
Posted Under: CPI • Data Watch


Implications:  Consumer prices took a breather in September following seven months of rising prices.  Meanwhile "core" prices – a gauge of inflation that strips out the typically volatile food and energy components – rose 0.1%.  Overall consumer prices are up 1.7% in the past year, but they have been held back by declining costs for energy.  Core prices are up 2.4%, tied for the largest twelve-month increase going back to late 2008.  Given the Fed's 2% inflation target, that should be a signal that everything is looking A-OK. Not too fast, not too slow, just right.  While core inflation is up 2.4% in the past year, it's up at a faster 2.8% annualized rate over the past three months.  The Fed needs to keep this data in mind in the months ahead as it deliberates about rate cuts.  With employment data continuing to show strength, the Fed would clearly be putting their dual mandate on the back burner in an attempt to use monetary policy to "solve" issues that have developed overseas.  But the Fed has shown at recent meetings that it has moved away from a "data dependent" stance, so don't expect the pickup in inflation – paired with Monday's report on producer prices which showed core prices at 2% as well - to change the Federal Reserve's plan for additional rate cuts.  Looking at the details of today's report shows that rising costs for housing, medical care, and services were offset in September by declining costs for energy and new and used vehicles.  The most disappointing news in today's report was that real average hourly earnings were unchanged in September, but remain up 1.2% in the past year.  With the strength in the labor market, we believe earnings will trend higher in the months ahead.  Healthy consumer balance sheets, a strong job market, inflation in-line with Fed targets but pushing upwards, and the continued tail winds from improved tax and regulatory policy, all reinforce our belief that the economy is on solid footing.  In employment news this morning, initial jobless claims fell 10,000 last week to 210,000, while continuing claims rose 29,000 to 1.684 million. Plugging this data into our models suggests nonfarm payroll continue to grow at a healthy pace in October.

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Posted on Thursday, October 10, 2019 @ 11:24 AM • Post Link Share: 
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  The Producer Price Index (PPI) declined 0.3% in September
Posted Under: Data Watch • PPI


Implications:  Producer prices made a surprise move lower in September, as falling energy prices and declining margins to wholesalers pushed the index down 0.3%.  Energy prices dropped 2.5% in September, led lower by a 7.2% decline in gasoline prices.  Food prices, meanwhile, rose 0.3% on the month.  Strip out these typically volatile categories, and "core" prices also fell 0.3% in September, marking the largest single-month drop for core prices since early 2015. Declining margins to wholesalers, particularly machinery and vehicle wholesalers, led the drop in core prices in September, though most major categories moved lower.  It's important to note that, even with the multi-year large decline in September, "core" prices are up 2.0% in the past year, and have run at or above the Fed's 2% inflation target on a year-ago comparison basis for the past twenty-six months straight.  Consensus expectations for the "core" reading in Thursday's consumer price index (CPI) release is a rise of 0.2%, and if that holds, "core" consumer prices will be up 2.4% in the past year.  In other words, parsing the volatile month-to-month data from the trend, the Fed should consider if further rate cuts are really needed right now.  The data don't seem to justify it, but the Fed left data dependence behind back in July.  Goods prices led the producer price index lower in September, with energy costs the key culprit.  Services prices declined 0.2% in September, with falling wholesaler margins more than offsetting a 1.1% increase in the cost for hospital outpatient care. Further down the pipeline, prices for intermediate demand goods remains soft, while intermediate demand services prices continue to move higher.  The pouting pundits may take today's report and point to the decline as evidence that the Fed needs to move rates lower, but we think that's a mistake.  Core inflation remains in-line with targets, and a focus on a single-month's reading misses the forest for a tree. That said, the Fed seems bent on lowering rates, and we expect we will see one more rate cut before the year is out, most likely coming at the meeting later this month.  

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Posted on Tuesday, October 8, 2019 @ 12:09 PM • Post Link Share: 
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  Labor Market Continues to Roar
Posted Under: Employment • Monday Morning Outlook

In spite of all the fear-mongering about a recession, Friday's employment report clearly showed we are not in an economic downturn.  The best news in the report was that the unemployment rate fell to 3.5%, the lowest most Americans have seen in their lifetimes. 

Even better, the drop in joblessness was broad-based.  The Hispanic unemployment rate fell to 3.9%, while the Black unemployment rate remained at 5.5%, both record lows.  These figures are much better than in prior business cycles.  The lowest Hispanic jobless rate in a prior expansion was 4.8% in 2006; the lowest Black unemployment rate in a prior expansion was 7.0% in 2000.    

Workers age 25+ who lack a high school degree have an unemployment rate of 4.8%.  This is a group whose jobless rate peaked at 15.8% back in 2010.  Remember the new stories suggesting these workers would never find new jobs because of automation?  As it turns out, that was bunk.  

Some analysts will bemoan the tepid pace of payroll growth in September, but it's important to put the 136,000 jobs gained into context.  First, the initial report on September payrolls has fallen short of consensus expectations in ten of the past twelve years.  Second, September payrolls have a history of being revised higher.  Since the economic expansion started, September has been revised up over the next two months by an average of 48,000, which, if that holds true this year, would put September roughly on par with the average pace of payroll growth seen over the past twelve months.          

Remember all the talk a few years ago about how job growth was due to part-time work, not full-time jobs?  That was never really true; instead, in our view, it was a case of some analysts letting their (in this case, conservative) political leanings get in the way of sound economic analysis.  But now the story about part-time job growth would be even more absurd.  Part-time workers are only 17.1% of all employed workers, versus a peak of 20.1% back in 2010.  Since 1980, the lowest part-timer share has been 16.7%, which the economy looks on-track to hit sometime in 2020.

Some analysts are focusing on the fact that average hourly earnings for all private-sector workers were unchanged in September, and are up 2.9% from a year ago, slightly slower than the 3.0% growth in the year ending in September 2018.  But average hourly earnings for production and non-supervisory workers (who tend to be lower paid than other workers), rose 0.2% in September and are up 3.5% from a year ago, a clear acceleration from the 3.0% gain in the year ending in September 2018.  If you've been hoping that a tighter labor market would help shrink the earnings gap between high- and low-income workers, that finally seems to be happening.     

Eventually, the pace of job creation should slow down somewhat as we get a larger share of economic growth from rising productivity, which has accelerated in response to deregulation and lower tax rates.  There is a limit to how far unemployment can fall, and how many workers, on average, join the labor force each month.  Payroll growth of about 100,000 per month is probably enough to keep the jobless rate at 3.5%; by contrast, payrolls are up 179,000 per month in the past year while civilian employment, an alternative measure of jobs that includes small-business start-ups, is up 183,000.

In the meantime, look for plenty of good news to keep coming from the labor market.  And when these unjustified recessions fears fade, long term bond holders are in for a rude awakening.   

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

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Posted on Monday, October 7, 2019 @ 11:38 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, October 7, 2019 @ 9:13 AM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $54.9 Billion in August
Posted Under: Data Watch • Trade

Implications: The Trump Administration may bemoan the larger trade deficit in August, as exports grew but imports grew faster.  But, as a result, the total volume of trade (imports plus exports), which signals how much businesses and consumers interact across the US border, increased by 0.4% in August, and that's what matters most about today's report.  However, compared to a year ago, exports and imports are essentially unchanged.  Of particular note in today's report, exports of petroleum products (think oil and gasoline) rose 6.8% in August, while imports decline 7.7%. As a result, the ratio of petroleum imports to exports fell to 1.02, the lowest reading since record keeping began back in 1989, and representing a virtual balance of trade. And it's worth noting, the attack on Saudi Arabian oil facilities that roiled the markets and likely pushed more export activity towards the US didn't occur until mid-September, so that isn't reflected in today's report.  It's possible that the ratio could dip below one in next month's report for the first time ever. For comparison, the US imported petroleum products at more than eleven times the rate it exported as recently as 2005.  Despite the progress, there is a lot of angst out there from the pouting pundits that the China trade battle is still a long way from done.  We think the worst-case-scenarios much discussed by the financial press will prove excessively pessimistic, as they so often do.  We still don't believe an all-out trade war (like the Smoot-Hawley tariff act) will materialize, but rather that these short-term skirmishes will lead to longer-term gains for all countries involved. We have already seen outlined trade deals with Mexico, Canada, and Japan. Total trade from these three is far bigger than with China, yet that's what the media obsesses over.  China is hurting, and further tariffs ratchet up the pressure to get a deal done.  So far this year, US imports from China are down 13.2% from the same period in 2018, while up 31.5% from Vietnam, 14.0% from Taiwan, 7.6% from India, 6.8% from South Korea, and 2.2% from Mexico.  Companies are shifting production out of China.  And the longer this drags on, the worse the outcome will be for China. The list of companies leaving China continues to grow and, at some point, the damage will become too much. Yes, this is hurting growth in the US to a small degree, sure. But the economic damage to China is greater.  It's in everyone's best interest to get a deal done.

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Posted on Friday, October 4, 2019 @ 12:17 PM • 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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