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   Brian Wesbury
Chief Economist
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  Industrial Production Increased 0.7% in April
Posted Under: Data Watch • Industrial Production - Cap Utilization • COVID-19

Implications:  Industrial production continued to recover in April, rising for the second month in a row as many factories that were damaged by February's severe winter weather returned to operation.  But, while good news, the production side of the economy still has a way to go.  Yes, both industrial production and manufacturing activity are now up substantially from a year ago, but this is just the result of the big declines we saw last Spring in the early days of the pandemic rolling into the year-ago comparison.  Looking at the overall progress of the recovery versus pre-pandemic levels shows a different story.  Industrial production is not only down 2.7% from February 2020, but is still down 0.5% from January 2021 levels before the winter storm hit in February, as well. That means there continues to be a wide gulf between the production and consumption sides of the US economy, which creates conditions for rising inflation. Meanwhile, ongoing issues with supply chains were also visible in today's report, with the one source of weakness coming from auto production, where output fell 4.3%. According to the Federal Reserve, this is largely the result of the ongoing semiconductor chip shortage that is keeping finished vehicles from rolling off the assembly line.  Notably, manufacturing activity excluding the auto sector rose 0.7% in April and is now back above its pre-winter storm high in January.  Mining activity also continued to recover in April, rising 0.7%, and is likely to be an ongoing tailwind in the months ahead.  Oil prices have now fully recovered to where they were pre-pandemic, and with upward pressure on commodity prices likely to continue as the US begins to reopen, extraction activity has begun to rebound. This is reflected in the number of active oil and gas rigs in operation, which have nearly doubled from the bottom in August of 2020, but still need to double again to get back to pre-pandemic levels.  Look for a continued upward trend in industrial production in the months ahead as reopening continues, supply chain issues are ironed out, and factories continue to ramp up production. 

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Posted on Friday, May 14, 2021 @ 1:16 PM • Post Link Share: 
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  Retail Sales Were Unchanged in April
Posted Under: Data Watch • Government • Inflation • Retail Sales • Spending • COVID-19

Implications: Retail sales took a breather in April after soaring 10.7% in March.  Sales soared in March because of a rebound from polar-vortex related problems in February plus the government sending out "stimulus" checks like they're going out of style.  So the lack of further growth in retail sales in April is understandable.  Eight of thirteen major categories declined in April, with general merchandise stores leading the way.  But gains in autos and restaurants and bars helped offset the decline.  Still, the level of sales remains extremely robust.  Sales are at an all-time record high, up 51.2% from a year ago, when a great deal of business activity was shut down due to COVID-related restrictions.  Another way to look at it is that sales are up 17.9% versus February 2020, which was pre-COVID.  That's the fastest growth rate for any 14-month period since 1979.  In other words, due to temporary government support, retail sales are running hotter than they would have been in the absence of COVID, even as the level of output (real GDP) is still running lower than it would have been in the absence of COVID.  It has not been an even recovery for all major categories, though.  For instance, sporting goods stores (+42.0%), non-store retailers (+33.7%), auto sales (+32.2%), and building materials (+31.3%) have all grown significantly faster than overall retail sales since February 2020.  Only at restaurants and bars (-2.0%) are sales still below where they were in February 2020.  "Core" sales, which exclude the most volatile categories of autos, building materials, and gas station sales, declined 0.8% in April, but are up 38.1% from a year ago.  In the months ahead, the path of retail sales will be a battle between getting back to normal due to vaccines as well as rising wages and jobs, while the temporary and artificial boost from "stimulus" checks wanes.  In inflation news today, import prices rose 0.7% in April.  Meanwhile, export prices increased 0.8%.  In the past year, import prices are up 10.6%, while export prices are up 14.4%.  Jumps like these show the rising inflation trend we are likely to witness in the year ahead.

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Posted on Friday, May 14, 2021 @ 11:38 AM • Post Link Share: 
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  COVID-19 Tracker 5/13/2021
Posted Under: COVID-19

The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective.

Click here to view the one page report

Posted on Thursday, May 13, 2021 @ 4:38 PM • Post Link Share: 
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  COVID-19 High Frequency Data 5/13/2021
Posted Under: COVID-19

Source: First Trust Advisors, Bloomberg, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, OpenTable, Transportation Security Administration, Energy Information Administration, American Staffing Association, Flight Radar 24

2019 Level and % Change 2019 is from the same week in 2019, unless otherwise noted.

1 Data for level and 2019  level are both YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows change in seated diners from 2021 to 2019 at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.
Posted on Thursday, May 13, 2021 @ 12:20 PM • Post Link Share: 
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  The Producer Price Index (PPI) Rose 0.6% in April
Posted Under: Data Watch • Employment • Government • Inflation • PPI • Fed Reserve • COVID-19

Implications:  For the last decade the Fed has talked about the difficulty of getting inflation to run at or above its long-term 2.0% target.  Now they have their wish...and then some.  The producer price index rose 0.6% in April, pushing the headline reading to 6.2% year-to-year, the highest in more than a decade.  And prices are accelerating, up at a 7.5% annualized pace in the past six months.  Three things are going on.  First, a "base effect" is making year-to-year comparisons higher because producer prices fell steeply last April during the onset of COVID-19.  This impact will start to ease (and potentially become a headwind) in the months ahead as prices rose coming out of last year's shutdowns.  Second, extensive "supply-chain" issues are affecting the economy and leading to higher prices. Think the shortage in semiconductors for cars and trucks, as well as delays in meeting demand for household appliances.  Third, the M2 measure of the money supply is up 24% versus a year ago.  The first two factors, the base effect and supply-chain issues, are temporary; the third issue, the huge increase in the money supply, will affect inflation over the long term.  The Fed seems to anticipate that, after peaking due to the base effect and supply-chain issues, inflation will subside later this year and into 2022.  We think any waning in inflation later this year due to the first two factors will be temporary, as the increase in the money supply gains traction.  In other words, the Fed thinks recent higher inflation is temporary, but we think any deceleration in inflation later this year is the temporary phenomenon.  In terms of the details for April, prices for services led the overall index higher.  The most notable increases were in transportations costs, airfare, and food retailing.  The index for goods also increased, up 0.6% in April, with food up 2.1% in April as beef and pork prices both jumped more than 10%.  Energy prices declined in April, but don't expect that to last.  The shutdown of the Colonial pipeline in response to a cyber-attack has national average gas prices back above $3 per gallon for the first time since 2014, according to the American Automobile Association.  Strip out the volatile food and energy components, and "core" prices rose 0.7% in April and are up 4.1% in the past year.  In spite of all these increases, we don't expect the Fed to signal any change in the plan to keep short-term rates near zero for the foreseeable future.  The Fed wants inflation to trend above the 2% target for a prolonged period, while the labor market – the other side of the Fed's dual mandate – also has to heal considerably further to get the Fed to seriously consider a move higher.  In other news this morning, initial jobless claims declined 34,000 last week to 473,000 while continuing claims declined 45,000 to 3.655 million.  These figures are consistent with continued job growth in May, although that job growth would be much faster in the absence of overly-generous unemployment benefits still available to many workers.  As those additional benefits expire in September (or sooner, in some states) we expect job gains to accelerate.

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Posted on Thursday, May 13, 2021 @ 11:27 AM • Post Link Share: 
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  The Consumer Price Index (CPI) Increased 0.8% in April
Posted Under: CPI • Data Watch • Government • Inflation • Fed Reserve • Interest Rates • Spending • COVID-19

Implications:  Consumer prices rose in April at the fastest pace in more than a decade as supply chains struggled to keep up with rapidly rising demand.  The April rise of 0.8% comes after increases of 0.6% in March and 0.4% in February, bringing the three-month change to a 7.2% annual rate, the fastest increase since 2008.  Usually, when we get a sudden sharp spike in inflation, it's because of energy prices, but not this time.  Energy prices declined 0.1% in April while food prices, also sometimes a source of volatility, rose a relatively moderate 0.4%.  Instead, it was "core" prices, which exclude food and energy, that led overall consumer prices higher in April.  Core prices rose 0.9%, the largest monthly increase since 1982.  The leading driver of the increase in core prices was used cars and trucks, which rose 10% in just one month, the largest gain ever for the series, which dates back to 1953.  Other key contributors were airfares (+10.2%), hotels/motels (+8.8%), and car and truck rentals (+16.2%).  Overall consumer prices are now up 4.2% versus a year ago, while "core" prices are up 3.0%.  Of course the Federal Reserve is going to claim these increases are "transitory", which is its way of saying there is no need to change monetary policy.  And yes, we do not expect prices to continue to rise at the recent rapid clip.  But that doesn't mean we aren't headed for persistently higher inflation.  The M2 measure of the money supply is up 24% from a year ago, the federal government has ramped up "stimulus" efforts, and employers need to lift wages rapidly to compete with abnormally high unemployment benefits.  Math wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.  Meanwhile, we should expect a much higher energy inflation reading in the month of May due to the cyber-attack on the Colonial Pipeline, which carries about 45% of the fuel consumed on the East Coast.  Inflation will be a front and center issue for markets and policymakers in 2021 and beyond.

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Posted on Wednesday, May 12, 2021 @ 12:05 PM • Post Link Share: 
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  Recovery Tracker 5/11/2021
Posted Under: Bullish • COVID-19

The table and charts above track high frequency data, which are published either weekly or daily. With most states reopening their economies and widespread distribution of a vaccine, these indicators show continued improvement in economic activity.  From an economic standpoint the worst is over and activity continues to improve. It won't improve in a straight line, but the trend should remain positive over the coming months and quarters. The charts highlight where the high frequency indicators were in 2019, 2020,and in 2021.

The enlarged data can be found here.
Posted on Tuesday, May 11, 2021 @ 2:38 PM • Post Link Share: 
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  Biden and Powell Versus Summers and Dudley
Posted Under: CPI • Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending

One of the best economic debates that's happening right now isn't between Republicans and Democrats or liberals versus conservatives, it's between policymakers who want to go full steam ahead with as much fiscal and monetary "stimulus" as possible and center-left economists who worry about the economic effects of over-stimulating the economy. 

In one corner we have President Joe Biden and Fed Chief Jerome Powell.  Biden signed a $1.9 trillion stimulus bill back in March and is asking for more than $4 trillion in additional measures.  Powell has the Federal Reserve setting short-term interest rates at essentially zero and buying $120 billion per month in Treasury and mortgage-related securities.  Moreover, the Fed is committed to keeping these policies in place for the foreseeable future.  As far as Biden and Powell are concerned, any problems that might arise from overstimulating the economy can be dealt with when and if the economy shows clear signs of overstimulation.  

In the other corner we have Larry Summers and William Dudley, both center-left economists.  Summers was Treasury Secretary under President Clinton and ran the National Economic Council under President Obama; Dudley was the chief economist for Goldman Sachs and ran the New York Federal Reserve Bank from 2009 to 2018.  Supply-siders, conservatives, or Republicans, these are not. 

Summers has called Biden's efforts the "least responsible" macroeconomic policy in forty years (by which he means the least responsible since President Reagan's) and has argued the amount of extra spending is far in excess of what's needed to get the economy back to where it would have been in the absence of COVID-19.  "If your bathtub isn't full, you should turn the faucet on, but that doesn't mean you should turn it on as hard as you can and as long as you can," Summers said earlier this year on National Public Radio. 

In turn, Summers is concerned the extra spending will generate too much inflation, the Fed will have to address the increase in inflation by tightening monetary policy earlier than it would otherwise want to, and when the Fed tightens monetary policy to address inflation, it usually ends badly for the US economy.

Summers sees only a one-in-three chance of robust growth without inflation for the US, with the other two-thirds split between two different negative scenarios: (1) stagflation or (2) the Fed applying the brakes so hard it tips the economy into a recession.

Meanwhile, William Dudley has also issued warnings, saying that he thinks the Fed is putting itself in a position where when it eventually starts to raise rates, it's going to have to do so aggressively.  If the Fed is too slow to tighten, says Dudley, it will have to eventually "catch up," and that caching up will not be "pleasant" for financial markets.  A 10-year Treasury Note yield of 4.0% would be possible in this scenario, says Dudley.

What's notable about Summers and Dudley is not only their center-left pedigrees but also that neither is likely to pursue a position in the Biden Administration, which means they have no reason to "spin" their views to get an important appointment.  As such, they can say what they think, without fear of losing out on an offer of a political job.

The bottom line is that politics doesn't make good economics.   No one knows for sure where these unprecedented policies are going to take us.  However, at least Summers and Dudley are thinking about how risky this riverboat gamble might be.             

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

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Posted on Monday, May 10, 2021 @ 11:35 AM • Post Link Share: 
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  COVID-19 Tracker 5/7/2021
Posted Under: COVID-19
The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective.

Click here to view the one page report
Posted on Friday, May 7, 2021 @ 3:35 PM • Post Link Share: 
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  Nonfarm Payrolls Increased 266,000 in April
Posted Under: Data Watch • Employment • Government • COVID-19

Implications:  The April employment report was disappointing, but not a total dud.  It was disappointing because payrolls increased only 266,000 for the month, a huge miss versus the 1,000,000 gain the consensus expected and well lower than the forecast from any economics group.  Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased a similar 328,000 and the unemployment rate ticked up to 6.1%.  Manufacturing, retail, transportation & warehousing, professional & business services, and education all lost jobs in April.  But all the news on the labor market wasn't bad and some of it was downright positive.  Average weekly hours hit 35.0 in April, tying a record high, and the total number of private-sector hours worked increased 0.5%.  This kind of increase in hours would normally be associated with an increase in private payrolls of about 600,000, not the 218,000 by which private payrolls actually grew in April.  Meanwhile, average hourly earnings rose 0.7% in April, even as many employers were bringing back lower-paid workers; for example, leisure and hospitality payrolls increased 331,000.  Combining average hourly earnings and hours worked, total earnings rose 1.2% in April and are now 1.9% higher than they were in February 2020, pre-COVID.  Put it all together and we have a labor market where employers are willing to pay more (higher wages!) and want more workers (more hours!), but are having trouble enticing people to take jobs.  This is a sad situation that is largely a result of government policy.  We think the key factor here is the extra unemployment benefits, which will run through early September, that enable many workers to earn about as much (or more!) by not working as by getting a job.  Notably, the entire increase in the jobless rate in April was due to workers who never went to college, for whom government benefits might be a more attractive alternative.  Given the improvement in the overall economy in reaction to the distribution of vaccines, looser COVID-related rules on economic activity, and policies oriented toward short-term economic growth, look for stronger payroll reports in the months ahead, particularly if other states follow Montana's lead and reject beefed-up unemployment benefits.  In spite of today's report, the US economy is still getting back on its feet.  Removing overly generous government benefits would help it become sturdier even faster.

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Posted on Friday, May 7, 2021 @ 11:05 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.
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.
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