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   Brian Wesbury
Chief Economist
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  Brian Wesbury on Fox Business: Tariffs Need to be Eliminated Entirely
Posted Under: Trade • Video • TV • Fox Business
Posted on Friday, March 16, 2018 @ 11:30 AM • Post Link Share: 
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  Industrial Production Rose 1.1% in February
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production picked up pace in February following January's breather.  The headline series rose 1.1% in February, the fastest monthly pace of growth in four months, as most major categories showed gains.  More importantly, industrial production has increased 4.3% in the past year, the largest 12-month increase since early 2011.  And the gains in February would have been even larger but for warmer than usual weather that pushed down utilities production 4.7%.  Meanwhile, mining jumped 4.3% in February – the largest monthly increase since late 2008 - on the back of strong gains in oil and gas extractions.  In the past year, mining production is up 9.7%.  Drilling slowed in the second half of 2017, most likely associated with hurricanes Harvey and Irma, but remains up 27.2% from a year ago.  In addition, the rig count has continued to rise in recent weeks, suggesting gains in mining production in the months ahead.  In other recent factory news this morning, the Empire State index, a measure of manufacturing sentiment in New York, rose to a very healthy 22.5 in March from 13.1 in February.  Meanwhile, the Philly Fed index, its counterpart among East Coast manufacturers, declined modestly to a still strong 22.3 in March from 25.8 in February, signaling optimism in the region.  On the inflation front, import prices rose 0.4% in February while export prices increased 0.2%.  In the past year, import prices are up 3.5% while export prices have increased 3.3%, reinforcing other recent data showing a rising trend in inflation.

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Posted on Friday, March 16, 2018 @ 10:57 AM • Post Link Share: 
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  Housing Starts Declined 7.0% in February
Posted Under: Data Watch • Home Starts • Housing


Implications:  After starting 2018 with a bang, housing starts took a breather in February.  Starts fell 7% in February to a 1.236 million annual rate, and are now down 4% from a year ago.  However, the weakness in today's headline number came exclusively from the very volatile multi-unit sector, where starts fell 26.1% after rising 25.6% in January.  Meanwhile, single family starts rose 2.9% in February, and continue to be the main driver of trend growth, as the chart to the right shows.  The transition to more growth in single-family construction than multi-family is good news for the overall economy.  On average, each single-family home contributes to GDP about twice the amount of a multi-family unit.  Even though permits for new construction fell 5.7% in February, driven primarily by authorizations for multi-unit buildings, the horizon continues to look bright for future activity.  Permits are up from a year ago for both single-family and multi-family units.  Meanwhile, the number of units currently under construction and the rate at which developers finished building homes, which frees them up to take on new projects, are both at their fastest post-recession pace.  Notably, this has all happened despite a significant uptick in mortgage rates in the past year, which some analysts claimed would derail the housing recovery.  Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year.  And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark.  Although tax reform trimmed the principal limit against which borrowers can take a mortgage interest deduction to $750,000 versus the prior amount of $1 million, the law only affects new mortgages.  Large reductions to marginal tax rates in the early 1980s, which reduced the value of the mortgage interest deduction, coincided with a rebound in housing.  In other words, we don't expect the changes in the deduction to cause problems for the housing industry at the national level, although we do expect some shift in building toward regions with lower taxes and land prices.  In other recent housing news, the NAHB index, which measures homebuilder sentiment, fell slightly to 70 in March from 71 in February, remaining at a historically elevated level signaling strong optimism from developers.  On the employment front, new claims for jobless benefits fell 4,000 last week to 226,000, while continuing claims fell 4,000 to 1.88 million.  These figures are consistent with continued healthy job growth in March, although at a pace that's likely to be slower than the rapid gains in February.

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Posted on Friday, March 16, 2018 @ 10:47 AM • Post Link Share: 
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  Retail Sales Declined 0.1% in February
Posted Under: Data Watch • Retail Sales


Implications: Retail sales disappointed in February, falling for the third straight month and coming in below consensus expectations.  Despite the negative headline number, the recent weakness in spending looks to be moderating; including upward revisions to prior months, sales would have been unchanged in February.  Further, retail sales are still up a healthy 4% from a year ago. That being said, plugging in today's report into our GDP models suggests real consumer spending will be up at a roughly 1.0% annual rate in Q1, the slowest pace for any quarter in almost five years.  As a result, it now looks like real GDP is only growing at about a 2.0 – 2.5% annual rate in Q1.  However, this has more to do with the timing of economic growth than the trend.  We remain very optimistic about an acceleration of growth in 2018.  At present we estimate that real GDP will grow 3.0%+ this year, which would be the best year since 2005.  It is not unusual for retail sales to fall three or four months in a year, even during periods of robust growth.  February was one of those months.  Hurricanes in the second half of last year pulled some sales forward. It makes sense that autos represented the largest decline in February, as hurricane victims were buying new cars at a rapid clip to replace those destroyed in the storms late last year.  Removing autos, sales were up 0.2% in February and 4.4% in the past year, showing the consumer isn't dead. As we get back to normal, expect overall retail sales to resume their trend higher in the months to come.  Why are we optimistic about retail sales growth in the months ahead?  Jobs and wages are moving up, tax cuts are taking effect, consumers' financial obligations are less than average relative to incomes, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.

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Posted on Wednesday, March 14, 2018 @ 11:01 AM • Post Link Share: 
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  The Producer Price Index Increased 0.2% in February
Posted Under: Data Watch • Inflation • PPI


Implications:  Producer prices moved higher in February, rising 0.2% in the final key inflation reading before next week's Fed meetings.  And, with producer prices up 2.8% in the past year, there is little question the Fed has the green light to raise rates while also signaling intentions for four rate hikes in 2018.  The pouting pundits of pessimism may cry fears of rising rates slowing economic activity, but the Federal Reserve is still running a loose monetary policy.  Yes, the federal funds rate is slowly and steadily on the rise, but there are still more than two trillion dollars of excess reserves in the banking system, and monetary policy won't be tight until that excess slack is removed.  This is especially true because anti-bank attitudes and regulation have been reversed, which reduces the headwinds to monetary growth.  Taking a look at the details of today's PPI report shows rising costs for services less trade, transportation, and warehousing (think areas like health care, lodging, and banking) led the way in February.  Energy prices fell 0.5% in February as fuel prices declined for the month, but remain up 9.1% in the past year.  Meanwhile food prices declined 0.4%, led by a sharp drop in costs for vegetables.  Strip out these typically volatile food and energy groupings, and "core" producer prices rose 0.2% in February and are up 2.5% in the past year (the largest twelve-month increase going back to early 2012).  For comparison, "core" prices rose 1.3% in the twelve months ending both February 2017, and February 2016.  And a look further down the pipeline shows the trend higher should continue in the year to come.  Intermediate processed goods rose 0.7% in February and are up 4.8% from a year ago, while unprocessed goods increased 2.8% in February and are up 5.6% in the past year.  Both categories have seen a pickup in the pace of price increases over recent months.  Given these figures, and with employment growth remaining strong, the greater risk now is that the Fed flinches and falls behind the curve.   

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Posted on Wednesday, March 14, 2018 @ 10:28 AM • Post Link Share: 
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  The Consumer Price Index Rose 0.2% in February
Posted Under: CPI • Data Watch • Inflation


Implications:  Consumer prices marched higher in February, continuing an acceleration in the pace of inflation. The persistent and consistent rise in prices gives the Fed plenty to think about when they meet next week.  The consumer price index rose 0.2% in February and is up 2.2% in the past year, marking a sixth consecutive month of year-to-year inflation above 2%.  But, in both the past three  and six months, the CPI is up at a 3.6% annual rate, showing clear acceleration.  Energy prices increased 0.1% in February, while food prices were unchanged. Remove these, and "core" prices rose 0.2% in February following January's 0.3% increase.  Core prices are up 1.8% in the past year, but are showing acceleration in recent months, up at a 2.5% annual rate over the past six-months and a 3.1% rate in the past three months.  In other words, both headline and core inflation stand above the Fed's 2% target, and both have been accelerating.  Housing costs led the increase in "core" prices in February,  rising 0.3%, and are up 2.8% in the past year. Meanwhile prices for services rose 0.2% in February and are up 2.6% over the past twelve months.  Both remain key components pushing "core" prices higher and should maintain that role in the year ahead.  One piece of disappointing news in today's report is that real average hourly earnings were unchanged in February.  Inflation-adjusted hourly earnings have been on the decline in recent months, down at a 0.7% annualized rate over the past six months. However, these earnings data do not include irregular bonuses – like the ones just paid by companies after the tax cut.  In addition, earnings are still up a modest 0.4% in the past year, while job growth is accelerating. We expect a visible pickup in wage pressures in the months ahead. A strong February jobs report, combined with today's inflation data suggests the Fed is on track to raise rates four time in 2018.

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Posted on Tuesday, March 13, 2018 @ 10:03 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve


Source: St. Louis Federal Reserve FRED Database

Posted on Tuesday, March 13, 2018 @ 8:51 AM • Post Link Share: 
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  Stay Invested: Economy Looks Good
Posted Under: Bullish • Employment • GDP • Housing • ISM • Monday Morning Outlook

The current recovery started in June 2009, 105 months ago, making it the third longest recovery in U.S. history.

The longest – a 120-month recovery in the 1990s – saw real GDP expand an annual average of 3.6%.  The current recovery has experienced just a 2.2% average annual growth rate – what we have referred to as "plow horse" economic growth.

That's changing.  In particular, the labor market is gathering strength.  In February, nonfarm payrolls rose 313,000, while civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 785,000.

Hourly wages rose a tepid 0.1% in February, but in the past six months, average hourly earnings are up at a 2.7% annual rate while the total number of hours worked is up at a 2.6% annual rate.  Total earnings are up at 5.4% annual rate in the past six months, which is faster than the trend in nominal GDP growth the past few years.

New orders for "core" capital goods, which are capital goods excluding defense and aircraft, were up 6.3% in the year ending in January, while shipments of these capital goods were up 8.7%.  Sales of heavy trucks – trucks that are more than seven tons – are up 17.4% from a year ago.

The pace of home building is set to grow in the year ahead, in spite of higher interest rates or the new tax law limiting mortgage and property tax deductions.  In the fourth quarter of 2017, there were 1.306 million new housing permits issued, the highest quarterly total since 2007.

A better economy also means higher interest rates, but this doesn't spell doom.  Housing has been strong despite rising mortgage rates many times in history.  In fact, both new and existing home sales were higher in 2017 than they were in 2016 in spite of higher mortgage rates.

Yes, the new tax law will be a headwind for homebuyers and builders in high-tax states, but it's going to be a tailwind for construction in low tax states like Texas, Florida, and Nevada.  Housing starts have increased eight years in a row.  Look for 2018 to be the ninth.      

In the past two months, both ISM surveys - for Manufacturing and Services - have beaten consensus expectations.  The US economy is not going to grow at a 3.0% pace every quarter, but all this data suggests that our forecast for an average pace of 3% growth this year is on steady ground.   

The bottom line is that the U.S. economy is accelerating, not decelerating, and the potential for any near-term recession is basically zero.  Corporate earnings growth, and forecasts of future earnings, have accelerated, and our 2018 year-end forecast for Dow 28,500 and S&P 500 3,100 remain intact.   Even with higher interest rates!  Stay invested.

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

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Posted on Monday, March 12, 2018 @ 11:05 AM • Post Link Share: 
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  The Bull Market: 9 Years and Counting!
Posted Under: Bullish • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Spending • Taxes • Stocks • Wesbury 101
Posted on Friday, March 9, 2018 @ 1:58 PM • Post Link Share: 
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  Nonfarm Payrolls Rose 313,000 in February
Posted Under: Data Watch • Employment


Implications:  The job market boomed in February, a clear sign the Federal Reserve is behind the curve.  Nonfarm payrolls grew 313,000 in February, the largest increase in 19 months, beating the forecast from every economics group.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 785,000.  In the past year, nonfarm payrolls are up 190,000 per month while civilian employment is up 202,000 per month, both solid figures.  Given tax cuts and deregulation, we expect similar gains in the year ahead.  Although the unemployment rate remained at 4.1% in February, that stability was due to an 806,000 increase in the labor force.  As a result, the labor force participation rate rose to 63.0%.  That's still low by the standards of the past 40 years, but it ties the highest level since March 2014.  Some analysts will bemoan the tepid 0.1% gain in average hourly earnings in February, but these wages, which don't include irregular bonuses or commissions, are up a respectable 2.6% from a year ago.  Meanwhile, total hours worked rose 0.6% in February and are up 2.2% from a year ago.  As a result, total earnings, which combine the total number of hours and average hourly earnings, are up 4.8% from a year ago, suggesting plenty of growth in consumer purchasing power.  In other recent news on the labor market, new claims for jobless benefits increased 21,000 last week to s still-low 231,000.  Continuing claims fell 64,000 to 1.87 million.  These figures are consistent with continued healthy job growth in March, although at a pace that's likely to be slower than the rapid gains in February.  What will the Fed do with all this?  It's almost certainly going to raise rates on March 21.  At present the futures market in federal funds suggests 37% odds of the Fed raising rates by at least 100 basis points this year; we'd put those odds at more like 60%.  If so, long-term rates should continue to trend up as well.  

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Posted on Friday, March 9, 2018 @ 10:31 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 and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients.
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