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 | The ISM Manufacturing Index Rose to 60.8 in February |
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| Posted Under: Data Watch • Inflation • ISM • COVID-19 |
Implications: The manufacturing sector was firing on all cylinders in February, rising to a reading of 60.8 that ties the highest mark for the ISM index since 2004. All the major measures of activity moved higher in February, and growth was broad-based across industries, with sixteen of eighteen reporting growth (printing & related support activities and petroleum & coal products reported contraction). Following a tumultuous period from March to May as lockdowns and COVID-19 uncertainty put much of the business world on hold, manufacturing expansion has been rising steadily since. Respondent comments remain overwhelmingly upbeat, with five positive comments for every cautious comment. That said, responses are reflecting an increasingly tight supply chain, with notes such as, "Supply chains are depleted; inventories up and down the supply chain are empty." "Overall capacities are full across our industry." And "we are overloaded with orders and do not have the personnel to get product out the door on schedule." Combined, these headwinds are causing delays in supplier deliveries (note the supplier deliveries index rising to 72.0 in February from an already elevated 68.2 in January), with sixteen of eighteen industries reporting longer delivery times. While companies report that demand is healthy, the inability of supply to meet that demand is causing price pressures to build. Case in point, the prices paid index surged to 86.0 in February, the highest reading in more than a decade, as all eighteen industries reported increased prices for raw materials. In total, forty-eight commodities (particularly metals like steel) were reported up in price, while just one – dairy - was reported lower. Inflation looks likely to be a key topic in 2021, with the M2 money supply up an incredible 26.3% over the last twelve months, at the same time supply chains struggle to catch up to demand (for more on the inflation discussion, check out this week's Monday Morning Outlook). Speaking of demand, the two most forward-looking indices – new orders and production – moved even further into the 60s in February, signaling very healthy expansion. And given that the customers' inventories index stands at the lowest reading on record, while at the same time the backlog of orders index (which show orders rising faster than production can fill them) hit the highest reading in more than fifteen years, the data suggest activity should remain robust for the foreseeable future. The employment index also moved higher in February, as companies cite the above-mentioned new order strength and expanding backlogs as reasons to increase payrolls. While the ISM index on employment is informative, we put more weight on other measures of the jobs market to provide a guide of what we should expect from this Friday's employment report. While it may change with data out over the coming days, we are projecting that Friday's report on payrolls will show manufacturing jobs flat, while total nonfarm payrolls grow by around 140,000. All-in-all, we expect 2021 to be a year of continued growth in the manufacturing sector, as we get back toward "normal." In other news this morning, construction spending increased 1.7% in January (+2.1% including revisions to prior months), easily beating the consensus expected +0.8%. Nearly all categories of construction increased, but gains were led by the continued surge in single-family home building – much needed, just take a look at home prices – which was partially offset by a decline in commercial construction.
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| | Powell Disses Uncle Milty |
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| Posted Under: CPI • Government • Inflation • Monday Morning Outlook • Interest Rates • COVID-19 |
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Those of us who are concerned about inflation increasing faster than the Federal Reserve anticipates are focusing on the rapid increase in the M2 measure of the money supply. This measure has soared since COVID-19 hit the US, up about 25% from a year ago, the fastest growth on record.
It is the key difference between the current situation and the situation in the aftermath of the Financial Crisis of 2008-09. During that first round of Quantitative Easing and big spending bills (like TARP), the M2 measure remained subdued because the Fed kept banks from lending, in part by raising capital standards. As a result, inflation remained subdued as well.
This is consistent with what the late great economist Milton Friedman (Uncle Milty) taught us. He said, watch M2: Nominal economic growth and inflation will tend to track M2 broadly over time, adjusted for any fluctuations in the velocity of money, the speed with which money circulates through the economy.
But Fed Chairman Jerome Powell disagrees. As he recently said, "When you and I studied economics a million years ago, M2 and monetary aggregates seemed to have a relationship to economic growth," but, "right now ... M2 ... does not really have important implications. It is something we have to unlearn I guess." In other words, Uncle Milty's theories don't work.
Wow! A Federal Reserve Chairman who casually dismisses the monetary lessons of Milton Friedman does so not only at his own peril but the country's.
The yield on the 10-year Treasury note is already up about 50 basis points this year even though short-term interest rates haven't budged and aren't expected to do so anytime soon. Meanwhile, analysts are marking up their estimates of real GDP growth this year.
We're not saying inflation is going to suddenly surge to 25% (the same pace as M2 growth) or anywhere close. COVID-19 led to a crash in velocity and it will take time to recover, which also gives monetary policymakers time to reduce the pace of M2 growth before a serious inflation problem takes hold.
But that's different from saying the money supply doesn't matter at all, which was the message Powell sent.
The US economy is healing faster than expected, while the US Congress and President Biden are intent on pouring at least one more massive government spending stimulus into the system. They are doing this even though the pandemic is waning, and a double-dip recession seems highly unlikely.
The big risk for the next couple of years is an upward surge in inflation that's larger than anything we've experienced in the past couple of decades. We still project 2.5% CPI inflation for 2021, as the government's measure of housing rents holds the top-line inflation number down. But commodity prices are likely to continue rising and overall inflation will as well in 2022 and beyond. There is an old saying: When the Fed is not worried about inflation, the market should be worried.
Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist
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| | Personal Income Surged 10.0% in January |
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| Posted Under: Data Watch • Government • Inflation • PIC • Spending • COVID-19 |
Implications: A ramp up in government spending – namely stimulus payments and supplemental unemployment benefits – pushed personal income 10.0% higher in January. In fact, the increase in government transfer payments more than accounted for the total rise in personal income for the month. Private sector wages and salaries rose 0.8% in January, but were offset by a decline in dividends. Income from wages and salaries are a far more sustainable long-term driver for the economy than government stimulus, which is really just borrowing spending activity from the future. More stimulus out of Washington D.C. is on the way, but the best economic tailwind for the economy comes not from our politicians, but from the near miraculous scientific achievements that now have COVID-19 vaccines being distributed across the country. So far, 91.7 million vaccines have been distributed in the U.S. with 68.3 million administered. Rarely does government ever under-promise and over-deliver, but in this case President Biden's goal of 100 million vaccines in 100 days will be easily achievable. Through this morning, more than 41 million doses have been administered in February alone, a pace of more than 1.5 million shots per day. It takes getting back to normal – getting back to work – to fully recover from the wounds of 2020; stimulus has and will continue to be a band-aid to tidy over until the real healing takes place. Like income, spending moved higher in January, rising 2.4% in January, but remains down 0.4% from a year ago. With incomes rising faster than spending in January, the saving rate rose to 20.5%. This is lower than the peak of 33.7% last April, but still well above "normal" levels and hints at rapid gains in spending as COVID-related restrictions ease. On the inflation front, PCE prices grew 0.3% in January, are up 1.5% from a year ago, but up at a faster 2.5% annualized rate in the past six months. Core prices, which exclude food and, more importantly, the very volatile energy component, also rose 0.3% in January and are up 1.5% from a year ago. Here too inflation has accelerated of late, up 2.1% annualized over the past six months. By April, the 12-month change for PCE inflation will be well above 2.0%, because we had a temporary bout of deflation last spring due to COVID. However, we expect this inflation measure to remain at or above 2.0% well beyond this spring, as inflation starts reflecting the loose stance of monetary policy and a faster recovery in incomes, due to government assistance, than in actual production. Regardless, don't expect a faster pace of inflation to mean monetary policy will be tightening anytime soon; the Federal Reserve is perfectly fine with inflation exceeding the 2.0% target to make up for previous years when it fell short of that target. In other recent news, pending home sales, which are contracts on existing homes, declined 2.8% in January, after a 0.5% rise in December. As a result, look for a modest decline in existing home sales for February. On the manufacturing front, the Kansas City Fed Manufacturing Index, a measure of factory sentiment in that region, increased to 24 in February from 17 in January, a good sign for continued improvement in the US economy. Also on manufacturing, the Chicago Purchasing Manager Index (PMI) declined to 59.5 in February from January's reading of 63.8, which represented the highest level for the index in more than two years. These figures are consistent with a forecast of a modest increase in the ISM Manufacturing Index in February to 59.0 versus 58.7 for January.
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| | COVID-19 Tracker 02/25/2021 |
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| Posted Under: COVID-19 |
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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.
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| | Coronavirus High Frequency Data 02/25/21 |
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| Posted Under: COVID-19 |
Sources: First Trust Advisors, 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
1 Data for level and year ago level are YOY % changes.
2 Data is provided daily instead of weekly.
3 Data shows year-over-year seated diners 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.
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| | New Orders for Durable Goods Increased 3.4% in January |
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| Posted Under: Data Watch • Durable Goods |
Implications: Durable goods orders started the new year on a healthy note, rising for the ninth consecutive month and are now up 6.3% from a year ago, which was before COVID-19 hit the US. Orders for durables are now up 53.2% since hitting bottom in April. Moreover, readings in prior months were broadly revised up as well. Looking at the details in today's report, it wasn't just the volatile transportation sector that drove headline growth. Excluding transportation, orders rose 1.4% in January, and are up 8.5% in the past year. Among the core non-transportation categories, the best performers were electrical equipment (+4.2%), primary metal products (+3.2%), and fabricated metals (+1.8%), while orders for computers & electronic products and machinery declined. One of the most important pieces of data from today's report, shipments of "core" non-defense capital goods ex-aircraft (a key input for business investment in the calculation of GDP growth), rose 2.1% in January. If unchanged in February and March, this measure will be up at a 12.3% annualized rate in Q1 versus the Q4 average. Keep in mind, the fourth quarter showed an impressive 18.2% annualized pace of growth, and that came on the heels of Q3, which rose at a record high 33.1% annualized pace. In other words, though the pace of growth in business investment is slowing down, it will likely remain a tailwind for overall GDP growth going forward. When you add in the vaccine rollout, and the removal of pandemic restrictions as COVID-19 data continue to improve rapidly, 2021 is on pace for real GDP growth of 5.0%. In other recent news this morning on the labor market, initial jobless claims fell 111,000 last week to 730,000. Meanwhile, continuing claims for regular benefits fell 101,000 to 4.419 million. These figures are consistent with continued job growth in February, in spite of the brutal polar vortex that hit the mid-section of the country earlier this month.
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| | Real GDP Growth in Q4 was Revised Up to a 4.1% Annual Rate |
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| Posted Under: Data Watch • GDP |
Implications: Today's report on real GDP growth in the fourth quarter was pretty much a non-event, with only very slight revisions to all major categories of growth, totaling up to a tiny upward revision overall, to a 4.1% annualized growth rate. That narrowly misses the consensus expected 4.2%, but no sane investor should alter their plans based on a 0.1 percentage point miss on a growth-rate expectation for a quarter that ended two months ago. Next month's GDP report for Q4 will be more important because it will include figures on economy-wide corporate profits that help us assess fair value on the stock market. In the meantime, we are watching what incoming reports suggest about real GDP growth in the first quarter of 2021. Right now we're projecting growth at a 6.0% annual rate for Q1, spurred by the roll-out of vaccines, the loosening of COVID-related restrictions, and the stimulus bill passed in late December. The best news in today's report on the fourth quarter was the increase in business investment, which should help spur productivity growth over time, which will help raise living standards. Non-residential fixed investment (business investment in equipment, commercial construction, and intellectual property) rose at a 14.0% annual rate in Q4, finishing the year down only 1.2% from the end of 2019. Look for this investment to hit a new all-time high in early 2021.
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| | The Greatest Possible Stimulus |
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| Posted Under: COVID-19 |
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After receiving the genetic sequence of the novel coronavirus from China, it took Moderna just two days (two days!!) to generate the sequence of the vaccine. In less than a month, they produced the first clinical batch of the mRNA-1273 vaccine that has now seen tens of millions of doses distributed. It moved through clinical trials at warp speed, going from idea, to FDA authorization, to shots in arms in less than a year. In short, it's a modern-day medical miracle.
The COVID-19 vaccines – Moderna, Pfizer-BioNTech, and Johnson & Johnson to name a few - are the key to unlocking sustainable growth in the economy. They are critical for ending restrictions that have devastated small and medium size businesses from coast to coast. And the effect of reopening is more impactful than the trillions of dollars the government has thrown at the economy (and the spending isn't over). Government spending is a Band-Aid, while reopening heals the root cause of our economic ailment. As the data shows, vaccine distribution is well under way. The rollout hasn't been perfect, nobody will argue that, but it is accelerating, and the economy is following suit.
As we wrote earlier this month, we believe it's possible – dare we say likely - that the US can hit herd immunity in mid-to-late April. The ramifications for the US economy of plummeting cases, declining hospitalizations, and fewer lives lost to the virus can hardly be overstated. But the underlying details of the overall data are even more impressive.
So far, 82.1 million vaccine doses have been distributed with 65.0 million having been administered, and 44.5 million people having received at least one dose. That means 13.4% of the US population has some form of antibodies to COVID-19 through vaccination. And vaccine production is ramping up. Based on analysis from Bloomberg, the current delivery pace of 10 to 15 million doses per week is set to rise to 20 million next month, 25 million in April and May, and more than 30 million a week in June. We could move from 1.5 million shots administered per day to levels two to three times higher.
We all know COVID-19 has more severe health impacts on some groups than others. Those aged 65+ have accounted for over 80% of reported COVID-19 deaths, yet this group makes up only 16.3% of U.S. population. Narrow in on those aged 85+, and it's even more severe. They make up 31.6% of COVID-19 deaths but account for only 1.8% of population!
As we continue to roll out the vaccine, these groups are – and should be – prioritized. Based on the latest data from the CDC, 41.3% of those 65 years and older have received at least one dose of a vaccine, while 53.6% of those 75+ have received at least one dose. The accelerating pace of vaccinations give us the chance to have these groups heavily protected within the next few weeks. In fact, at the current rate of roughly 10 million vaccinations over the last seven days, the rest of those 65+ could get at least one vaccination within three weeks. For those over 75 it would only take seven days if that was the focus!
And remember, the vaccine doesn't just make it less likely that you catch the virus, it also significantly reduces the severity of symptoms (and risk of death) if you do contract. By treating those most vulnerable, the health data is reflecting massive progress. From the peak, cases are down 73%, hospitalizations are off 56%, and daily deaths have declined 38%.
Let's take this one step further. Add the CDC estimate of people who have already been infected with COVID-19 (the latest data is from December so the numbers are a conservative estimate of where we stand today) to those who have already received at least one dose of vaccine, and the numbers are even more promising for the 65+ age bracket, with an estimated 57.9% having some form of antibodies. Yes, the CDC wants those who have had the virus to still get the vaccine, but it doesn't change the fact that their natural immunity has an impact on reducing spread.
We are gradually seeing adoption of the reality that herd immunity could largely be here in just a few months. We expect more to follow as the data continues to improve. Math wins. It has been a long, sad, and destructive journey. Mistakes have been made, lessons have been learned, and as we reflect back on the response the grade is still pending.
Now the clouds are parting, and the vaccine has the light at the end of the economic tunnel drawing closer by the day. While more fiscal stimulus out of Washington is on the way, vaccines are bringing the kind of stimulus this nation really needs.
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| | New Single-Family Home Sales Increased 4.3% in January |
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| Posted Under: Government • Home Sales • Housing • Interest Rates • COVID-19 |
Implications: New home sales surprised to the upside in January, rising for a second consecutive month following the slowdown seen late last year. Sales are now up 19.3% from a year ago, illustrating the resiliency of the housing market. A shift in buyer preferences is a big part of that story, with pandemic restrictions and significant changes in corporate work-from-home policies giving workers both the urgency and ability to seek out more spacious options in the suburbs. Moreover, there seems to be significant regional factors at play, with sales in the South up 40.4% over the past year while both the Northeast and West have posted declines. It looks like differences in lockdown policies led some to vote with their feet. That said, even for those looking to move the lack of finished new homes waiting for buyers remains a headwind for even faster sales growth. In the past year, the only portion of new homes inventory that has increased comes from homes where construction has yet to start. Unsold homes that are either under construction or finished continue to see inventories decline from a year ago levels. How significant are these movements? While the number of housing starts for single-family homes is up 17.5% from a year ago, the inventory of completed new homes available for sale is down a massive 44.7% over the same period, illustrating just how strong demand was in 2020. The good news is that there are signs builders are responding, with the number of single-family homes currently under construction and permits issued for future construction sitting at the highest levels since 2007 and 2006, respectively. And as more homes become available, we expect demand will remain strong and push sales higher in 2021. Why? First, affordability; near zero interest rates from the Federal Reserve have helped keep 30-year fixed mortgage near record lows. Second, even as pandemic restrictions are removed and life returns to "normal," recent changes towards work-from-home policies are unlikely to fully reverse, and buyers who have their minds set on a single-family home will follow through as more options become available. In recent housing news, the Case-Shiller national home index increased 1.3% in December and climbed 10.4% in 2020, the largest calendar-year increase since 2013. Price gains in 2020 were led by Phoenix, Seattle, and San Diego. The slowest price gains were in Las Vegas, ravaged by temporary weakness in the travel and gaming industries, as well as Chicago. The FHFA index, which measures prices for homes financed by conforming mortgages, increased 1.1% in December and was up 11.4% in 2020, the largest increase for any calendar year on record (going back to 1991). On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, remained unchanged in February at a healthy reading of 14, signaling solid growth in manufacturing for the month.
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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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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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