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 | The ISM Manufacturing Index Increased to 61.1 in November |
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| Posted Under: Data Watch • Employment • Home Sales • Housing • Inflation • ISM • COVID-19 |
Implications: The manufacturing sector continued to expand in November, and at a slightly faster pace, with thirteen of eighteen industries reporting growth. While the new orders and production indices both remain at historically elevated levels, it's clear the factory sector would be expanding even more rapidly if it weren't for a slew of unusual factors holding back output. Respondent comments in November continued to be dominated by widespread worries about rapidly rising costs for inputs, shortages of raw materials across the board, and employers having trouble filling open positions. These issues have all come together to keep manufacturing activity from rising quickly enough to meet the explosion of demand as the US economy reopens. However, there has been recent progress on several fronts. For example, though the supplier deliveries index remains near historical highs (signaling longer wait times) it looks to have peaked in May. That said, sixteen of eighteen industries reported waiting longer for inputs. This, in turn, has resulted in long lead times for the clients of US factories, who continued to see their inventories shrink rapidly in November as retailers continued to rely on the goods they already had in warehouses. Keep in mind, businesses will eventually restock their shelves, which will be a big source of future demand for manufactured goods as well as a tailwind for GDP growth. There has also been recent progress on hiring, with the employment index rising for the third month in a row. However, staffing troubles remain a persistent issue when it comes to ramping up production. Manufacturing is one of the worst hit sectors in the ongoing labor shortage, with job openings twice what they were pre-pandemic. Notably, the recent recovery in the employment index has coincided with the end of generous federal pandemic unemployment benefits which expired in September. With less disincentive effects in the labor market, we expect the shortage of workers to continue to abate in coming months. Finally, price growth for inputs slowed in October, with the prices paid index falling to 82.4. All eighteen industries reported increased prices for raw materials. Looking at the details, five commodities were reported lower in price while thirty-six were reported up. In other news this morning, the ADP employment report showed 534,000 private-sector jobs gained in November. After plugging this into our model, we expect Friday's employment report to show a nonfarm payroll gain of 545,000. We also got data on construction spending this morning, which rose 0.2% in October. Looking at the details, large increases in highways, streets, and conservation projects more than offset a big decline in residential construction. In other recent news, home prices continue to increase rapidly, but not as fast as they were in late 2020 through early 2021. The national Case-Shiller index increased 1.2% in September and is up 19.5% versus a year ago. Price gains were led by Phoenix and Tampa, while Chicago and Minneapolis had the slowest price increases. Meanwhile, the FHFA index, which measures prices for homes financed by conforming loans, increased 0.9% in September and are up 17.8% from a year ago. Pending home sales, which are contracts on existing homes, rose 7.5% in October after a 2.4% drop in September. These figures suggest a November gain in existing home sales, which are counted at closing.
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| | Riding the COVID Rollercoaster |
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| Posted Under: Government • Markets • Monday Morning Outlook • Bonds • Stocks • COVID-19 |
On Friday, news of a COVID-19 variant identified in South Africa, and the announcement of new travel restrictions, sent markets reeling. This is obviously not the only variant, and it won't be the last, either. In our opinion, it's not the new variant that is the problem, but the government's potential reaction to it. Oil prices fell 13% on Friday, pricing in a potential new round of lockdowns.
We're obviously not scientists, but what seems clear is that vaccines have underdelivered on their promise of ending the pandemic. Yes, relative risks for hospitalization and death are reduced (though not eliminated) after the jab, but fully vaccinated individuals can still get and spread the virus. This means the "zero COVID" strategy that public health officials have been pursuing since the pandemic began needs to change.
At this point, what seems likely is that COVID will gradually become like the flu, where there is a vaccine/booster available each year depending on what strain is most likely to be prevalent. Providing the public with accurate information about risk factors surrounding age and comorbidities is more important than ever.
However, our fear as economists is that certain urban areas in the US could be stuck in a cycle of fear, with each new variant leading to more draconian measures. This is where policymakers and individuals with disproportionate influence live, and their mindsets have become gradually divorced from the rest of the population. Just look at the packed stadiums at college football games.
Most importantly, is this how people want to live? Economic planning for businesses has become impossible. Individual travel plans can be disrupted at any moment. Maybe you are already fully vaccinated and are not overly concerned about mandates. What about when boosters become required to maintain your fully vaccinated status? Dr. Fauci recently hinted that this would be the case. Where is the offramp to normal life at this point?
Fortunately, we think widespread shutdowns are unlikely in response to this or any variant. Recent election returns in New Jersey and Virginia suggest the American public is fed up with the overly cautious policy mix chosen by officials in the past year and a half, including widespread shutdowns and tough mask rules.
Another round of shutdowns could turn a political environment that we believe favors a Republican wave in 2022 into a Republican tsunami. Democratic political strategists will be cautioning their party's leaders not to court fate. Although it's not our base case at this point, it's not outside the realm of possibility that another harsh shutdown would lead to a filibuster-proof Senate majority for the GOP in 2025.
Put it all together and we think investors need to continue to be ready to ride the COVID rollercoaster. Given record high profits, we still believe stocks are relatively cheap. That doesn't mean there won't be dips, though, or even corrections. But when they happen, they should still be considered buying opportunities.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
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| | New Single-Family Home Sales Increased 0.4% in October |
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| Posted Under: Data Watch • Durable Goods • Home Sales • Housing • Inflation • COVID-19 |
Implications: New home sales in October rose for the second month in a row. However large downward revisions to prior months means there wasn't much to celebrate in today's report. If September's sales pace was still at the original reading of 0.800 million, October's headline gain of 0.4% would have instead been a decline of 6.9%. Despite those downward revisions, the pace of sales is still up 9.1% from the recent bottom in June 2021, returning to an upward trend and signaling that the housing market has found its footing after a series of weak reports earlier this year. That said, sales are still well below the January peak of 993,000. Why? We think for two main intertwined reasons: a lack of supply of completed homes plus rapid price appreciation versus pre-COVID levels. The good news is that builders have been ramping up activity, with the total number of single-family homes under construction currently at the highest levels since 2007. Ultimately, that added supply will facilitate more sales while slowing the pace of new home price appreciation. In the meantime, buyers are still stuck dealing with very few options when it comes to completed homes. It's true that overall inventories have been rising recently and now sit at the highest level since 2008. This has pushed up the months' supply (how long it would take to sell the current inventory at today's sales pace) to 6.3 from a record low reading of 3.5 in late 2020. However, almost all of this inventory gain is from homes where construction has either not yet started or is still underway. Doing a similar calculation with only completed homes on the market shows a months' supply of a meager 0.6, near the lowest level on record back to 1999. The good news is that the inventory of completed homes has been rising recently after nearly a year straight of declines. While it's too early to say if this represents a new trend, there are reasons to be optimistic. Builders have plenty of projects in the pipeline to meet demand and are likely to keep construction activity running on all cylinders for the foreseeable future. As more homes become available, we expect demand will remain strong and help boost sales later in 2021 and beyond. In other news this morning, new orders for durable goods fell 0.5% in October. However, the decline was mostly attributable to the volatile aircraft sector. Excluding transportation equipment, durable goods orders rose 0.5%, the eighth consecutive increase. Moreover, shipments of core capital goods excluding aircraft (a good proxy for business investment) rose 0.3% in October. These shipments are now up 16.4% from pre-pandemic levels, signaling a huge uptick in capital expenditures that should help boost productivity growth in the years ahead.
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| | Real GDP Growth in Q3 Was Revised Up to a 2.1% Annual Rate |
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| Posted Under: Bullish • Data Watch • Employment • GDP • Inflation • Markets • PIC • Bonds • Stocks • COVID-19 |
Implications: Today's second report on Q3 real GDP was revised slightly higher from the initial reading a month ago, growing at a 2.1% annual rate, still showing a substantial slowdown after growing 6.5% in the first half of the year when the federal government was passing out checks like they were going out of style. The slight upward revision to the overall number in Q3 was due to very small revisions in a number of GDP categories; no single category stood out. Meanwhile, other data out this morning on inventories and international trade in October suggest a potentially sharp re-acceleration of the economy in the fourth quarter. Companies appear to be making progress re-stocking shelves and showrooms in Q4, which should temporarily boost real GDP growth. The best news today, however, was the first look at economy-wide Q3 corporate profits, which rose 4.3% from the second quarter, are up 20.7% from a year ago, and at a new all-time high. In fact, the two-year moving average of corporate profits, which includes both the drop related to COVID as well as the following rebound, is also at an all-time high, showing how well many companies have adapted in the face of COVID and related restrictions. Profits in the third quarter rose at both domestic non-financial companies and domestic financial corporations, as well as profits from operations abroad. Our capitalized profits model suggests US equities remain cheap, not only at today's interest rates but even using a 10-year Treasury yield of 2.0%. In other news this morning, initial unemployment claims declined 71,000 last week to 199,000, plunging to the lowest level since 1969. Continuing claims declined 60,000 to 2.049 million. These figures are consistent with strong job growth in November. Also, personal income rose 0.5% in October, led by private-sector wages & salaries, while personal consumption rose 1.3%, both coming in higher than consensus expectations. Personal income is up 5.9% in the past year, while spending has increased 12.0%. On the inflation front, PCE prices grew 0.6% in October, and are up 5.0% from a year ago. Core prices, which exclude food and energy, rose 0.4% in September and are up 4.1% from a year ago. These figures show that the Federal Reserve is behind the curve. It should have started, and finished, tapering by now. In addition, increases in short-term rates should already be under discussion.
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| | Existing Home Sales Increased 0.8% in October |
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| Posted Under: Data Watch • Home Sales • Housing • COVID-19 |
Implications: Existing home sales continued to climb in October, eking out a gain on the heels of September's increase, which was the largest in a year. Since the pandemic hit US shores in early 2020, sales of existing homes have been through a wild ride, as the nearby chart shows. Now it looks like the upward trend in sales is returning despite buyers' ongoing struggle with higher prices and lack of supply. The number of listed, but unsold, existing homes was 1.25 million in October, the lowest number for any October on record (dating back to 1999). Our expectation is that listings will move upward again, at least on a seasonally adjusted basis, as virus fears fade and sellers feel more comfortable showing their homes. Meanwhile, the months' supply of existing homes for sale (how long it would take to sell today's inventory at the current sales pace) was unchanged at 2.4 months in October, remaining near record lows. Despite the ongoing shortage of listings, there is still significant pent-up demand from the pandemic, with buyer urgency so strong in October that 82% of existing homes sold on the market for less than a month. The combination of strong demand and sparse supply has pushed median prices up 13.1% in the past year, but the good news is that price gains have decelerated significantly since hitting a year-to-year gain of 23.6% in May. Sales in 2021 are on track to be the highest for any calendar year since 2006 and we expect another solid year in 2022 as more inventory becomes available and price gains moderate. Millennials are now the largest living generation in the US and have begun to enter the housing market in force, making up over 50% of new mortgage issuance for the first time in 2019. This represents a demographic tailwind for sales for the foreseeable future.
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| | Thankful, But Watchful |
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| Posted Under: Bullish • Employment • GDP • Government • Inflation • Markets • Monday Morning Outlook • Productivity • Fed Reserve • Interest Rates • Spending • Bonds • Stocks • COVID-19 |
As Americans gather among family and friends to celebrate Thanksgiving, we all have much to be thankful for.
Twenty-one months after COVID-19 led to massive lockdowns across the US, vaccines are now widely available thanks to the private enterprise system. In addition, new highly effective treatments are coming to market, which could minimize the risks associated with COVID-19 for both the highly-vulnerable as well as those who'd prefer not to take the vaccine.
Meanwhile, entrepreneurs and businesses of all sizes had to squeeze about a decade's worth of innovation into a year to overcome both COVID itself as well as draconian measures taken to (supposedly) limit the spread of the disease. So much so that the number of workers on payrolls is still down 4.2 million versus February 2020 (the last month pre-COVID). But this reflects worker decisions, more than worker demand. Total employment plus total job openings are just 1.3 million below pre-COVID levels.
Meanwhile 232 years after the Constitution was ratified we continue to enjoy the blessings of the American Founders' wisdom. The separation of powers means no president is a dictator, neither the ones you vote for or against, even in the face of a health threat that many still perceive as severe. Witness the recent suspension of extremely burdensome OSHA rules that would have required private companies to impose vaccine mandates on their workers or, in the alternative, authoritarian-style mask and testing requirements, even as every adult who wants a vaccine can get one and young people face very little risk.
Then there's the federal system of overlapping jurisdiction between the federal government and the states that allows for some variety in public policy, in part responsible for the movement of people between the states toward places where people are more free, both in general, as well as with respect to COVID.
But all of the things we should be thankful for don't add up to a reason to be complacent. Inflation is obviously a bigger problem than it's been in decades and no one should be confident that they know exactly the course of treatment the Federal Reserve will ultimately apply. Near the end of next year, we will all have a clearer picture of how persistent and high inflation really is, and whether tapering does anything to bring it down.
Our belief is that inflation is not temporary. The only question is whether the Fed chooses to bring policy back to normal quickly or slowly. We expect the Fed to kick the inflation can down the road for some period of time. Whether that is just until 2023, or until a new administration in 2025, is still debatable. Either way, the US will end up with a period of slower growth at some point in the years ahead.
So for now, be thankful. We remain bullish on equities and the economy. A bear market or recession in 2022 is very unlikely. But don't be complacent. Be watchful and be ready to shift, as always, if circumstances change.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
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| | COVID-19 Tracker 11/19/2021 |
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| Posted Under: COVID-19 |
With the Delta variant still on everyone's mind, we continue to hear about school closings, mask mandates, potential shutdowns, vaccine mandates, vaccine effectiveness, the list goes on and on. The vaccines have clearly led to a lower overall level of deaths during this recent wave of Delta variant cases, and that represents considerable progress. There are still many questions out there, and it's important to follow the data closely.
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| | Recovery Tracker 11/19/2021 |
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| Posted Under: Bullish • COVID-19 |
The table and charts in the Recovery Tracker track high frequency data, which are published either weekly or daily. With most states reopening their economies and widespread distribution of COVID-19 vaccines, these indicators show continued improvement in economic activity. It won't improve in a straight line, but the trend should remain positive over the coming months and quarters. The charts in the Recovery Tracker highlight where the high frequency data indicators were in 2019, 2020, and in 2021.
Click here for this week's Recovery Tracker
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| | Housing Starts Declined 0.7% in October |
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| Posted Under: Data Watch • Home Starts • Housing • Inflation • COVID-19 |
Implications: Since emerging from the initial collapse in construction activity early in the pandemic, housing starts have averaged a 1.550 million annual rate, and starts in October remained roughly at that average, although 0.7% lower than in September. Builders continue to deal with ongoing issues surrounding supply chains and shortages of labor that are holding back a broader upswing in activity. Looking at the details, all of the decline in October came from the single-family sector, where activity fell 3.9%. Meanwhile, multi-family construction rose 7.1%. Notably, in the past year multi-family starts are up 36.6% while single-family starts have fallen 10.6%. It looks like developers may be shifting some resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents as some people move back into big cities and the eviction moratorium ends. Zillow estimates that rental costs for new tenants are up 9.2% in the past year and Apartmentlist.com estimates they have risen an even faster 15.8%, easily exceeding typical gains in the 3.0 – 4.0% range. Recent distributional effects aside, housing construction remains healthy. Looking at the 12-month moving average of overall housing starts to help sift through recent volatility shows residential construction now stands at the fastest pace since 2007. While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to trend upward in the next couple of years. Builders have a huge number of permitted projects sitting in the pipeline waiting to be started. In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999. Meanwhile, permits for new building projects rose 4.0% in October, demonstrating that builders see even more demand on the horizon. Keep in mind, the US needs roughly 1.5 million housing starts per year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.). However, we haven't built that many new homes in any calendar year since 2006. With plenty of future building activity in the pipeline, builders looking to boost the inventory of homes and meet consumer demand, and as more Millennials finally enter the housing market, it looks very likely construction in 2021 will cross the 1.5 million unit benchmark this year and then move higher in 2022. In other recent housing news, the NAHB Housing Index, which measures homebuilder sentiment, increased to 83 in November from 80 in October, hitting a six-month high.
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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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