|
|
|
|
|
Brian Wesbury
Chief Economist
|
|
Bob Stein
Deputy Chief Economist
|
|
| Focused on the Fed |
|
Posted Under: CPI • Government • Inflation • Markets • Monday Morning Outlook • Retail Sales • Fed Reserve • Interest Rates • Spending • Bonds • Stocks |
The Fed meets this week, which means investors and analysts will be sifting through Wednesday’s FOMC statement, updated economic projections, the “dot plots,” and Powell’s press conference searching for any signal – real or imagined – about what our central bank will do next. In particular, the market is on tenterhooks about when rate cuts will start, how fast those rate cuts will come, or if the Fed will simply hit the “pause” button on the prospect of rate cuts until deep into 2024.
We think this obsession with the Federal Reserve is unhealthy. Instead of an obsession with slight policy shifts out of Washington, DC, we think investors need to be focused on more important matters, like the process of innovation, entrepreneurial risk-taking, and corporate profits. In the end, it’s these factors that will drive stock market valuations the most, not the vagaries of the short-term interest rate target by the mandarins of money.
Things have changed a great deal since the last Fed meeting on January 31. Back then, the futures market expected about six rate cuts of 25 basis points each this year, with the first cut coming in March. As of Friday’s close, the market was expecting only three rate cuts this year, with the first one coming in either June or July.
No wonder the shift in rate expectations given recent reports on inflation. The two CPI reports since then show consumer prices up at a 4.6% annual rate in the first two months this year. And no, this was not food and energy; “core” prices, which exclude those two volatile categories were also up at a 4.6% annual rate so far this year.
Even worse for the Fed is that the newly made-up slice of the CPI that the Fed and others call the “Super Core” measure of inflation, which includes services only (no goods) but also excludes food, energy, and housing rents, rose 0.8% in January and 0.5% in February. That’s a growth rate of 8.2% annualized so far this year. Notice how you used to hear a lot about this measure a year or so ago when it was indicating lower inflation and now few dare speak its name when it shows inflation re-accelerating! Meanwhile, overall producer prices are up 5.4% so far this year and “core” producer prices are up at a 4.5% annual rate.
None of these figures are remotely close to the 2.0% inflation goal the Fed claims it’s still targeting.
The problem for the Fed is that there are signs that the economy may be slowing. Although retail sales rose 0.6% in February, after factoring in downward revisions to prior months, retail sales rose a tepid 0.1%. “Core” sales, which exclude volatile categories such as autos, building materials, and gas stations — and is a crucial measure for estimating GDP — increased by 0.1% in February, but was revised significantly lower for previous months, down 0.5%. If unchanged in March these sales will be down at a 0.7% annual rate in Q1 versus Q4, which would be the first quarterly decline since the COVID lockdowns.
Industrial production rose a tepid 0.1% in February but that follows declines of 0.3% and 0.5% in December and January, respectively. We like to follow manufacturing output excluding the auto sector (which is volatile) and that is down 0.9% from a year ago. Not a good sign.
As always, we will be watching the press conference following Wednesday’s meeting for any mention of the Fed looking more closely at the money supply, but we won’t get our hopes up. The M2 measure of money is down 2.0% in the past year, which would not be good for the economy if these figures are accurate and if they continue.
Another key issue is whether the Fed will publicly abandon it’s 2.0% target to make it easier on themselves to achieve their goal. We think that will happen eventually, but that’s several years from now, not soon. The Fed likely thinks it would lose credibility if it announced a higher target for inflation, and could send long-term interest rates spiraling upward; that’s not a risk the Fed would take, particularly in an election year.
Our advice to investors: listen to and watch the Fed but don’t obsess about it. The changes in monetary policy from meeting to meeting don’t matter nearly as much as the productive capacity of the American people.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
Click here for a PDF version
|
|
| Industrial Production Increased 0.1% in February |
|
Posted Under: Data Watch • Industrial Production - Cap Utilization • Inflation • Markets |
Implications: Industrial production rebounded in February, with the underlying details coming in stronger than the headline gain of 0.1%. The Federal Reserve highlighted that February’s winter weather was milder than January’s, boosting production. The manufacturing sector was the biggest source of strength in today’s report, with activity rising 0.8%. Non-auto manufacturing (which we think of as a “core” version of industrial production) posted a gain of 0.8% in February, the largest in more than a year. Meanwhile, auto production jumped 1.9%, as well. Notably, the production of high-tech equipment also rose for the thirteenth month in a row and is up 18.6% in the past year, by far the strongest growth of any major category. This likely reflects investment in AI as well as the reshoring of semiconductor production, which remains temporarily strong due to the CHIPS Act, despite broader weakness in the industrial sector. The mining sector rebounded in February, too, increasing 2.2%, also the largest monthly gain in over a year. Broad-based strength in oil and gas extraction as well as mineral extraction contributed. Finally, the utilities sector (which is volatile and largely dependent on weather) was the big source of weakness in today’s report. Activity plummeted 7.5% in February, the largest monthly decline since 2006, as the end of unusually cold weather in January rapidly reduced demand for home heating. In other news this morning, the Empire State Index, a measure of manufacturing sentiment in the Northeast, dropped unexpectedly to -20.9 in March from -2.4 in February, while import prices increased 0.3% in February and export prices jumped by 0.8%. In the past year, import prices are down 0.8% while export prices are down 1.8%.
Click here for a PDF version
|
|
| Three on Thursday - How is the Financial Health of U.S. Households? |
|
|
In this week’s edition of “Three on Thursday,” we look at the current overall financial health of households in the United States. Quarterly, the Federal Reserve Board of Governors releases a report officially known as the “Z.1 Financial Accounts of the United States,” which provides comprehensive data on the flow of funds and levels of financial assets and liabilities for various sectors of the U.S. economy. This report provides a look at the overall health of all households combined but does not look at households on an individual basis. To further the discussion, click on the link below.
Click here to view the report
|
|
| Retail Sales Rose 0.6% in February |
|
Posted Under: Data Watch • Employment • GDP • Government • Inflation • Markets • Retail Sales • Fed Reserve • Interest Rates • Spending • COVID-19 |
Implications: Do not be fooled by the strong headline gain; today’s report was an ugly one on the US consumer. Retail sales rose 0.6% in February – lagging the consensus expected gain of 0.8% – but after factoring in downward revisions to prior months, retail sales rose a tepid 0.1%. Much of the headline gain was driven by auto sales bouncing back after a steep drop in January. Strip that category out, and sales rose 0.3% (but were down 0.2% when including previous months’ revisions). “Core” sales, which exclude volatile categories such as autos, building materials, and gas stations — and is a crucial measure for estimating GDP — increased by 0.1% in February, but was revised significantly lower for previous months, down 0.5%. If unchanged in March these sales will be down at a 0.7% annual rate in the first quarter versus the fourth quarter. That would be the first quarterly decline since the COVID lockdowns. Overall retail sales are up 1.5% in the last year, but down 0.6% since peaking last September, and they are even weaker when factoring in inflation (one of the key drivers of overall spending over the last few years). Real retail sales are down 1.6% in the last year, and have been stagnant for nearly two years since peaking in April 2022. While recent data suggest the goods side of the economy may already be in recession, that cannot be said yet for the services side. However, the category for restaurant & bars – the only glimpse we get at services in the retail sales report – was the main culprit for the substantial downward revisions to prior months; the initial 0.7% gain in January for that category was revised to a 1.0% decline (and prior months were revised lower as well). Factoring in revisions turns February’s 0.4% gain into a 1.9% decline. Putting this altogether, it appears consumers are finally running out of their excess COVID savings, which were boosted by temporary and artificial government stimulus payments in 2020-21 (paid for by money printing). Expect more deterioration in real retail sales into 2024 as higher borrowing costs and a softening labor market take their toll. In employment news this morning, initial claims for jobless benefits declined by 1,000 last week to 209,000, while continuing claims rose by 17,000 to 1.811 million. These figures suggest continued job growth in February.
Click here for a PDF version
|
|
| The Producer Price Index (PPI) Rose 0.6% in February |
|
Posted Under: CPI • Data Watch • Government • Inflation • Markets • PPI • Fed Reserve • Interest Rates |
Implications: When Chairman Powell said the FOMC is looking for greater confidence that inflation is trending lower before they begin cutting rates, this is not what he had in mind. While consumer prices continue to run too hot for comfort, producer prices further back in the supply chain jumped 0.6% in February, easily outpacing consensus expectations. February inflation was led by a 4.4% rise in energy prices, a category which had shown steady decline over the prior four months and is down 3.8% from a year ago. Food prices – the other typically volatile category – rose 1.0% in February and are up 0.3% in the past twelve months. Stripping out these two components shows “core” prices rose 0.3% in February, following an outsized 0.5% increase in January. The Fed can take solace in noting the twelve-month rise in core prices has eased since peaking at 9.7% back in March of 2022, and is now up a moderate 2.0% from a year ago, but the trend of late has turned back higher, with core prices up 2.9% at an annualized rate over the past three months. Diving into the details of today’s PPI report shows core inflation was spread between goods and services, with prices for nondurable consumer goods, transportation and warehousing, and outpatient care leading the charge. Further back in the pipeline, processed goods prices rose 1.6% in February but remain down 1.8% in the past year. Meanwhile unprocessed goods prices rose 1.2% in February but are down 8.3% in the past year. Further easing in inflation appears on the way should the Fed have the patience to let a tighter monetary policy do its work. But inflation risks rearing its ugly head once again should the Fed falter and cut rates too quickly. The markets – and the Fed itself – seem unsure how soon or how quickly rate cuts will come. Patience is a virtue.
Click here for a PDF version
|
|
| The Consumer Price Index (CPI) Rose 0.4% in February |
|
Posted Under: CPI • Data Watch • Government • Inflation • Markets • Fed Reserve • Interest Rates |
Implications: Inflation accelerated in February, showing the battle against inflation is not over and the last mile of getting it back down to 2.0% will be the toughest. Looking at the headline, consumer prices rose 0.4% in January, the most in six months, while the twelve-month comparison ticked up to 3.2%. For those wondering, this marks the thirty-sixth straight month the year-to-year change is above the Fed’s 2.0% long term inflation target. Looking at the details, inflation was boosted by energy prices in February, which rose 2.3% on the back of higher prices for gasoline. However, it’s important to point out that energy has not been the culprit for stubbornly high inflation over the last year; energy prices are down 1.9% in the same timeframe. Stripping out the energy component and its often-volatile counterpart (food prices) to get “core” prices does not make the inflation picture look any better. That measure rose 0.4% in February for the second consecutive month, meaning January’s core jump was not a one-off anomaly. Rental inflation – both for actual tenants and the imputed rental value of owner-occupied homes – continue to defy predictions of imminent reversal, rising 0.4% for the month and running at or above a 5% annualized rate over three-, six-, and twelve-month timeframes. Housing rents have been a key driver of inflation over the last year (this month it was responsible for over a third of the rise in the overall index), and we expect it to continue to do so, as it makes up a third of the weighting in the overall index and still hasn’t caught up with the rise in home prices in the past four years. But the most troublesome piece of today’s report for the Federal Reserve came from movement in a subset category of prices that the Fed is watching closely – known as the “Super Core” – which excludes food, energy, other goods, and housing rents, and is a useful gauge of inflation in the services sector. After jumping 0.8% in January, that measure followed up with a 0.5% increase in February, driven by higher prices for airfare (+3.6%) and motor vehicle insurance (+0.9%). In the last twelve months, this measure is up 4.3% and has been accelerating as of late; up at 6.9% and 5.9% annualized rates in the last three and six months, respectively. And while inflation remains stubbornly high, workers are no longer being compensated for it. Case in point, real average hourly earnings declined 0.4% in February. These earnings are up 1.1% in the past year, while real average weekly earnings are up just 0.5%, underpinning brewing weakness in the labor market. Putting this all together, the Fed has little reason at this point to start cutting rates soon. How they respond to the incoming economic data in the months ahead could determine whether we repeat the inflationary 1970s.
Click here for a PDF version
|
|
| Is the Job Market Really That Strong? |
|
Posted Under: Employment • Markets • Monday Morning Outlook • COVID-19 |
If you only look at the headlines about the monthly payroll report, the job market has looked surprisingly strong in recent months. Nonfarm payrolls rose 275,000 in February, beating the consensus expected 200,000 as well as the average of 229,000 per month in the past year.
But a deeper look at the data makes it look about as fishy as week-old sushi. Now, we’re not alleging some sort of “Deep State” conspiracy, we’ll leave that to others. But reviewing the report in its entirety show the job market is not nearly as strong as the top line payroll readings suggest.
For example, look at the revisions. Payrolls in December and January were revised down by a total of 167,000 (the largest monthly downgrade for any non-shutdown months since late 2008), meaning February was just 108,000 above the original January level. And it was even worse in the private sector, where payroll gains were a paltry 19,000 for the month after netting out revisions for prior months.
What’s odd about these downward revisions is that they seem to happen pretty darn often of late. In 2023, for example, the regular two-month revision process reduced the initial monthly report by 30,000, on average. That ain’t chump change. In the past few decades, negative revisions like this have normally been associated with recessions or the immediate aftermath of recessions.
It's also important to follow civilian employment, an alternative measure of jobs that includes small-business start-ups. On a monthly basis, these figures are volatile, and are affected by estimates of the size of the total population, so take them with a grain of salt. But the trend is important and isn’t anywhere as strong as payrolls. While payrolls are up 2.7 million in the past year, civilian employment is up 0.7 million and the unemployment rate has risen to 3.9%. Moreover, the gain in civilian employment in the past year has all come in part-time work, with a slight loss for full-time jobs.
There may be solid technical reasons for this large gap. The figures are generated by two different surveys (one for employers, the other for households), and maybe the massive influx in immigrants, even if largely illegal, is finding its way into payroll expansion (perhaps with illegal hiring or false documents) in a way not being picked up by the civilian survey. We’re guessing many recent immigrants are not eager to answer surveys sent by the Labor Department.
Notably, among those who do answer the survey, civilian employment among the native-born population is down around 900,000 from a year ago – the first drop since the onset of COVID – versus an increase of about 1.5 million among the foreign-born.
Only time will tell the true underlying health of the labor market. There is no clear signal we’re in a recession, but the patient isn’t looking well. What is clear, is that economic risks abound, and a soft landing is far from guaranteed.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
Click here for a PDF version
|
|
| Nonfarm Payrolls Increased 275,000 in February |
|
Posted Under: Data Watch • Employment • Government • Inflation • Markets • Fed Reserve • Interest Rates |
Implications: Another month with a solid headline gain in payrolls in February, but the details of the report show a murkier situation in the labor market, where not all is well. Nonfarm payrolls rose 275,000 in February, beating the consensus expected 200,000 and higher than the average gain of 229,000 in the past year. So far, so good. But downward revisions to prior months reduced payrolls by 167,000, bringing the net gain to a moderate 108,000. More important: net of revisions, private payrolls rose only 19,000 in February. That’s not a typo; there’s not a zero missing from that number: 19,000. We like to follow payrolls excluding government (because it's not the private sector), education & health services (because it rises for structural and demographic reasons, and usually doesn’t decline even in recession years), and leisure & hospitality (which is still recovering from COVID Lockdowns). That “core” measure of payrolls rose a modest 80,000 in February. Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups, declined by 184,000. In the past, at economic turning points, the civilian employment figure has done a good job of picking up future weakness in payrolls. In the past year, full-time civilian employment is down, while part-time is up, another sign of impending economic weakness. Moreover, on account of the drop in civilian employment, the unemployment rate rose to 3.9% in February, the highest in more than two years, versus 3.7% in January. However, there is good news on the labor market, as well. Total hours worked in the private sector increased 0.4% in February, reversing the decline in January. Hours are up a moderate 1.0% from a year ago. Meanwhile, average hourly earnings rose only 0.1% after a 0.5% surge in January. Average hourly earnings are now up 4.3% versus a year ago. The Federal Reserve will like that a 4.3% gain is slower than the 4.7% gain in the year ending in February 2023 and workers will like that a 4.3% gain is beating consumer prices, which are up 3.1% from a year ago (assuming a 0.4% increase in prices in February). Our view remains that companies have gotten out over their skis in terms of hiring, a recipe for layoffs later in 2024. Total payrolls are up 1.8% in the past year, a pace that would be normal in the middle of an economic expansion when the unemployment rate (and available workers) is much higher than it is today. A weaker job market is heading our way.
Click here for a PDF version
|
|
| Three on Thursday - Bitcoin |
|
|
With Bitcoin recently hitting all-time highs, this week’s edition of “Three on Thursday” takes a deeper look at the crypto currency. Many believe Bitcoin’s revolutionary appeal lies in its ability to offer a secure, transparent, and borderless method of financial exchange, challenging traditional banking and financial institutions by providing an alternative form of currency and asset ownership that is not subject to government control or inflation. For more detail, click on the link below.
Click here to view the report
|
|
| The Trade Deficit in Goods and Services Came in at $67.4 Billion in January |
|
Posted Under: Data Watch • Employment • Trade |
Implications: The trade deficit in goods and services grew to $67.4 billion in January as imports rose faster than exports. However, we prefer to focus on the total volume of trade, imports plus exports, as it shows the extent of business and consumer interaction across the US border. This measure grew in January, rising by $3.9 billion. However, total trade volume is still down 0.8% from a year ago with exports down 0.4% versus a year ago, while imports are down 1.2%, consistent with our forecast that the US is headed toward a recession. And while a recent surge in the federal budget deficit might have helped the US economy avoid recession in the short-term, this kind of artificial support can’t last. Notably, there is a major shift going on in the pattern of US trade. In January, imports from China were down 6.4% versus the same month in 2023. China used to be the top exporter to the US. Now the top spot is held by Mexico as China has fallen to number two with Canada nipping at its heels. Meanwhile, daily freight has fallen rapidly, and was back down to pre-COVID levels, or lower, as demand for shipping stabilized. This was confirmed by the New York Fed’s Global Supply Chain Pressure Index in January, with the index moving back into negative territory, 0.23 standard deviations below the index’s historical average. For some perspective, two years ago in the month of January the index sat 3.65 standard deviations above the index’s historical average. Expect some temporary volatility though as Yemen’s Houthi rebels continue to deter container ships from transiting the Red Sea and Bab-el-Mandeb Strait, adding volatility to shipping costs. Also in today’s report, the dollar value of US petroleum exports exceeding imports once again. This marks the 23rd consecutive month of the US being a net exporter of petroleum products. In employment news this morning, initial claims for jobless benefits remained unchanged last week at 217,000, while continuing claims rose by 8,000 to 1.906 million. Also yesterday, ADP’s measure of private payrolls increased 140,000 in February versus a consensus expected 150,000. We expect Friday’s payroll report to show a nonfarm payroll gain of 185,000.
Click here for a PDF version
|
|
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.
|
|
Archive
Search by Topic
|
|
|
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.
|