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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  Housing Starts Increased 19.4% in March
Posted Under: Data Watch • Home Starts • Housing

 
Implications: Housing construction came roaring back in March following the large, but temporary, disruption from February's severe winter weather. The 19.4% gain in housing starts puts them at the highest level since 2006 and the gains were broad-based, with every region outside the West and both single-family and multi-family construction posting increases.  Not every month is going to be this strong, but we expect housing starts to remain in an upward trend.  Why the confidence?  Building permits for future construction remain near the highest level since 2006.  Moreover, permits have now outpaced new construction for eight consecutive months. This has resulted in a backlog of projects that have been authorized but not yet started, which is now the largest in nearly 15 years.  As we mentioned in this week's Monday Morning Outlook, there has been a long running deficit in new home construction.  The US needs roughly 1.5 million housing starts a year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.), but we haven't built that many new homes in any calendar year since 2006.  Now, with plenty of future building activity in the pipeline and builders looking to boost the inventory of homes as well as meet consumer demand, it looks likely that construction in 2021 will surpass the 1.5 million unit benchmark. This positive outlook is reinforced by yesterday's read on the NAHB index, a gauge of homebuilder sentiment, which rose to a reading of 83 in April from 82 in March. The gain was driven by strong consumer demand for homes offsetting rising materials costs, especially lumber, another signal of ongoing inflationary pressure as the US begins to reopen.

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Posted on Friday, April 16, 2021 @ 11:01 AM • Post Link Share: 
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  COVID-19 Tracker 04/15/2021
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, April 15, 2021 @ 4:04 PM • Post Link Share: 
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  Coronavirus High Frequency Data 04/15/2021
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. Starting Mar. 11th 2021, data compares 2019 to 2021. % change month over month is the current reading minus the month ago reading.

Posted on Thursday, April 15, 2021 @ 1:38 PM • Post Link Share: 
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  Retail Sales Rose 9.8% in March
Posted Under: Bullish • Data Watch • Retail Sales • COVID-19

 
Implications: Retail sales soared in March as Washington, DC was passing out checks like it's going out of style.  Retail sales skyrocketed 9.8% for the month, crushing the consensus expectations of a 5.8% gain, and the underlying details of the report were strong as well. All thirteen major categories rose in March, with autos leading the way.  The massive gain in sales was the result of several factors, including a rebound from the polar vortex that hit much of the midsection of the United States in February, tax refunds that went out a little later than normal, $1,400 stimulus checks that arrived in March for many, plus the additional easing of lockdown restrictions nationwide.  Notably, the level of retail sales in March was 17.1% higher than it was in February 2020 before COVID.  In other words, retail sales in March were not just a V-shaped bounce back, but a check-mark ✅ from prior weakness, up to a level they probably would not have reached in the absence of COVID.  Now, as the vaccine continues to roll-out around the country, lockdowns and restrictions will continue to ease.  More than 250 million vaccine doses have been distributed nationwide with 194.7 million administered.  It has not been an even recovery for all major categories, though.  For instance, sporting goods stores (+43.9%), non-store retailers (+35.0%), building materials (+29.3%), and auto sales (+26.8%) have all grown significantly faster than overall retail sales since February 2020.  Although growing slower than overall sales, among those sectors that were massively impacted by the shutdowns early on, only restaurants & bars (-4.8%) remain below February 2020 levels. Gas stations (+12.6%) and clothing stores (+3.3%) have now recovered to their pre-COVID levels.  "Core" sales, which exclude the most volatile categories of autos, building materials, and gas station sales, rose 7.8% in March, and are up 17.0% from a year ago. In other news today, initial jobless claims fell 193,000 last week to 576,000 while continuing claims rose 4,000 to 3,731 million.  In other news yesterday on the inflation front, import prices jumped 1.2% in March, largely the result of a 6.3% surge in fuel prices.  Meanwhile, export prices increased 2.1%, as agricultural export prices jumped 2.4%.  In the past year, import prices are up 6.9%, while export prices are up 9.1%.  Jumps like these indicate the rising inflation trend we are likely to witness in the year ahead.

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Posted on Thursday, April 15, 2021 @ 1:26 PM • Post Link Share: 
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  Industrial Production Increased 1.4% in March
Posted Under: Data Watch • Industrial Production - Cap Utilization • COVID-19

 
Implications: Industrial production began to rebound from the plunge in activity related to severe winter weather in February, but, while good news, don't get too excited about today's report.  Yes, both industrial production and manufacturing activity are now up from a year ago, but this is just the result of the big declines we saw last year 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.  Manufacturing production is not only still down 2.0% from February 2020, but is down 1.1% 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. For example, consumer spending data out this morning show retail sales excluding the widely shutdown restaurant sector are now up 20.2% from pre-pandemic levels.  COVID-19 has clearly shifted consumer preferences from services (like travel, dining, or attending sporting events) toward goods, and that means a continued rebound in industrial production will be necessary to meet demand going forward. While nearly every major category posted gains in March, the one source of weakness came from utilities where activity fell 11.4%. However, this is just the result of a decline in demand for home heating as the unseasonably cold weather in February became unseasonably warm weather in March.  Look for a continued upward trend in industrial production in the months ahead as reopening continues and factories continue to ramp up production.  Measures of factory-related sentiment from this morning reinforce this outlook. The Empire State Index, a measure of New York factory sentiment, rose to +26.3 in April from +17.4 in March, the highest reading since 2017.  Meanwhile, the Philadelphia Fed Index surged to its highest level since 1973, posting a reading of +50.2 in April versus an already sky-high reading of +44.5 in March.

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Posted on Thursday, April 15, 2021 @ 1:23 PM • Post Link Share: 
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  Coronavirus High Frequency Data 04/13/2021
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. Starting Mar. 11th 2021, data compares 2019 to 2021. % change month over month is the current reading minus the month ago reading.

Posted on Tuesday, April 13, 2021 @ 1:42 PM • Post Link Share: 
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  The Consumer Price Index (CPI) Increased 0.6% in March
Posted Under: CPI • Data Watch • Government • Housing • Inflation • Fed Reserve • Interest Rates • COVID-19

 
Implications: What do you get when you take rising vaccinations and immunity, add in additional stimulus, all in an economy where supply-chains are still working to get back online?  Inflation rising at the fastest pace in more than a decade, on the tails of sizeable increases in January and February.  The 0.6% increase in the March CPI ties for the largest single-month increase going back to 2009.  The monthly gain in March, as well as the "base-effect" impact of comparing to last March (when prices were declining) pushed the 12-month increase in the CPI up to 2.6%.  With the largest monthly decline coming last April, even a flat reading in the CPI in the month ahead would put the 12-month CPI increase above 3%.  It's going to take time for supply-chain issues that have created shortages - and lifted prices - for things like semiconductors, lumber, and household appliance to resolve, but that is a temporary (or as the Fed likes to say "transitory") factor.  What is less temporary is the massive 27% increase in the M2 money supply and ongoing proposals for trillions more in government spending.  Simply put, math wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.  Will that change the Fed's plans to hold rates at zero for the foreseeable future?  Don't count on it.  The Fed seems to believe that this rise will ease later this year and into next as re-openings help ease supply-chain pressures.  We believe they are writing off the upward pressure in prices from the money supply growth too quickly.  Taking a look at the details of today's report shows energy led the consumer price index higher in March, rising 5.0% on the back of higher costs for gasoline and natural gas.  Food prices rose a more modest 0.1%, as higher costs for fruits and vegetables were largely offset by lower prices on dairy products.  Strip out these typically volatile categories, and "core" prices still rose 0.3% in March.  Here, housing costs were the main contributor, despite the governments measure for housing (which focuses on what homeowners would have to pay if they rented the house from someone else) being artificially subdued by the moratorium on evictions.  We like to follow "cash inflation," which is everything in the CPI except for owners' equivalent rent.  Cash inflation increased 0.7% in March and is up at a 4.9% annual rate since prices began to rise again last June.  Prices for used cars (impacted by the semiconductor shortage slowing production of today's ever more tech-heavy vehicles), auto insurance, and medical care also moved higher.  Inflation will be front and center in 2021 as the Fed – and markets – try to untangle just how quickly, and how sustained, will be the impact the of the unprecedented spending in response to COVID-19.  There is no free lunch.

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Posted on Tuesday, April 13, 2021 @ 11:43 AM • Post Link Share: 
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  Housing Boom to Continue
Posted Under: Home Sales • Home Starts • Housing • Inflation • Monday Morning Outlook • COVID-19

Housing prices have soared in the past year.  The national Case-Shiller index is up 11.2% in the past twelve months, the largest gain since 2005-06.  The FHFA index is up 12.0% in the past twelve months, the largest on record (going back to 1991).

Given these gains, some are wondering whether housing is back in a 2000s-type bubble.  But a deep dive into the data suggests we are not. 

To assess home prices we use the market value of all owner-occupied homes calculated by the Federal Reserve.  We then compare that to the "imputed" rent calculated by the Commerce Department for the GDP report.  (Imputed rent means what people would pay to rent their homes if they rented them from someone else.)  In the past 40 years, home values have typically been 16.4 times annual rent.  At the peak of the bubble in 2005, they were 21.4 times annual rent, or 33% above normal.  Now, home prices are 17.8 times annual rent, about 11% above normal.

We also compare home prices to the Fed's measure of replacement cost.  In the past 40 years, home prices have typically been 1.59 times replacement cost.  In 2005, they peaked at 1.94 times replacement cost, a premium of 22.5%.  Now homes are selling for 1.63 times replacement cost, only 2.5% above normal, which is minimal.

Does this mean housing is at risk?  We don't think so.  The recent price surge is based on fundamentals and the housing market should continue to boom.

The primary problem is a lack of homes.  Based on population growth and scrappage (voluntary knockdowns, fires, floods, hurricanes, tornadoes...etc.), we would normally expect housing starts of 1.5 million per year.  But in the past twenty years (March 2001 through February 2021), builders have only started 1.256 million per year.  Builders haven't started more than 1.5 million homes in a calendar year since 2006.          

No wonder the inventory of homes for sale is so low!  Single-family existing home inventories are at rock bottom levels, with only 870,000 for sale in February.  To put this in perspective, the lowest inventory for any February on record from 1982 through 2016 was 1.55 million.  Meanwhile, there are only 40,000 completed new homes for sale, versus 77,000 a year ago and an average of 87,000 in the past twenty years. 

Two other factors are likely at work.  One issue is that there's a moratorium on evictions, so some tenants are paying less in rent than they normally would, which is temporarily holding down rental values versus home prices (therefore elevating the price-to-rent ratio).  This is also holding down the housing component of the Consumer Price Index, which is calculated using rents, not home prices.

Another factor is that people have moved away from places where renting is popular to places where home ownership is popular.  If you leave New York City or San Francisco for Nashville or Boise, there's a good chance you went from renting to owning.  This helps boost home prices as well.

Yes, home prices are up and, yes, they look somewhat expensive relative to normal, but this is more about the unprecedented events of the past decade, not some problem with the market.  With the Fed so easy, and the stock of housing constrained, prices will continue to rise.  The housing boom will continue.   

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

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Posted on Monday, April 12, 2021 @ 12:12 PM • Post Link Share: 
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  The Producer Price Index (PPI) Rose 1.0% in March
Posted Under: Data Watch • Employment • Government • Inflation • PPI • Fed Reserve • Interest Rates • Spending • COVID-19

 
Implications: The Federal Reserve wanted more inflation and now we have more inflation.  For the second time in three months, producer prices jumped by a massive 1%+ on a month-to-month basis, pushing the headline reading to 4.2% year-to-year, the highest in nearly a decade.  And prices are accelerating, up at a 7.6% 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 March during the onset of COVID-19.  Expect more of that in the near future as prices fell even faster in April 2020.  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 27% 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 later this year 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 March, prices for goods led the overall index higher, with the bulk of that coming from a 5.9% increase in energy costs (the index for gasoline alone increased 8.8%).  The food index rose 0.5% in March as increased costs for poultry were partially offset by lower prices for beef and veal.  Prices for services jumped 0.7% in March.  Within services, final demand trade services (think margins received by wholesalers and retailers) were the key contributor to higher costs, consistent with supply-chain problems.  Meanwhile, transportation and warehousing services had an outsized increase for the third consecutive month.  Further down the pipeline, prices for intermediate demand processed goods rose 4.0% in March, while intermediate demand unprocessed goods rose 9.3% (and are up at an astonishing 70.1% annualized rate in the past six months).  Intermediate unprocessed goods are up 41.6% from a year ago, and have shown significant movement since bottoming at a 28.6% twelve-month decline back in April 2020.  However, 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.  Expect inflation pressures to remain a dominant topic of conversation throughout the year ahead.  In recent news on the labor market, initial jobless claims rose 16,000 last week while continuing claims declined 16,000.  As we saw with March's nonfarm payroll gain of 916,000, jobs growth is re-accelerating with the easing of restrictions across the country as vaccinations continue to rise.  Expect significant job gains in the months ahead as we get back toward "normal."

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Posted on Friday, April 9, 2021 @ 11:12 AM • Post Link Share: 
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  COVID-19 Tracker 04/08/2021
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, April 8, 2021 @ 4:33 PM • 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.
 
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