Implications:  New orders for durable goods beat consensus expectations in October, and started the fourth quarter off on strong footing following the historic pace of new orders growth in Q3.  With a combined 43.7% increase since the April bottom, new orders now sit just 2.2% below the February pre-pandemic high, signaling a sharp (and very V-shaped) recovery in the manufacturing sector.  The volatile transportation sector once again lived up to its name, with a healthy rise in orders for commercial and defense aircraft partially offset by a drop in orders for motor vehicles.  Excluding transportation, orders rose 1.3% in October, and now stand 3.6% above levels seen at the start the year.  Among the core non-transportation categories, orders activity was mostly higher in October, with computers & electronic products (+3.1%), fabricated metal products (+2.3%), electrical equipment (+1.0%), and primary metals (+0.4%) all rising, while machinery orders (-0.6%) 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 2.3% in October.  In the third quarter, this measure rose at a record shattering 33.1% annualized rate versus the Q2 average, and the fourth quarter is off to an impressive start.  If unchanged in November and December, these shipments will be up at a 14.2% annualized rate, which would represent the second fastest quarterly growth pace (behind last quarter) in nearly a decade.  In other words, business investment, which was a major drag on real GDP in the second quarter, was a major tailwind in Q3 and looks likely to continue supporting growth as we close out 2020.  Taken as a whole, today's report on durable goods left us with plenty to be thankful for as we head into tomorrow's holiday. We aren't yet back to "normal," but we are comfortably on that track.  In other economic news this morning, initial jobless claims rose 30,000 last week to 778,000.  Meanwhile, continuing claims for regular benefits fell 299,000 to 6.071 million.  Plugging these figures into our models suggests continued job growth in November, but at a more modest pace than in recent months.  On the manufacturing front, the Richmond Fed Index declined to still robust +15 in November from the record-high reading of +29 in October.  This data continue to show a healthy rebound in manufacturing activity versus the deeply negative readings early on in the pandemic.

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Implications:  Don't let the negative headline number fool you, new home sales continued to impress in October, easily beating consensus expectations. The drop of 0.3% was due to an upward revision of 43,000 to September's sales pace, putting that month at the highest level since 2006.  Without that upward revision, October would have posted a gain of 4.2% versus the sales figure for October reported a month ago.  New home sales are now 29.1% above the January pre-pandemic high, and a couple of factors should continue to keep the fast pace of new home sales going in the months ahead.  First, affordability; near zero interest rates from the Federal Reserve have helped reduce 30-year fixed mortgage to record lows.  Second, due to the pandemic, closures, and urban unrest, buyers' preferences have shifted away from units in denser urban environments, toward more spacious options in the suburbs, where most new single-family homes are built.  That said, a lack of finished new homes waiting for buyers remains a headwind for sales going forward.  In the past year, the only portion of the inventory of unsold new homes that has increased are homes where construction has yet to start.  Meanwhile, the inventory of unsold homes that are either under construction or finished is down from a year ago.  Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, we do not expect an oversupply of homes anytime soon.  This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of new homes for sale, which has collapsed from 6.8 in April during the height of the pandemic to only 3.3 in October, the lowest level on record going back to 1963.  New home sales normally run around 70% of single-family housing starts, but have now exceeded that threshold for each of the past six months, sitting at 84.7% in October, and signaling plenty of appetite for new homes. And this has occurred despite single-family housing starts rising in October to the fastest pace since 2007.  In other words, even though new home construction has accelerated rapidly during the pandemic, it still needs to pick up more to keep pace with consumers' appetites for new homes.  In other recent housing news, the national Case-Shiller home price index rose 1.4% in September and is up 7.0% from a year ago, more than doubling the 3.2% gain in the year ending in September 2019.  In the past twelve months, prices were up the most in Phoenix, Seattle, and San Diego, while up the least in New York, Chicago, and Dallas.  Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, rose 1.7% in September and is up 9.1% from a year ago, a major acceleration from the gain of 5.5% in the twelve months ending in September 2019.  The 1.7% gain in September is the largest monthly increase on record (going back to at least 1991) and the 9.1% gain versus a year ago is the largest year-to-year increase since the housing bubble in the 2000s. 

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Implications: Hold off on GDP for a moment.  The big news in this morning's GDP report was that economy-wide corporate profits soared in the third quarter, rising 27.1% and hitting an all-time record high, even higher than pre-COVID-19 levels.  Profits were up 3.3% versus a year ago.  Plugging economy-wide profits into our capitalized profits models suggest that, even at higher interest rates stocks are still relatively cheap.  Meanwhile, the "second" GDP report for the third quarter showed the same massive growth that was estimated last month. Real GDP grew at a 33.1% annual rate in Q3.  Business investment, specifically in intellectual property, and home building were revised higher, while personal consumption in services, government spending, trade, and inventories were revised slightly lower.  Nominal GDP growth (real growth plus inflation) was unrevised at a 38.0% annual rate in Q3.  Nominal GDP is down 1.8% in the past year but up at a 1.0% annual rate in the past two years. In other news today, personal income declined 0.7% in October (-0.4% including revisions to prior months), coming in below the consensus expected decline of 0.1%.  Personal consumption rose 0.5% in October (+0.4% including prior month revisions).  The consensus expected a gain of 0.4%.  Personal income is up 5.5% in the past year, while spending has declined 0.6%. The decline in income was all due to a continued decline in government transfer payments.  Excluding these payments, personal income rose 0.8% in October. Private-sector wages and salaries rose 1.0% in October, are up 12.7% from the April bottom, and are only 0.4% below the February high.  On the spending side, after declining by 19% in March and April, total spending is only 1.6% below February levels, and is down only 0.6% versus a year ago.  There is clear evidence of damage from the shutdowns, but spending is consistently improving. With spending growth continuing to outpace incomes, the saving rate declined to a (still elevated) 13.6% in October.  This is down from 33.7% back in April, but still well above "normal" levels.  On the inflation front, PCE prices were unchanged in October, but are up 1.2% from a year ago and up at a faster 1.9% annualized rate in the past three months.  Core prices, which exclude the volatile food and energy components, also were unchanged in October, but are up 1.4% from a year ago and have likewise accelerated of late, up 2.0% annualized over the past three months. 

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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.

Who's in charge of fiscal policy?  That's the real issue behind the recent dispute between Treasury Secretary Steve Mnuchin and Federal Reserve Chairman Jerome Powell regarding the Treasury's decision to end certain emergency lending facilities by December 31, 2020.

Back in March, right after the US had hunkered down due to COVID-19, Congress passed the CARES Act.  Among the many forms of economic aid that law provided, such as tax cuts, PPP loans and extended unemployment benefits, Congress authorized the Treasury to give the Fed up to $454 billion to backstop loans the Fed could make to some corporations (large and small) and state and local governments.  The Fed already had other emergency loan facilities, but the CARES Act increased the Fed's involvement in pandemic bailouts.

The idea behind the lending facilities was to backstop markets; meaning private-sector lenders would have confidence that creditors could get funds, so markets wouldn't meltdown like in 2008-09.  This was overkill.  Without overly strict mark-to-market accounting rules, a 2008-like meltdown was not as large a threat as many believed.  And the fact that the Fed never lent much of this money is the proof.

An interesting side note is that the money the Treasury gave the Fed didn't affect the annual budget deficit.  Budget scorekeepers counted the money as an asset of the Federal Government, and only if a loan later defaulted would it become deficit spending.  And at present, these facilities are only funding about $25 billion in loans.

Some observers are wondering about the effect of the unwinding of these facilities on monetary policy.  Here are our thoughts: Unless the Treasury uses this cash to pay down the debt, it will still be in the system.  If a future Congress chooses to spend it, it becomes just another part of the current Modern Monetary Theory process of the Fed buying large portions of new Treasury debt, while Congress spends it. This is not only inflationary, but is also a burden on future generations.

For now, pulling these funds from the Fed will not harm market liquidity, as markets are behaving quite well. In addition, taking these funds back will hopefully muzzle some at the Fed who have become more vocal in their recommendations about fiscal policy, supporting a very large expansion in the size of government, a policy at odds with the preferences of the current Administration.  In other words, Treasury is telling the Fed to stay in its monetary-policy lane.

Finally, we think the current Treasury wants to make sure new leadership next year can't use the program as a piggy bank to generate bailouts for states with long-term financial issues due to underfunded pension plans and government over-spending in general.  The fear is that the Fed, with newly elected political leaders in Washington, could extend "loans" to poorly managed states only to have those states default later.  In essence, the spending would be hidden from the democratic process, concealed as Federal Reserve "loans," with the extra spending only gradually counted in future years as part of the federal budget deficit when the loan impairments happened.              

Congress has specifically decided not to use these funds today (which it could easily do).  It appears that the House will wait for the outcome of the two Senate races in Georgia before passing a new stimulus bill.  If Republicans win one of those seats, stimulus will likely be $1-$1.5 trillion.  If Democrats win both, it could be as much as $3 trillion.  In other words, on January 5th Georgia will have a $2 trillion Senate election, which will also determine what happens to the money Secretary Mnuchin just took back from Jay Powell.

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

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Source: St. Louis Federal Reserve FRED Database

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.

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.