Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  Retail Sales Declined 0.3% in September
Posted Under: Data Watch • Retail Sales

 

Implications:  Retail sales fell in September for the first time in seven months. This should pretty much solidify a rate cut by the Fed in two weeks, as the financial markets fully anticipate. But should it? No! Yes, overall retail sales declined 0.3% in September, but including revisions to prior months, sales were only down 0.1%, and remain up a solid 4.1% from a year ago.  Sales declined in seven of thirteen major categories with autos, which are very volatile from month to month, leading the way lower, declining 0.9% in September. Still auto sales are up 5.6% from a year ago. Non-store sales which have been a real bright spot, fell for the first time in nine months but are still up 12.9% from a year ago. The largest gain in sales in September was for clothing & accessory stores which grew 1.3%. "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) increased 0.1% in September, were up at a 6.8% annual rate in Q3 and are up 4.9% from a year ago.  "Core" sales are up 8.6% at an annualized rate since the start of 2019, the fastest year-to-date growth we have seen since record keeping began in 1992!   Jobs and wages are moving up, companies and consumers continue to benefit from tax cuts, consumer balance sheets look healthy, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  For these reasons, expect continued solid gains in retail sales in the year ahead.  In other news earlier this week, the Empire State Index, which measures factory sentiment in the New York region, rose to +4.0 in October from +2.0 in September, beating the consensus expected decline to +1.0. On the housing front today, the NAHB index, which measures homebuilder sentiment, rose to 71 in October from 68 in September, the highest reading since February of 2018. This represents a significant and consistent rebound in optimism following the collapse in the index at the end of 2018.

Click here for PDF version
                                              

Posted on Wednesday, October 16, 2019 @ 11:01 AM • Post Link Share: 
Print this post Printer Friendly
  Trade Clouds Parting
Posted Under: Monday Morning Outlook • Trade

Trade disputes have been an ongoing soap opera since President Trump took office.  From steel tariffs to trade skirmishes with China, Japan, Canada, Mexico, South Korea, and the European Union, among others,  it's been hard to keep track! 

But over the past few months we think a trend toward settlement of these disputes has emerged.  Congress must still act on the new version of NAFTA with Mexico and Canada – USMCA – but as Democrats in the House of Representatives consider impeaching the president, they should also become more interested in showing they're not only interested in all scandal, all the time.  Passing some broad bi-partisan legislation and USMCA would be a good start.  Look for it to get passed by early 2020, putting our disputes with our two largest export markets behind us.
 
From the perspective of US economic growth, the relationship with China has received way too much attention in the past couple of years.  Even before the trade dispute started, US exports to China were a smaller share of our GDP than exports to Japan were before the Japanese economy went into a long-term funk in the early 1990s.  If the US could prosper in the 1990s in spite of Japan's problems, the US economy overall should be able to absorb softer demand for our products coming from China, which lags well behind Canada and Mexico as an export market.

But last week's news indicates a deal is getting close.  It will not be a huge deal that comprehensively puts all our trade issues with China to rest; not even close.  But it will likely mean no new additional restrictions from now through 2020, and some rolling back of tariffs put in place in the last couple of years.

Meanwhile, the US recently concluded a trade deal with Japan.

None of this suggests we are fully out of the woods on trade issues.  We doubt China will stop its theft of intellectual property, and so, expect a trade dispute with China to re-emerge in 2021 no matter who wins the presidential election next year.  In the meantime, tariffs and the threat of other economic sanctions on China were always more damaging to China than the US.  That's why we never worried as much as the conventional wisdom.      

But nothing that's happened in the last few years suggest we are entering some sort of Smoot-Hawley-like downward spiral in international trade.  US merchandise imports dropped 70% from 1929 to 1932 while exports dropped 69%.  That's a downward spiral!  US imports didn't reach 1929 levels again until 1946.

By contrast, even before the recent trade deals with Mexico, Canada, and Japan have been implemented, US trade with the rest of the world has been rising.  In the past twelve months, exports and imports of goods and services combined have been $5.65 trillion, versus $5.63 trillion in calendar 2018, $5.26 trillion in 2017, and $4.93 trillion in 2016.  Even without deals, trade could be hitting a record high this year.      

The US economy has been and will continue to be much more resilient than many think.  Trade has increased uncertainty, but was never as big a threat as feared.  And, as trade relations improve, stocks will make up lost ground.  We were never as worried as the conventional wisdom, and now it will come around. 

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

Click here for PDF version

Posted on Monday, October 14, 2019 @ 11:33 AM • Post Link Share: 
Print this post Printer Friendly
  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 

Source: St. Louis Federal Reserve FRED Database

Posted on Monday, October 14, 2019 @ 8:24 AM • Post Link Share: 
Print this post Printer Friendly
  The Consumer Price Index was Unchanged in September
Posted Under: CPI • Data Watch

 

Implications:  Consumer prices took a breather in September following seven months of rising prices.  Meanwhile "core" prices – a gauge of inflation that strips out the typically volatile food and energy components – rose 0.1%.  Overall consumer prices are up 1.7% in the past year, but they have been held back by declining costs for energy.  Core prices are up 2.4%, tied for the largest twelve-month increase going back to late 2008.  Given the Fed's 2% inflation target, that should be a signal that everything is looking A-OK. Not too fast, not too slow, just right.  While core inflation is up 2.4% in the past year, it's up at a faster 2.8% annualized rate over the past three months.  The Fed needs to keep this data in mind in the months ahead as it deliberates about rate cuts.  With employment data continuing to show strength, the Fed would clearly be putting their dual mandate on the back burner in an attempt to use monetary policy to "solve" issues that have developed overseas.  But the Fed has shown at recent meetings that it has moved away from a "data dependent" stance, so don't expect the pickup in inflation – paired with Monday's report on producer prices which showed core prices at 2% as well - to change the Federal Reserve's plan for additional rate cuts.  Looking at the details of today's report shows that rising costs for housing, medical care, and services were offset in September by declining costs for energy and new and used vehicles.  The most disappointing news in today's report was that real average hourly earnings were unchanged in September, but remain up 1.2% in the past year.  With the strength in the labor market, we believe earnings will trend higher in the months ahead.  Healthy consumer balance sheets, a strong job market, inflation in-line with Fed targets but pushing upwards, and the continued tail winds from improved tax and regulatory policy, all reinforce our belief that the economy is on solid footing.  In employment news this morning, initial jobless claims fell 10,000 last week to 210,000, while continuing claims rose 29,000 to 1.684 million. Plugging this data into our models suggests nonfarm payroll continue to grow at a healthy pace in October.

Click here for PDF version

Posted on Thursday, October 10, 2019 @ 11:24 AM • Post Link Share: 
Print this post Printer Friendly
  The Producer Price Index (PPI) declined 0.3% in September
Posted Under: Data Watch • PPI

 

Implications:  Producer prices made a surprise move lower in September, as falling energy prices and declining margins to wholesalers pushed the index down 0.3%.  Energy prices dropped 2.5% in September, led lower by a 7.2% decline in gasoline prices.  Food prices, meanwhile, rose 0.3% on the month.  Strip out these typically volatile categories, and "core" prices also fell 0.3% in September, marking the largest single-month drop for core prices since early 2015. Declining margins to wholesalers, particularly machinery and vehicle wholesalers, led the drop in core prices in September, though most major categories moved lower.  It's important to note that, even with the multi-year large decline in September, "core" prices are up 2.0% in the past year, and have run at or above the Fed's 2% inflation target on a year-ago comparison basis for the past twenty-six months straight.  Consensus expectations for the "core" reading in Thursday's consumer price index (CPI) release is a rise of 0.2%, and if that holds, "core" consumer prices will be up 2.4% in the past year.  In other words, parsing the volatile month-to-month data from the trend, the Fed should consider if further rate cuts are really needed right now.  The data don't seem to justify it, but the Fed left data dependence behind back in July.  Goods prices led the producer price index lower in September, with energy costs the key culprit.  Services prices declined 0.2% in September, with falling wholesaler margins more than offsetting a 1.1% increase in the cost for hospital outpatient care. Further down the pipeline, prices for intermediate demand goods remains soft, while intermediate demand services prices continue to move higher.  The pouting pundits may take today's report and point to the decline as evidence that the Fed needs to move rates lower, but we think that's a mistake.  Core inflation remains in-line with targets, and a focus on a single-month's reading misses the forest for a tree. That said, the Fed seems bent on lowering rates, and we expect we will see one more rate cut before the year is out, most likely coming at the meeting later this month.  

Click here  for PDF version 

Posted on Tuesday, October 8, 2019 @ 12:09 PM • Post Link Share: 
Print this post Printer Friendly
  Labor Market Continues to Roar
Posted Under: Employment • Monday Morning Outlook

In spite of all the fear-mongering about a recession, Friday's employment report clearly showed we are not in an economic downturn.  The best news in the report was that the unemployment rate fell to 3.5%, the lowest most Americans have seen in their lifetimes. 

Even better, the drop in joblessness was broad-based.  The Hispanic unemployment rate fell to 3.9%, while the Black unemployment rate remained at 5.5%, both record lows.  These figures are much better than in prior business cycles.  The lowest Hispanic jobless rate in a prior expansion was 4.8% in 2006; the lowest Black unemployment rate in a prior expansion was 7.0% in 2000.    

Workers age 25+ who lack a high school degree have an unemployment rate of 4.8%.  This is a group whose jobless rate peaked at 15.8% back in 2010.  Remember the new stories suggesting these workers would never find new jobs because of automation?  As it turns out, that was bunk.  

Some analysts will bemoan the tepid pace of payroll growth in September, but it's important to put the 136,000 jobs gained into context.  First, the initial report on September payrolls has fallen short of consensus expectations in ten of the past twelve years.  Second, September payrolls have a history of being revised higher.  Since the economic expansion started, September has been revised up over the next two months by an average of 48,000, which, if that holds true this year, would put September roughly on par with the average pace of payroll growth seen over the past twelve months.          

Remember all the talk a few years ago about how job growth was due to part-time work, not full-time jobs?  That was never really true; instead, in our view, it was a case of some analysts letting their (in this case, conservative) political leanings get in the way of sound economic analysis.  But now the story about part-time job growth would be even more absurd.  Part-time workers are only 17.1% of all employed workers, versus a peak of 20.1% back in 2010.  Since 1980, the lowest part-timer share has been 16.7%, which the economy looks on-track to hit sometime in 2020.

Some analysts are focusing on the fact that average hourly earnings for all private-sector workers were unchanged in September, and are up 2.9% from a year ago, slightly slower than the 3.0% growth in the year ending in September 2018.  But average hourly earnings for production and non-supervisory workers (who tend to be lower paid than other workers), rose 0.2% in September and are up 3.5% from a year ago, a clear acceleration from the 3.0% gain in the year ending in September 2018.  If you've been hoping that a tighter labor market would help shrink the earnings gap between high- and low-income workers, that finally seems to be happening.     

Eventually, the pace of job creation should slow down somewhat as we get a larger share of economic growth from rising productivity, which has accelerated in response to deregulation and lower tax rates.  There is a limit to how far unemployment can fall, and how many workers, on average, join the labor force each month.  Payroll growth of about 100,000 per month is probably enough to keep the jobless rate at 3.5%; by contrast, payrolls are up 179,000 per month in the past year while civilian employment, an alternative measure of jobs that includes small-business start-ups, is up 183,000.

In the meantime, look for plenty of good news to keep coming from the labor market.  And when these unjustified recessions fears fade, long term bond holders are in for a rude awakening.   

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

Click here for PDF version                                                     

Posted on Monday, October 7, 2019 @ 11:38 AM • Post Link Share: 
Print this post Printer Friendly
  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve

 

Source: St. Louis Federal Reserve FRED Database

Posted on Monday, October 7, 2019 @ 9:13 AM • Post Link Share: 
Print this post Printer Friendly
  The Trade Deficit in Goods and Services Came in at $54.9 Billion in August
Posted Under: Data Watch • Trade

 
Implications: The Trump Administration may bemoan the larger trade deficit in August, as exports grew but imports grew faster.  But, as a result, the total volume of trade (imports plus exports), which signals how much businesses and consumers interact across the US border, increased by 0.4% in August, and that's what matters most about today's report.  However, compared to a year ago, exports and imports are essentially unchanged.  Of particular note in today's report, exports of petroleum products (think oil and gasoline) rose 6.8% in August, while imports decline 7.7%. As a result, the ratio of petroleum imports to exports fell to 1.02, the lowest reading since record keeping began back in 1989, and representing a virtual balance of trade. And it's worth noting, the attack on Saudi Arabian oil facilities that roiled the markets and likely pushed more export activity towards the US didn't occur until mid-September, so that isn't reflected in today's report.  It's possible that the ratio could dip below one in next month's report for the first time ever. For comparison, the US imported petroleum products at more than eleven times the rate it exported as recently as 2005.  Despite the progress, there is a lot of angst out there from the pouting pundits that the China trade battle is still a long way from done.  We think the worst-case-scenarios much discussed by the financial press will prove excessively pessimistic, as they so often do.  We still don't believe an all-out trade war (like the Smoot-Hawley tariff act) will materialize, but rather that these short-term skirmishes will lead to longer-term gains for all countries involved. We have already seen outlined trade deals with Mexico, Canada, and Japan. Total trade from these three is far bigger than with China, yet that's what the media obsesses over.  China is hurting, and further tariffs ratchet up the pressure to get a deal done.  So far this year, US imports from China are down 13.2% from the same period in 2018, while up 31.5% from Vietnam, 14.0% from Taiwan, 7.6% from India, 6.8% from South Korea, and 2.2% from Mexico.  Companies are shifting production out of China.  And the longer this drags on, the worse the outcome will be for China. The list of companies leaving China continues to grow and, at some point, the damage will become too much. Yes, this is hurting growth in the US to a small degree, sure. But the economic damage to China is greater.  It's in everyone's best interest to get a deal done.

Click here for a PDF version
Posted on Friday, October 4, 2019 @ 12:17 PM • Post Link Share: 
Print this post Printer Friendly
  Nonfarm Payrolls Rose 136,000 in September
Posted Under: Bullish • Data Watch • Employment • Government • Fed Reserve • Interest Rates

 
Implications:  The US labor market remains strong.  Nonfarm payrolls rose 136,000 in September, which was slightly less than the consensus expected 145,000.  However, at least a few reasons suggest faster job growth in the final quarter of the year.  First, upward revisions to prior months added 45,000.  Remember the tepid 130,000 gain in payrolls in August?  That's now been revised to a healthier 168,000.  Second, the initial report on September has come in below consensus expectations in ten of the past twelve years, and usually gets revised higher.   And third, civilian employment, an alternative measure of job creation that includes small-business start-ups rose 391,000 in September.  Civilian employment is up 183,000 per month in the past year while payrolls are up 179,000, both healthy figures.  The best news today was the drop in the unemployment rate to 3.5%, the lowest level since the New York Jets and Joe Namath were reigning Super Bowl champs (that's 1969 if you're a Millennial, or younger).  Meanwhile, the employment to-population ratio (the share of those age 16+ with jobs) increased to 61.0%, the highest since 2008.  The labor force participation rate remained at 63.2%, tying the highest level since 2013.  The worst news in today's report was that average hourly earnings were unchanged in September.  We think the months ahead will show that's an outlier and wage growth will rebound quickly.  Even so, average hourly earnings are up a respectable 2.9% in the past year.   The total number of hours worked were up 0.1% in September and are up 1.4% in the past year.  Combining the figures on hours and wages, total wages are up 4.3% from a year ago, which means consumers have plenty of purchasing power.  Yes, it'd be better if payrolls grew faster in September, but, given demographics (particularly aging Baby Boomers), anything north of 100,000 per month will tend to push down the jobless rate over time and it's hard to see the jobless rate going much lower than the current 3.5%.  In terms of monetary policy, today's report shows why the economy doesn't need another rate cut.  Regardless, the Fed is focused on potential downside risks it can't control, like Brexit and trade negotiations, so another rate cut later this year is much more likely than not. 

Click here for a PDF version                 
Posted on Friday, October 4, 2019 @ 11:39 AM • Post Link Share: 
Print this post Printer Friendly
  The ISM Non-Manufacturing Index Fell to 52.6 in September
Posted Under: Data Watch • Employment • ISM Non-Manufacturing

 
Implications:  If you take the ISM index at face value, activity in the service sector continues to grow, though at a slower pace than in recent months. Given that Monday's report on the manufacturing sector showed a further decline below 50 (levels below 50 signal contraction), the pouting pundits are having a field day, but today's report doesn't support their doom and gloom pronouncements.  Yes, it's true that reading of 52.6 is the lowest reading for the index in three years, but it remains in expansion territory, and the expansion remains broad-based with thirteen of eighteen industries reporting growth in September, while four showed a decline.  With the headline decline, you may expect respondent comments to be largely negative, but that wasn't the case.  Respondents did note trade uncertainty impacting short-term pricing, but far more comments reflected a positive view on the current environment.  "We are very busy right now [and] expect to be so for the next 12 months." "Business continues to pick up as we quickly approach Q4." "(E)mployee cost [wages] are increasing in this better economy..."  These hardly sound like companies anticipating a recession.  Following large jumps in August, the two most forward-looking indices – business activity and new orders – led the decline in September, but both remain comfortably in expansion territory, and both categories match the overall index in showing the bulk of industries participating in the growth.  The employment index moved lower to 50.4 from 53.1 in August. Pairing this with yesterday's ADP employment report, which showed private payroll gains of 135,000 in September, and this morning's report, which showed initial jobless claims rose 4,000 last week to 219,000 while continuing claims declined 5,000 to 1.651 million, and our models suggest nonfarm payroll gains of 125,000 from tomorrow's September employment report.  September reports have tended to come in below consensus expectations in recent years, but we expect a rebound in the pace of job creation in the fourth quarter.  The supplier deliveries index moved to 51.0 in September from 50.5 in August, signaling slower deliveries to companies, as respondents noted higher demand and capacity constraints as reason for the slowdown. Price pressures, meanwhile, continue to pick up in September, led higher by costs for fuels and construction workers.  Some of the upward pressure may be attributable to tariffs affecting the costs of goods imported from China, but as companies continue to shift production out of China, the magnitude of the impact has been muted. As a whole, today's report could have been better, but it continues to show an economy on solid footing.  In other recent news, automakers reported selling cars and light trucks at a 17.2 million annual rate in September, up 1.1% versus August, but down 0.7% from a year ago.

Click here for a PDF version
Posted on Thursday, October 3, 2019 @ 11:31 AM • Post Link Share: 
Print this post Printer Friendly

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.
 
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 advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA.
First Trust Advisors L.P.
Home |  Important Legal Information |  Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2019 All rights reserved.