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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Existing Home Sales Declined 1.3% in January
Posted Under: Data Watch • Home Sales • Housing


Implications:  Existing home sales fell slightly in January, but remained on the broader upward trend that began a year ago.  The decline in January was entirely contained to the West region while in the rest of the country sales remained unchanged or eked out small gains.  That said, the details in today's report were disappointing, as the inventory of existing homes was down 10.7% versus a year ago (the best measure for inventories given the seasonality of the data).  Unless reversed soon, this will likely be a headwind for future sales.  The primary culprit behind the weak existing home market in 2018 was lack of supply.  A consistent decline in inventories along with a rising sales pace has driven down the months' supply – how long it would take to sell the current inventory at the most recent sales pace – to only 3.1 months in January, just above December's reading of 3.0 which was the lowest on record going back to 1999.  Notably, this measure has now been below 5.0 months (the level the National Association of Realtors considers tight) since late 2015.  With demand so strong that 42% of homes sold in January were on the market for less than a month, inventories remain crucial to sales activity going forward.  The good news is that builders are beginning to respond. The total number of housing units under construction and the number of new housing starts have been rising lately and now sit at or just below post-recession highs.  As these properties are finished, and people trade up or down to a new home, more inventory of existing homes will become available.  More construction will be doubly important for properties worth $250k or less, where sales have sputtered and the decline in inventories has been the greatest.  In other recent news, initial claims for unemployment benefits rose 4,000 last week to 210,000 while continuing claims rose 25,000 to 1.726 million.  Despite the increase, both measures remain subdued and signal continued growth in payrolls in February.  On the manufacturing front, the Philly Fed Index, a measure of East Coast factory sentiment, surged to +36.7 in February from +17.0 in January.  This is the highest reading since early 2017 and echoes a recent rebound in the Empire State Index, pointing to a continued recovery in the US manufacturing sector.

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Posted on Friday, February 21, 2020 @ 11:37 AM • Post Link Share: 
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  Housing Starts Declined 3.6% in January
Posted Under: Data Watch • Home Starts • Housing


Implications:  Great news on the housing market in January.  Although housing starts fell versus December, they came in substantially higher than the consensus expected.  In fact, with the exception of the massive surge in December, the 1.567 million annualized pace of starts in January was the highest since 2006.  The recent strength in housing starts is in part due to unusually mild weather through much of the country so far this winter.  However, it's not just about the weather.  Building permits jumped 9.2% in January and hit the highest level since 2007, a good sign for construction later in 2020.  We think home building will remain on the upward trend it's been in since 2011.  Based, on fundamentals (population growth and scrappage) the US needs to start about 1.5 million homes each year, a level that was only recently hit in December 2019.  Given how long it's taken to get back to that level, there's also some room for overshooting to make up for lost time.  In other recent housing news, the NAHB index, which measures sentiment among homebuilders fell one point to 74 in February from 75 in January, remaining just below the 20-year high of 76 set in December 2019.  It's not hard to see why builders remain optimistic about the housing market.  Mortgage rates have dropped roughly 110 basis points since the peak in late 2018 while wages continue to grow at a healthy pace, boosting affordability.  Our outlook on housing hasn't changed: we continue to anticipate a rising trend in home building in the next few years.

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Posted on Wednesday, February 19, 2020 @ 11:31 AM • Post Link Share: 
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  The Producer Price Index Rose 0.5% in January
Posted Under: Data Watch • PPI


Implications:  Producer prices surged 0.5% in January, the largest monthly increase since late 2018.  With the January rise, producer prices are up 2.1% in the past year, breaching the 2% level last seen in May of 2019.  Services led prices higher in January, rising 0.7%, while prices for goods increased 0.1%.  Goods prices were held lower by energy costs, which declined 0.7%.  Food prices rose 0.2% in January, as rising costs for vegetables and grains more than offset a decline in prices for eggs.  Strip out the typically volatile food and energy categories, and "core" prices also rose 0.5% in January, tied for the largest monthly increase since the series began back in 2010.  Within core prices, the rise was led by margins to retailers, particularly apparel, jewelry, footwear, and accessories, which saw prices jump 10.3% in January.  "Core" goods rose 0.3% in January, with prices for iron and steel scrap up 13.9%.  In the past year, services prices are up 2.0% while goods prices are up 1.8%.  Core prices as a whole are up 1.7% over the past twelve months.  We expect core prices to follow the headline number toward 2% in 2020. Further down the pipeline, prices for intermediate demand processed goods declined 0.3%, while intermediate demand unprocessed goods fell 0.6%.  Both intermediate demand categories continue to show prices broadly lower compared to year-ago levels.  Taken altogether, today's report reinforces the Fed's plan to leave rates unchanged in 2020.  Core consumer inflation stands above 2% on a twelve-month basis, while core PCE prices (the Fed's preferred measure) are up 1.6% in the past year.  Paired with the very healthy employment market, these signal an economy with no need for more Fed rate cuts.  In recent manufacturing news, the Empire State Index, which measures factory sentiment in the New York region, jumped to +12.9 in February from +4.8 in January as rising orders and shipments led the index higher.  We're still waiting in other regional surveys arriving late this month, but the gain in the Empire index hints at an increase in the national manufacturing index for February. 

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Posted on Wednesday, February 19, 2020 @ 11:21 AM • Post Link Share: 
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  Lessons from Japan?
Posted Under: Government • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending • Stocks

Thirty years ago, many in the US were in fear that a rising power in Asia was on the verge of eclipsing the US.  Now it's China, back then it was Japan.

Back in the late 1980s Japan had become the second largest economy in the world after the US and seemed like a juggernaut that couldn't be stopped.  Many center-left economists thought that the post-World War II experience of Japan proved that industrial policy could work, with the government picking winners and losers and making sure favored industries and companies always got the credit they needed to grow.  They were eager to bring that approach to the US. 

History, however, had other plans.  Japanese government policies bottled up capital in favored industries and pulled it away from widespread entrepreneurship.  This meant the massive savings generated by Japanese workers were misallocated into a limited pool of domestic assets, with capital gains tax rates that favored listed stocks and drove up real estate prices.  The result was dual massive bubbles, with stocks far more overvalued than US stocks were in 2000 while Japanese real estate was far more overvalued than the US was in 2005.  As a sign of how large that bubble was, the Nikkei is still about 40% below the high set in 1989. 

That peak in asset prices also coincided with a dramatic slowdown in economic growth that has lasted thirty years.  To put an exclamation point on that, Japanese real GDP fell at a 6.3% annual rate in the fourth quarter of 2019.  This was before any impact from the coronavirus and the largest quarterly decline in six years.  While pandemics are serious and scary, the real cause of the drop was a national sales tax hike from 8% to 10%.  Real GDP is now down 0.4% from a year ago.

It's deja vu.  Japan keeps trying over and over again to boost economic growth with government policy – a combination of high government spending, high budget deficits, high taxes, quantitative easing, and, beginning in 2016, negative interest rates.  Sounds exactly like what policymakers in Europe have tried, but more of it and for longer.

None of this has worked, and it won't work in the US, either.  Not now, and not if we eventually go into a recession, which, thankfully we don't foresee anytime soon. 

In contrast to Japan, the US has lower taxes, lower (but still too high) government spending, a central bank that maintains positive short-term interest rates, and a much healthier economy, with equities at or near record highs while the jobless rate heads toward what could be the lowest unemployment rate since the Korean War.  

Instead of more of the same, we think Japan would benefit from shifting the mix of policies toward the supply-side, with big tax cuts on business investment and profits, and ending negative interest rates like Sweden just did.  And, given a falling population, this could be coupled with much larger tax deductions for parents.

Meanwhile, instead of raising the sales tax, with long-term interest rates at essentially zero, Japan should take a page from Great Britain's history and convert their debt into "perpetual" securities (called "consols"), paying whatever interest rate the market demands (near zero!) but without the need to repay principal.

Don't hold your breath waiting for this kind of policy shift.  Instead, Japan looks poised to continue to muddle through continuing to believe that government can manage economic growth and not trusting entrepreneurs and freedom.  Unless Japan starts trusting supply-side policies instead of demand-side fallacies, they will continue to be doomed to make the same mistakes.

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

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Posted on Tuesday, February 18, 2020 @ 11:49 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve


Source: St. Louis Federal Reserve FRED Database

Posted on Tuesday, February 18, 2020 @ 8:39 AM • Post Link Share: 
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  Industrial Production Declined 0.3% in January
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production started off 2020 on a soft note as warmer than usual weather pushed down utilities output and problems at Boeing weighed on manufacturing.  The production halt surrounding the 737 MAX caused a decline of 9.1% in the production of aerospace products and parts in January.  However, excluding the production of aircraft and parts, manufacturing rose a healthy 0.3%.  The auto sector also rebounded in January, posting a gain of 2.4%.  Notably, even with the Boeing disruption, manufacturing has been accelerating lately, up at an annualized pace of 3.9% over the past three months versus a decline of 0.9% over the past year.  It will remain difficult to get a true reading on manufacturing over the next couple months as issues surrounding coronavirus and Boeing distort the data, but we expect a rebound in activity in 2020 as we put some of the major headwinds for the factory sector in 2019  behind us.  The GM strike is over, USMCA has been passed, and a Phase One trade deal with China has been signed.  Turning to utilities, output dropped for a second consecutive month as unseasonably warm weather throughout much of the country continued in January and reduced demand for heating.  Finally, mining output rose 1.2% in January, fueled by a broad-based increase in oil, gas, and mineral extraction. This is somewhat surprising as the price of WTI crude fell 18.5% in January, demonstrating the resiliency of US producers.  In the past year mining activity is up 3.1%, the best performer of all major categories.   

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Posted on Friday, February 14, 2020 @ 11:28 AM • Post Link Share: 
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  Retail Sales Rose 0.3% in January
Posted Under: Data Watch • Retail Sales


Implications:   A respectable report on the US consumer.  Retail sales grew 0.3% in January and are up a solid 4.4% from a year ago.  The gain was widespread, as sales rose in nine of thirteen major categories.  Restaurants & bars, along with building materials, led the way rising 1.2% and 2.1% in January, respectively.  Building materials grew by the most since August of last year, partly due to the unusually mild January weather. This milder weather most likely affected sales at clothing and accessory stores, as well, holding down this category.  Less need to buy winter apparel when temperatures are higher than usual.  There should be no doubt the consumer is doing well.  "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) grew 0.2% in January, and are up 3.8% from a year ago.  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 inflation news today, import prices were unchanged in January, as falling fuel prices offset increasing prices for nonfuel imports.  Meanwhile, export prices rose 0.7%, with rising prices for both agricultural and nonagricultural exports contributing to the overall increase.  In the past year, import prices are up 0.3%, while export prices are up 0.5%.  Given loose monetary policy, expect higher inflation by later this year.

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Posted on Friday, February 14, 2020 @ 11:19 AM • Post Link Share: 
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  The Consumer Price Index (CPI) Rose 0.1% in January
Posted Under: CPI • Data Watch • Government • Inflation • Fed Reserve

Implications:  Consumer prices increased 0.1% in January, with prices rising in nearly every major category.  Prices for housing, medical care, and food led the index higher in January, partially offset by a decline in the cost of gasoline.  Consumer prices are up 2.5% in the past year, tied for the largest twelve-month increase going back to August of 2018.  Strip out the typically volatile food and energy sectors, and "core" prices rose 0.2% in January.  In addition to housing and medical care, prices for apparel, recreation, education, and airline fares pushed the core reading higher.  Core prices are up 2.3% in the past year, just a tick off the highest annual increase we have seen since the recovery started.  And "core" prices have hovered at or above the Fed's 2% inflation target for twenty-three consecutive months.  Add in employment data continuing to show strength and it makes sense the Fed doesn't expect further rate cuts unless we see a material change in the economic outlook.  On the wage front, average hourly earnings rose 0.2% in January and have increased 3.1% in the past year.  Take out inflation, and "real" earnings rose 0.1% in January and are up a modest 0.6% in the past year.  With the strength of the labor market, we believe earnings will trend higher in 2020.  Healthy consumer balance sheets, a strong job market, inflation in-line with Fed targets, and the continued tail winds from improved tax and regulatory policy, all reinforce our belief that the economy will continue to grow at a healthy pace in the year ahead.  In other news this morning, new claims for unemployment benefits rose 2,000 last week to a very low 205,000.  Continuing claims fell 61,000 to 1.698 million.  These figures are consistent with continued solid payroll growth in February.

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Posted on Thursday, February 13, 2020 @ 10:37 AM • Post Link Share: 
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  Jobs, Coronavirus, and the Budget
Posted Under: Employment • GDP • Government • Monday Morning Outlook • Spending

In January, US payrolls expanded by 225,000, not only beating the consensus forecast, but also forecasts from every single economics group.  Since January 2019 (12 months ago), both payrolls and civilian employment – an alternative measure of jobs that includes small-business start-ups – are up 2.1 million.  The labor force – those who are either working or looking for work – is up 1.5 million, while the jobless rate fell to 3.6% from the 4.0%.

The labor force participation rate (the share of adults who are either working or looking for work) increased to 63.4% in January, the highest reading since early 2013.  Participation among "prime-age" adults (25 to 54) hit 83.1%, the highest since the Lehman Brothers bankruptcy in 2008.   

Meanwhile initial claims for unemployment insurance hit 202,000 in the last week of January, and initial claims as a percent of all jobs are at the lowest level ever.  In other words, the job market and the economy look strong.

Only a few months ago, some analysts were saying that the inversion of the yield curve - with short-term interest rates above long-term rates - was signaling the front edge of a US recession.  Now a recession seems nowhere in sight.

Lately, financial markets have become very jumpy on any news – good or bad – regarding the coronavirus.  We aren't immunologists (or doctors) and would never make light of a virus that has killed more than 900 and infected over 40,000, but data released by the World Health Organization (WHO) cautiously suggests a positive turning point has been reached.

So far, the virus has had minimal impact outside of China, and the growth rate of new cases worldwide has slowed.  Yes, these numbers must be taken with a grain of salt, given that the news is coming from China.  But China's leaders have an interest in limiting the spread of the virus and the economic damage it causes, and they have allowed the WHO access.

China's President Xi Jinping has been able to accumulate more power than any leader since at least Deng Xiaoping, perhaps since Mao.  We assume he is well aware that a major failure to contain the virus could give his political opponents an opening to vent their frustration with the current leadership, and perhaps push for change.

It's true that the growth of the Chinese economy has slowed precipitously, and this is affecting many companies' sales and production.  However, we do not believe that this will damage global growth in a significant way, and the US stock market suggests that global investors agree.

Meanwhile President Trump is presenting his budget plans to Congress this week, and early reports suggest some proposals to rein in entitlement spending.  We wouldn't hold our breath waiting for these policies to get implemented.  No matter who controls Congress, the one bi-partisan thing DC is able to do is spend more taxpayer money.  And even with a slowdown in spending growth for entitlements, the President's budget proposal still won't balance the budget until 2035.

To be clear, we do not think deficits are the proper tool to use for economic forecasting.  What matters is spending, and federal spending has grown to be too large a share of US GDP.  The bigger the government, the smaller the private sector.

In 1983, according to the OMB, federal spending was 22.9% of GDP.  In 1999, under President Clinton, it had fallen to 18%, and from 1983 through 1999, real GDP grew 3.7% at an annual rate.  This trend was reversed with government spending rising to 21.1% of GDP in 2019, and from 2002 to 2019, real GDP grew just 2.1% annualized.  Bigger government leads to slower growth.

Taking all of this together, no recession on the horizon and improving news about the coronavirus suggests corporate profits will continue to grow in spite of moderate growth.  Stay bullish!  

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

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Posted on Monday, February 10, 2020 @ 11:44 AM • Post Link Share: 
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  M2 and C&I Loan Growth
Posted Under: Government • Fed Reserve


Source: St. Louis Federal Reserve FRED Database

Posted on Monday, February 10, 2020 @ 10:55 AM • 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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