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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Retail Sales Rose 1.6% in March
Posted Under: Data Watch • Employment • Retail Sales


Implications: Today's booming retail sales report confirms there is no recession in sight and that the consumer remains on very solid footing.  Retail sales soared 1.6% in March, beating even the most optimistic forecast by any economics group and rising by the most since September 2017.  The gains in March were broad-based, with twelve of thirteen major categories showing rising sales. The largest gain in dollar terms was for autos.  But even outside of autos, retail sales rose 1.2%.  "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) were up 1.0% in March, and are up 3.7% from a year ago, while overall retail sales are up 3.6% over the same period.  Plugging in today's data shows that real GDP grew at close to a 2.5% annual rate in the first quarter.  Meanwhile, the severity of the December decline in sales will remain a complete mystery given how inconsistent the report was with other economic data.  December's 4.5% decline in sales at non-store retailers, which includes internet sales, was the largest percentage drop since November 2008!  Give us a break! Something is wrong with that December report – seasonals, missing data, or an error in the spreadsheets. Unsurprisingly, it only took non-store sales two months to completely wipe out this strange December decline.  Non-store sales rose 1.2% in March, are up 11.6% from a year ago, and sit at all-time highs. In fact, for the first time ever, in February non-store retailers surpassed general merchandise stores. This trend continued in March and we don't expect it to change.  Some stores will continue to close, but it's not due to a weak consumer, just a shift in preferences.   Given the tailwinds from deregulation and tax cuts, we expect an average real GDP growth rate of close to 3% in 2019, just like we saw in 2018.  Jobs and wages are moving up, tax cuts have taken effect, consumer balance sheets look healthy, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  Some may point to household debt at a record high as reason to doubt that consumption growth can continue.  But household assets are near a record high, as well.  Relative to assets, household debt levels are hovering near the lowest in more than 30 years.  For these reasons, expect solid gains in retail sales over the coming months. In other big news this morning, initial claims for unemployment fell 5,000 last week to 192,000, the lowest level since 1969.  Continuing claims, meanwhile, fell 63,000 to 1.653 million.  Both of these figures suggest another month of solid job growth in April.  In turn, we expect continued reductions in investors' assessment of the odds of a Fed rate cut later this year.  On the manufacturing front, the Philly Fed Index, a measure of East Coast factory sentiment, declined to a still solid +8.5 in April from +13.7 in March, signaling continued growth. In observance of Good Friday, First Trust offices will be closed tomorrow. Our analysis of the housing starts data out tomorrow morning will instead be sent Monday morning. We hope you have a blessed and happy Easter!

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Posted on Thursday, April 18, 2019 @ 10:35 AM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $49.4 Billion in February
Posted Under: Data Watch • Trade


Implications: The trade deficit shrunk unexpectedly in February to $49.4 billion.  More important, there was a rebound in the total volume of trade – imports plus exports – which signals how much businesses and consumers interact across the US border.  Exports rose by $2.3 billion, while imports grew by $0.6 billion.  Total trade is still off of the record high set in October of 2018, but expect it to hit new highs later this year as global growth starts to reaccelerate and trade deals continue to progress.  In the past year, exports are up 2.4% while imports are down 0.5%.  In the meantime, one positive implication of today's report is that net exports look like they will make a large positive contribution to real GDP in the first quarter.  As a result, we are estimating real GDP grew in the 2.0 - 2.5% range for the quarter, much better than many analysts have recently been forecasting.  Despite lamentations by the pouting pundits, the China trade battles appear largely behind us, and the worst-case-scenarios much discussed on the financial "news" over the past year have (once again) proved excessively pessimistic.  We never believed an all-out trade war would materialize, but that short-term skirmishes would lead to longer-term gains for all countries involved.  We have already seen it happen with several countries, and now China looks to be extending an olive branch, too.  Average tariffs in China were cut from 9.8% in 2017 to 7.5% in 2018. We see this as real progress, and just the start.  The US's negotiating position is strong, in no small part due to the rise of the US as an energy powerhouse.  As recently as 2005, the US was importing more than ten times the petroleum products that we were exporting.  As of February, petroleum imports are down to only 1.09 times exports and this trend should continue.  This massive shift means the US has changed power dynamics on a global scale (witness the political turmoil in Saudi Arabia and elsewhere in the Middle East).  We will continue to watch trade policy as it develops, but don't see any reason to sound alarm bells yet.

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Posted on Wednesday, April 17, 2019 @ 9:56 AM • Post Link Share: 
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  Industrial Production Declined 0.1% in March


Implications:  Industrial production disappointed in March, falling short of expectations and posting its second decline in three months.  The March weakness also pulled Q1 into negative territory, representing the first such quarterly decline since late 2017.  That said, there is no need to sound alarm bells on the industrial sector or shoehorn in the narrative of slowing global growth as many analysts are doing.  The primary source of weakness over the past three months has come from the typically volatile auto sector, which fell 6.7% in January and 2.5% in March.  Meanwhile, industrial production excluding autos was unchanged in March and rose a modest 0.1% in the first quarter.  The bright spot in today's report was that manufacturing production outside the auto sector (which represents the majority of activity) rebounded 0.2% in March after two months of weak readings.  In the past year auto production is down 4.5%, while manufacturing outside the auto sector is up 1.5%, demonstrating the ongoing divergence in activity between the two sectors.  Further, the various capital goods indices within manufacturing continue to show healthy growth at a pace above headline industrial production, with business equipment up 3.7%, machinery up 4.3%, and high-tech equipment up 3.5%.  Comparing this with the slower year-over-year growth of 1.0% for manufacturing as a whole, or 0.2% for non-durable goods shows that companies are continuing to invest.  In turn, more capital goods should help push productivity growth higher, making it easier for the economy to grow in spite of a tight labor market.  The other source of weakness in today's report came from mining, which fell 0.8% due to a slowdown in oil and gas extraction.  That said, the overall index remains near a record high and represents the fastest year-over-year growth of any major category at 10.5%.  Today's reports shows once again why it's important to analyze the details of economic reports.  Rather than cause for concern (as a brief glimpse at the headline reading might suggest), industrial production continues to show an economy on very solid ground. In other recent news, the Empire State Index, which measures factory sentiment in the New York region, rose to 10.1 in April from 3.7 in March. This signals a rebound in optimism after the index touched its lowest reading since mid-2017 in March. 

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Posted on Tuesday, April 16, 2019 @ 11:31 AM • Post Link Share: 
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  Market Fears Overblown, Economy Strong
Posted Under: Bullish • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Stocks • Wesbury 101
Posted on Tuesday, April 16, 2019 @ 8:40 AM • Post Link Share: 
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  New Highs, Still a Buy
Posted Under: Bullish • GDP • Markets • Monday Morning Outlook • Stocks

The Dow Jones Industrials Average and S&P 500 are breathing down the neck of record highs set last Fall.  Some take that as a sign to sell, time to shift out of equities and realize gains.  We think that would be a mistake.

At the end of last year, we forecast the Dow would finish this year at 28,750 while the S&P 500 hit 3,100.  At the time, those goals seemed outlandishly optimistic to many investors.  We wrote that "[W]e do best by our readers when we tell them exactly what we think is going to happen, without altering our projections so we can run with the safety of the herd.  Grit your teeth if you have to; those who stay invested in the year ahead should earn substantial rewards."

Now we think we were too pessimistic. 

Through Friday's close, the Dow is up 13.2% year-to-date, while the S&P 500 is up 16.0%.  To reach our year-end targets, the Dow would have to gain another 8.9% while the S&P 500 would have to rise 6.6%.

We think investors should be undeterred by new record highs.  To assess market valuations, we use a capitalized profits model, which takes the government's measure of profits from the GDP reports and divides by interest rates.  Think of it this way: if profits are higher, stocks should be higher, too; if interest rates are higher, stocks should be lower, as they compete against an alternative with a higher rate of return.

Our traditional measure - using a current 10-year Treasury yield of about 2.57% - suggests the S&P 500 is still massively undervalued.  At the end of last year we used 3.40% for the 10-year yield, and generated a fair value on the S&P 500 of 3,100.  Now that looks like an aggressive call for long-term yields.  Using, say, 3.00% for the 10-year puts fair value at 3,500.  The model needs a 10-year yield of nearly 3.6% to conclude the S&P 500 is already at fair value, with recent profits.

What would obviously throw the cap profits model for a loop would be a recession, but we don't see one on the horizon.  As we wrote last week, the US economy is on very solid ground, with Q1 real GDP estimates up from near-zero to now over 2%.    In addition, we lack the imbalances we often see before recessions.  Household debts are near a multi-decade low relative to assets, and household debt service is very low relative to after-tax income.  Banks, meanwhile, have ample capital, and are no longer tied to the overly strict mark-to-market accounting rules that exacerbated the financial crisis.

In addition, the economy is still adapting to lower tax rates, particularly on corporate profits. We expect a continued shift of corporate operations toward the US.

Another angle to consider is that recessions often follow drops in home building, but the US is still building fewer homes than we'd expect given population growth and the scrappage of homes (knockdowns, fires, floods, hurricanes, tornadoes,...etc.).  In other words, we think the number of housing starts, which have grown every calendar year since bottoming in 2009, will rise again in 2019.

Notice, however, what we're not worried about:  quantitative tightening, which is one of President Trump's favorite recent targets.  We still don't think quantitative easing helped equities, because the extra reserves in the banking system sat on balance sheets earning near-zero returns.  Withdrawing those previously inert reserves won't hurt markets either.   

To be sure, we are not saying stocks will go up today or this week, or even this quarter. Corrections happen.  But, given the level of corporate profits and our outlook for economic growth, it looks more likely than not that equities will move substantially higher in the year ahead.

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

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Posted on Monday, April 15, 2019 @ 11:10 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, April 15, 2019 @ 9:49 AM • Post Link Share: 
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  The Producer Price Index Increased 0.6% in March
Posted Under: Data Watch • Inflation • PPI


Implications:  Hold off on a PPI for a minute. The biggest news this morning is that initial claims for unemployment dropped below 200,000 for the first time since Americans were still basking in the afterglow of Neil Armstrong's 1969 moon landing. Continuing claims, meanwhile, fell 13,000 to 1.713 million.  Both of these figures suggest another month of solid job growth in April. Now on to the producer price index, which rose a whopping 0.6% in March on the back of higher gas prices.  For comparison, that represents the second largest single-month increase since late 2012.  And while energy prices were the major driver in March, prices rose virtually across the board.  Strip out the typically volatile prices for food (up 0.3% in March) and energy (up 5.6%), and "core" prices rose 0.3% from February.  In the past year, producer prices are up 2.2%, while core prices are up 2.4%.  In other words, regardless of which measure you prefer, inflation is running modestly above the Fed's 2% inflation target.  And this is a trend, not the result of short-term volatility. "Core" prices have now exceeded the 2% target for twenty consecutive months.  Outside of energy, the March increase in producer prices was led by trade services (think margins to wholesalers), while machinery, equipment, and parts also moved higher.  In fact, transportation and warehousing was the only major category to show a decline in March, falling 0.8%.  Notably, private capital equipment prices are up 2.9% in the past year, the fastest year-over-year growth of any major category, possibly signaling rising demand for business investment which will provide a boost to economic activity in the year ahead.  Given these readings, we think many investors are severely mistaken in their belief that the Fed will cut rates before the end of the year. The data – for employment, inflation, and GDP growth – suggest further rate hikes are the far more likely path forward.  

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Posted on Thursday, April 11, 2019 @ 11:14 AM • Post Link Share: 
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  The Consumer Price Index Rose 0.4% in March
Posted Under: CPI • Data Watch • Inflation


Implications:  A jump in energy costs pushed the consumer price index higher in March, bringing the twelve-month increase to within a hair of the Fed's 2% inflation target.  That said, the Fed knows that both food and energy prices are abnormally volatile from month-to-month, so they put greater weight on "core" prices, which rose 0.1% in March and are up 2.0% in the past year.  In other words, no matter how you cut it, inflation is in-line with Fed targets, and shows no signs of the economic paralysis that bond markets are pricing in.  Housing and medical care costs – both up 0.3% in March - continue to be the primary drivers pushing "core" prices higher, more than offsetting a 1.9% decline in apparel prices that tied January 1949 for the largest single-month drop on record.  More important is that the trend shows prices hovering around the Fed's 2% inflation target, with "core" prices up 2.0% at an annual rate over the past three months and a slightly faster 2.2% annual rate over the past six months.  We believe these data, as well as continued strength in employment and the Q1 GDP data we get later this month, support the Fed's most recent "dot plots" suggesting that we are more likely to see another rate hike before a market implied cut.  What's currently restraining the Fed from raising rates is the low level of the yield on the 10-year Treasury Note, which doesn't reflect the underlying strength of the economy.  The market realization that their forecasts on economic fundamentals were excessively pessimistic, possibly catalyzed by further resolution of trade tensions, should bring more confidence to the financial markets and a return to a more "risk on" environment, which ultimately puts upward pressure on interest rates.  The worst news in today's report was that real average hourly earnings fell 0.3% in March.  However, they remain up 1.3% in the past year. These earnings rose 0.2% or more in each of the prior four months (and this is only the second monthly decline in the past year), and we believe that the trend higher will continue in the months ahead.  Add in the 0.5% increase in total hours worked from the March jobs report, and employees are continuing to see more cash in their pockets.  And remember, these earnings do not include irregular bonuses – like the ones paid by companies after the tax cut or to attract new hires – or the value of benefits.  Healthy consumers balance sheets, continued strong employment growth, inflation in-line with Fed targets, and GDP growth that looks set to come in well above the dismal forecasts some pundits were promoting earlier this year, all reinforce our belief that the economy is on very solid ground.   

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Posted on Wednesday, April 10, 2019 @ 10:25 AM • Post Link Share: 
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  Brian Wesbury on Fox Business: US Economy Will Hit 3% Growth in 2019
Posted Under: Bullish • GDP • Video • TV • Fox Business
Posted on Tuesday, April 9, 2019 @ 4:18 PM • Post Link Share: 
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  Economy on Very Solid Ground
Posted Under: Bullish • Employment • GDP • Government • Housing • ISM • Monday Morning Outlook • Retail Sales • Fed Reserve • Interest Rates

What a difference a month makes. 

Last month many economists had pushed down their estimates for first quarter economic growth to near zero.  The Atlanta Fed's "GDP Now" model was projecting real GDP growth at a 0.2% annual rate in Q1, which would have been the slowest growth since the weather-related negative reading in the first quarter of 2014.  But this time it was seen as a new trend leading us toward a recession.

Now, just four weeks later, the economy hasn't cooperated with the pessimists.  Just think about all the positive news we've had lately. 

Last Friday showed payrolls rose 196,000 in March after a temporary lull in February.  And while average hourly earnings rose a smaller than expected 0.1% in March, they're up 3.2% in the past year, an acceleration from the 2.8% gain in the year ending in March 2018. 

At least one analyst noted that the average change in payrolls in the last three months (180,000 per month) is the slowest since late 2017.  This is 100% true...and 100% irrelevant.  The three-month average bounces around all the time; since 2014 that average has been as high as 291,000 and as low as 136,000.  What these analysts are doing is exploiting the fact that payrolls grew only 33,000 in February, pulling down the short-term average.     

Meanwhile, new claims for unemployment insurance fell to 202,000 last week, the lowest reading since 1969.  If you expect a recession to start soon, this data doesn't support it.  Claims usually start to creep up before a recession starts; no sign of that now.    
Another piece of good news was that auto sales (cars and light trucks, both included) increased 5.3% in March to a 17.5 million annual rate.  As a result, our early estimate for retail sales for March is an increase of 1.0%.

Given the strong data, forecasters have been ratcheting up their Q1 real GDP estimates, which now stand around 2.0%.  That's a far cry from the 0.2% estimate a month ago, and strong retail sales growth for March means a higher starting point for the economy in Q2.

More solid news came from the ISM Manufacturing report, which showed the overall index rising to 55.3 for March.  Yes, the ISM Non-Manufacturing index declined to 56.1, but both indexes are above their average levels since the economic expansion began in mid-2009, almost ten years ago.  

Some analysts are worried about housing, but we have not wavered, and continue to believe the recovery in housing is not yet over.  Recent data supports our case, with new single-family home sales surging to a 667,000 annual rate in February, the fastest pace in almost a year.  Expect that surge in sales to translate into more home building in the months ahead. 

None of these reports mean the economy is booming like it was in the mid-1980s or late-1990s.  It's not.  But the US economy is no longer a Plow Horse, and it's nowhere close to a recession. 

Right now, the market on future policy decisions by the Federal Reserve suggests zero chance of a rate hike in 2019 and greater than 50% odds of a rate cut.  Look for that to change.  At the end of 2017, the market put the odds of four or more rate hikes in 2018 at 10-1 against.  In the end, rates went up four times.        

As we continue to get better than expected data in the coming months, look for investors to rethink their expectations for the Fed, as well.

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

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Posted on Monday, April 8, 2019 @ 11:19 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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