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   Brian Wesbury
Chief Economist
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  Nonfarm Payrolls Rose 266,000 in November
Posted Under: Data Watch • Employment


Implications:  The US labor market has rarely been stronger.  Payrolls increased 266,000 in November, easily beating the consensus expected 180,000 and coming in higher than the forecast from any economics group.  In addition, payroll growth was revised up 41,000 for the prior two months.  Remember how October was supposed to be a soft month for job growth because of the UAW strike?  Today's report shows payroll growth of 156,000 in October, a very respectable month.  Civilian employment, an alternative measure of jobs that includes small-business start-ups, grew a tepid 83,000 in November, but that follows average gains of 350,000 per month in the prior five months in this volatile series.  In the past year, nonfarm payrolls are up 184,000 per month while civilian employment is up 149,000.  The trend in job growth is likely somewhere in the middle, around 165,000 jobs per month.  The unemployment rate ticked down to 3.5% in November but has essentially been range-bound at very low levels in the past three months, hovering between 3.52% and 3.56%.  Perhaps the weakest part of today's report was the tepid 40,000 increase in the labor force, which caused the downward tick in the participation rate to 63.2%.  But labor force data are volatile from month to month and are still up 1.6 million from a year ago.  Even so, participation among "prime-age" workers (25-54) remained at the highest level in more than a decade.  We like to use the employment report to measure workers' purchasing power and that looks healthy, too.  Average hourly earnings rose 0.2% in October and are up 3.1% from a year ago.  Meanwhile, the number of hours worked rose 0.2% and are up 1.6% from a year ago.  Combined, total earnings are 4.8% ahead of a year ago, which is more than enough to keep powering consumer spending higher.  The Federal Reserve is clearly done cutting rates and the economy is in good shape.  Look for continued solid job creation in 2020.  There's no recession in sight. 

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Posted on Friday, December 6, 2019 @ 10:13 AM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $47.2 Billion in October
Posted Under: Data Watch • Trade


Implications: The trade deficit fell in October to $47.2 billion from $51.1 billion in September. While this will help boost Q4 GDP growth, we should step back before celebrating too much. Exports declined by $0.4 billion while imports declined by $4.3 billion. So, total trade between the US and the rest of the world fell $4.7 billion in October.  Overall, in the past year exports are down 1.4%, while imports are down 4.7%.  If trade between nations is falling because of weakness in consumption or investment, this might not be a good sign for economic growth.  For now, the jury is still out.  The US trade deficit (and total trade) may have been distorted by lopsided tariffs which new trade deals and higher tariffs on China (and now Brazil and Argentina) are rebalancing.  In the short-term, this rebalancing is painful for those who benefited from those trade patterns, but new trade patterns may be better for US and global growth in the long-term. Certainly, the drop in initial claims last week to 203,000 signals that the US is very near full employment.  Meanwhile, digging into the details of the trade report shows that for the second month in a row, the dollar value of US petroleum exports exceeded the dollar value of US petroleum imports.  Yes, you read that right: the US was again a net petroleum exporter in October.  Horizontal drilling and fracking have transformed the global energy market and the US is no longer hostage to foreign oil. This alone may be one of the many reasons why overall trade is lower. If we used to buy more oil from other countries and are now purchasing less, that means these countries have fewer dollars to purchase goods.  While many are worried about protectionism from Washington, especially regarding China, we continue to think this is a trade skirmish, and the odds of an all-out trade war that noticeably hurts the US economy are slim. It seems like major progress is being made on a "Phase One" trade deal with China to be signed in the next couple of months.  It also looks like there is a strong possibility the US will start to roll back the 15% tariffs that went into effect on September 1st on $125 billion of Chinese goods, and maybe even more, if China is willing to purchase more agriculture and address intellectual property protections.  Either way, we have already seen outlined trade deals with Mexico, Canada, and Japan, three of our four biggest trading partners.  In other words, the US isn't in a trade war like it was with the Smoot-Hawley Tariff Act.  There are many reasons why trade could be lower, including changing trade patterns in oil, a global slowdown, etc; tariffs are just one part.  We will continue to watch trade policy as it develops, but don't see any reason to sound alarm bells.  With initial jobless claims falling and continuing claims at 1.693 million. Plugging this data into our models suggests nonfarm payrolls grew around 200,000 in November.

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Posted on Thursday, December 5, 2019 @ 11:17 AM • Post Link Share: 
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  The ISM Non-Manufacturing Index Declined to 53.9 in November
Posted Under: Data Watch • Employment • ISM Non-Manufacturing


Implications:  While so much attention has been given to the ISM manufacturing index as it dipped below 50 in recent months, data from the much larger service sector continues to show solid growth, although not quite as strong as in October.  Growth was broad-based in November, with twelve industries reporting growth, while five showed decline.  Respondents continue to note that trade uncertainty is weighing on businesses, with upward pressure on costs the most common refrain (more on that below).  The two most forward-looking indices – business activity and new orders – moved in opposite directions in November, with orders rising but activity slowing.  Given the rise in orders - which should continue in December as companies look to spend their annual budgets by year end - expect to see the activity index follow suit higher in the months ahead.  The employment index jumped to 55.5 from 53.7 in October, coming in contrast to the ADP index data out this morning which showed private sector job gains of 67,000 for November, down from 121,000 in October.  While we are waiting on tomorrow's initial claims data to finalize our forecast, we believe that Friday's employment report will follow the ISM survey data higher and show a print of around 200,000 nonfarm jobs added.  Industries – construction in particular – continue to report difficulties finding qualified labor, but that shouldn't be a surprise with the unemployment rate near multi-decade lows.  The supplier deliveries index moved down to 51.5 in November from 52.5 in October, signaling faster deliveries to companies.  Respondents note that improved coordination activities with suppliers put in place during the third quarter are now resulting in faster deliveries in Q4.  As noted above, price pressures continued to pick up in November, led higher by costs for electrical components, lumber, and cheese.  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.  When you cut through the noise and focus on the fundamentals, the data continue to show an economy on solid footing. In other recent news, Americans bought cars and light trucks at a 17.1 million annual rate in November, up 3.4% from October, but down 1.7% from a year ago.  The trend over the next few years should be gradually downward as consumers shift their spending toward other sectors.

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Posted on Wednesday, December 4, 2019 @ 11:56 AM • Post Link Share: 
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  The ISM Manufacturing Index declined to 48.1 in November
Posted Under: Data Watch • ISM


Implications:  Manufacturing activity continued to slow in November, according to the Institute for Supply Management (ISM) survey.  However, the ISM index is calculated through a survey of purchasing managers who are often swayed more by sentiment than actual activity, so we think it should be taken with a grain of salt.  The index has dipped below 50 earlier in this recovery, without signaling recession – on three occasions in 2012, once again in 2013, and for five consecutive months in 2015/16.  Each time, the economy kept growing.  Keep that in mind as you see the inevitable headlines that overstate the importance of today's report.  Thirteen of eighteen industries reported contraction in November, while five reported growth.  The two most forward-looking indices - new orders and production – moved in opposite directions, but both remain below 50 signaling a slowdown in activity. The new orders index fell to 47.2 from 49.1 in October, while the production index rose to 49.1 from 46.2.  Despite the continued weakness, we expect a return to growth in the months ahead.  Why?  The ISM data doesn't match what we are seeing from other reports. The latest report on personal consumption shows goods consumption up at a 7.0% annualized rate so far in 2019, the fastest pace through October in fifteen years!  So, if consumers are clearly buying, and companies are apparently - according to today's report - not producing, something has got to give.   In fact, today's report showed the customers' inventories index declined to 45. Customers' inventories have now been declining for 38 consecutive months, which is positive for future factory output.  Given that we are also not seeing a pickup in layoffs – something you would expect to see if business significantly slowed - we lean towards the hard data over the survey output when it comes to judging the health of the economy. The employment index declined to 46.6 from 47.7 in October, so you may expect that Friday's job report will show a slowdown in manufacturing jobs growth, but the November report will reflect the return to work by striking GM workers, and the current consensus forecast is for 40,000 manufacturing jobs added on the month.  Finally, on the inflation front, the prices paid index rose to 46.7 in November, pushed higher due primarily to metals (namely steel and aluminum).  While the ISM manufacturing index has proved shaky over recent months, the preponderance of the data point to continued growth in the economy.  In other news this morning, construction spending declined 0.8% in October (-0.2% including revisions to prior months), falling well short of the consensus expected gain of 0.4%.  A slowdown in home building and public construction of highways and streets were partially offset by a pickup in public educational projects.

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Posted on Monday, December 2, 2019 @ 12:55 PM • Post Link Share: 
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  Don't Worry About the US Consumer
Posted Under: Bullish • Employment • Government • Monday Morning Outlook • Retail Sales • Interest Rates • Taxes

During the next couple of days you're going to see lots of stories about the strength of consumer spending.  Early reports say Black Friday on-line sales hit a record high, up 14% from a year ago, following a 17% increase on Thanksgiving Day itself.  Black Friday sales at brick and mortar stores were up 4.2% from a year ago.  So much for the theory that brick and mortar is dead or the economy is in trouble.  

This shouldn't surprise anyone who's paying attention to underlying data on workers.  The unemployment rate is hovering near a 50-year low, job growth remains robust, wage growth is solid, and wages are growing faster for low-income workers than high-income workers.  Overall, private-sector wages and salaries are up 5.2% from a year ago.   Meanwhile, we think the end of the GM strike means a sharp rebound in payroll growth in November.

In addition, consumers are in solid financial shape.  Consumer debts are the lowest relative to assets since 1984.  Household debt service relative to after-tax income is tied for the lowest on record (data go back to 1980).            

However, it's important not to let all the media attention on consumer spending distort the view of the way the economy really works.  People can't consume something until it's been produced. 

Yes, according to conventional statistics consumer spending is 68% of GDP.  But GDP doesn't count all economic activity; it uses the sales value of all goods and services (consumption and investment) to estimate production.

By contrast, economy-wide "gross output" includes not only business-to-consumer sales and investment but also what is not included in GDP, which is intermediate business-to-business sales, as well.  Consumer spending is only 38% of economy-wide gross output.  In other words, consumer spending is a much smaller part of total economic activity than GDP suggests.

That's why, as much as we like to see solid numbers on consumer spending, we see this as an effect, not a cause of our bounty. The primary cause is the innovation and risk-taking of entrepreneurs.  Which is why, if you want to know when the next recession is going to start, you need to pay careful attention to the environment for innovation and risk-taking, not how much people are spending.

Yes, when the next recession comes – and we don't see one for at least the next couple of years – consumer spending will likely falter.  But that doesn't mean slower consumer spending caused the recession.  It's just the natural and eventual consequence of a less healthy environment for businesses, small to large.  Less production would mean fewer workers and, in turn, less purchasing power.

So enjoy the good news you see the next couple days, but keep in mind that healthy growth in consumer spending is exactly what you should expect in an economy where tax rates are relatively low, business regulation has slowed, and monetary policy isn't tight.  If we're right, we should see more of the same kinds of headlines for at least the next couple of years.   

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

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Posted on Monday, December 2, 2019 @ 11:32 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, December 2, 2019 @ 10:41 AM • Post Link Share: 
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  Personal Income was Unchanged in October
Posted Under: Data Watch • PIC


Implications:  Consumers have plenty to be thankful for heading into the holiday season, and they are well positioned to take advantage of Black Friday sales.  While personal income was unchanged in October, the underlying details were more positive.  Private sector wages and salaries rose 0.4% in October (aided by the end of the United Auto Workers Strike), and are up 5.2% in the past year.  The rise in wages in October was offset by declines in personal interest and farm proprietors' income.  Higher wages continue to promote spending, which rose 0.3% in October.  A pickup in outlays on services was partially offset by a slowdown in spending on goods (notably, spending on new cars fell on the month).  Incomes are up 4.4% in the past year, while spending has increased by 3.7%, both healthy numbers. And it's important to remember that households de-levered following the recession, bringing financial obligations (think mortgages, car loans, etc.) to near multi-decade lows as a share of after-tax income.  The strong labor market simply has more people working more hours for more pay.  That math - aided by the improved tax and regulatory environment that went in place in 2018 - supports continued economic growth.  One area the Fed has been keeping a keen eye on is inflation, which continues to run below its 2% target.  PCE prices rose 0.2% in October, but are up just 1.3% in the past year.  "Core" prices, which exclude the volatile food and energy sectors, rose 0.1% in October and are up 1.6% in the past twelve months.  The more reliable "core" measure is what the Fed will be focused on, and that isn't far off the 2.0% target.  Add in other reports on the economy like today's releases on GDP and durable goods, and you can understand why the Fed is on pause for the time being.  Strong consumers, rising wages, tame inflation.  There is plenty to give thanks for tomorrow.  On the manufacturing front, the Chicago PMI index rose to 46.3 from 43.2 in October.  Pairing this with data from other regional manufacturing surveys suggests next week's national ISM report will show a rise to 49.9 in November from 48.8 last month. In housing news, pending home sales, which are contracts on existing homes, declined 1.7% in October after a 1.4% gain in September.  Despite the decline, we still expect existing home sales (counted at closing) will rise modestly in November.

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Posted on Wednesday, November 27, 2019 @ 12:05 PM • Post Link Share: 
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  New Orders for Durable Goods Rose 0.6% in October
Posted Under: Data Watch • Durable Goods


Implications:  Holiday cheer arrived early with this morning's report on durable goods, which easily beat consensus expectations and showed some green shoots for business investment.  And even though the biggest individual contributions to today's gain came from the volatile aircraft sector, orders excluding transportation equipment matched the headline gain of 0.6%.  Outside of aircraft the biggest gains in October came from fabricated metal products and industrial machinery.  More broadly, it looks like durable goods orders may be turning a corner after persistent weakness earlier this year.   Over the past five months, new orders for durable goods have risen at an 8.0% annualized rate, a stark reversal from the annualized decline of 12.6% during the first five months of 2019.  Arguably the best news in today's report came from "core" non-defense capital goods ex-aircraft, where both new orders and shipments posted their best gains since January.  For shipments (a key input for business investment in the calculation of GDP growth) this was the first increase in five months.  Even if this measure remains unchanged in November and December, shipments will be up at a 0.9% annualized rate in Q4 versus the Q3 average.  We expect the rate of GDP growth to move higher in the fourth quarter, especially if the weight on growth from weak business investment spending continues to abate. A Phase 1 trade deal with China looks more and more likely as election season approaches and would help reduce some of the uncertainty surrounding investment decisions going forward.  In employment news this morning, initial jobless claims fell 15,000 last week to 213,000, while continuing claims declined 57,000 to 1.640 million. Plugging this data into our models suggests nonfarm payrolls picked up substantially in November.

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Posted on Wednesday, November 27, 2019 @ 11:57 AM • Post Link Share: 
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  Real GDP was Revised to a 2.1% Annual Growth Rate in Q3
Posted Under: Data Watch • GDP


Implications: Real GDP grew at a 2.1% annual rate in Q3, beating the original estimate and the consensus expected 1.9% pace.  Inventories were revised higher, as was business investment in structures (commercial construction).  We like to follow "core" real GDP, which excludes inventories, government purchases, and international trade.  Inventories and government purchases are not representative of long-term growth, while the way trade is counted does a bad job of demonstrating that rising imports signal more purchasing power.  Core GDP grew at a 2.1% annual rate in Q3, is up 2.2% from a year ago, and is up at a 3.0% annual rate in the past two years.  Nominal GDP growth (real growth plus inflation) was revised to 3.8% annual rate in Q3 from a prior estimate of 3.5%.  Nominal GDP is up 3.8% in the past year and up at a 4.8% annual rate in the past two years.  All of these figures are well above where the Federal Reserve has set short-term interest rates, signaling that monetary policy is not tight and not an impediment to economic growth.  Also in today's GDP report was our first glimpse at economy-wide corporate profits in the third quarter. Profits rose 0.2% in Q3 but were down 0.8% versus a year ago. The increase was driven by profits from domestic non-financial firms as well as from the rest of the world, while profits at domestic financial firms were down.  Included in these numbers was a $6 billion reduction from legal settlements with Facebook and Google.  Both after-tax profits and corporate cash flow with an adjustment for inventory valuation, which is a measure of the funds companies have available to invest, hit all-time record highs. Plugging economy-wide profits into our capitalized profits models suggest that, even at higher interest rates stocks are still relatively cheap.

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Posted on Wednesday, November 27, 2019 @ 11:49 AM • Post Link Share: 
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  New Single-Family Home Sales Declined 0.7% in October
Posted Under: Data Watch • Home Sales • Housing


Implications:  New home sales surprised to the upside in October, beating even the most optimistic forecast of any economics group.  Yes, the headline number did show a decline in sales of 0.7%, but that was entirely due to a large 32,000 unit upward revision to September's sales pace, which now sits at a post-recession high.  Without that upward revision October would've posted a gain of 4.6%.  Moreover, even with the slight decline in October the average sales pace over the past two months is the fastest since 2007.  One of the key signals the US is not headed for recession is coming from the housing market.  New home sales normally run around 70% of single-family housing starts, but have now exceeded that threshold for each of the past nine months, hitting 78.3% in October, and signaling plenty of appetite for new homes.  In other words, home construction needs to pick up to keep pace with consumers' appetites for new homes.  The good news is that builders are beginning to respond, with the number of new single-family housing starts surging over the past several months to within spitting distance of new highs for this business cycle.  Affordability has been playing a big role in the recent rebound in sales, with mortgage rates having fallen roughly 110 basis points since peaking in November.  Meanwhile, new home prices have moderated, with seven of the ten months in 2019 posting declines on a year-over-year basis.    Bottom line, we expect sales in 2019 to outpace 2018, continuing the upward trend.  In turn, 2020 should outpace 2019.  In other housing news this morning, home price growth accelerated in September itself, but is still slower over the past year than in the year ending in September 2018.  The Case-Shiller national home price index rose 0.4% in September and is up 3.2% from a year ago versus a 4.5% gain in the year ending September 2018.  The three metro areas with the fastest home price growth in the past twelve months are Phoenix, Charlotte, and Tampa, all in relatively low-tax states; the three areas with the slowest price growth are San Francisco (the only city with an outright price decline), Chicago, and New York, all in high-tax states.  The FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.6% in September.  FHFA prices are up 5.1% from a year ago versus a 6.3% gain in the year ending in September 2018.  Finally, on the manufacturing front this morning, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, fell to -1 in November from +8 in September.  This is consistent with our view that the national ISM Manufacturing index will rise in November but remain slightly below 50.  

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Posted on Tuesday, November 26, 2019 @ 11:57 AM • Post Link Share: 
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