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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  The Producer Price Index (PPI) Rose 0.2% in March
Posted Under: CPI • Data Watch • Employment • Government • Inflation • Markets • PPI • Fed Reserve • Interest Rates
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Implications:   Do you hear that sound?  It’s the door creaking closed on the chances for a June rate cut. While the producer price index rose a modest 0.2% in March, that comes on the back of above-trend increases the prior two months.  Through the first three months of 2024, producer prices rose at a 4.4% annualized pace, while year-ago comparisons are on the rise and now back above 2.0% for the first time since April of last year.  Paired with consumer price data out yesterday showing inflation re-accelerating, the Fed is unlikely to feel the confidence that the inflation fight is won.  Looking at March itself, lower energy costs helped keep producer prices contained, down 1.6% on the back of falling gasoline prices, while food prices – the other typically volatile category – rose 0.8% on a jump in costs for processed poultry.  Stripping out these two components shows “core” prices rose 0.2% in March, following an outsized 0.5% increase in January and a 0.3% rise in February.  While the Fed can take some solace in noting the twelve-month rise in core prices has eased since peaking at 9.7% back in March of 2022, they remain up 2.4% in the last twelve months and accelerated to a 4.2% annualized rate over the first three months of 2024.   The 0.2% rise in core inflation in March was led by services, up 0.3%, while goods prices outside of food and energy rose 0.1%.  The largest price increases came from securities brokerage, commercial equipment wholesaling, and airline passenger services, which were partially offset by lower costs for traveler accommodations and auto retailing.  Further back in the pipeline, processed goods prices fell 0.5% in March and are down 1.7% in the past year, while unprocessed goods prices declined 1.9% in March and are down 7.1% in the past year.  Further easing in inflation will come should the Fed have the patience to let a tighter monetary policy do its work.  But inflation risks rearing its ugly head once again should the Fed falter and cut rates too quickly.  The markets – and the Fed itself – seem increasingly doubtful that rate cuts are near. And for good reason. In other news this morning, initial claims for jobless benefits fell 11,000 last week to 211,000, while continuing claims rose by 28,000 to 1.817 million.  The figures are consistent with continued job gains in April.

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Posted on Thursday, April 11, 2024 @ 11:08 AM • Post Link Print this post Printer Friendly
  Three on Thursday - The Fed's 2023 Financial Recap
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In this week’s edition of “Three on Thursday,” we look at the Federal Reserve’s financials through year-end 2023. Back in 2008, the Federal Reserve (the “Fed”) embarked on a novel experiment in monetary policy by transitioning from a “scarce reserve” system to one characterized by “abundant reserves.” In addition to inflation, this experiment has resulted in some other developments that are worrisome.

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Posted on Thursday, April 11, 2024 @ 10:13 AM • Post Link Print this post Printer Friendly
  The Consumer Price Index (CPI) Rose 0.4% in March
Posted Under: CPI • Data Watch • Government • Inflation • Markets • Fed Reserve • Interest Rates • Bonds • Stocks
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Implications:   Where is the evidence that monetary policy is tight?  Consumer prices rose 0.4% in March, pushing the twelve-month comparison up to 3.5%.   At this point it looks clear that the progress against inflation made from mid-2022 to mid-2023 has stalled.  Consumer prices were up 9.1% in the year ending in June 2022.  While many thought the drop back to 3.0% in the year ending in June 2023 was all due to the Fed, it was likely influenced greatly by supply chain disruption and recovery.  With CPI inflation back up to 3.5% from a year ago, it is clear that the problem has not gone away.  Looking at the details, March inflation was boosted by energy prices, which rose 1.1% on the back of higher prices for gasoline.  However, it’s important to point out that energy has not been the culprit for the stubbornly high inflation readings over the last year; energy prices are up 2.1% in the same timeframe versus 3.5% for overall prices.  Stripping out energy and its often-volatile counterpart (food) to get “core” prices does not make the inflation picture look any better.  That measure rose 0.4% in March for the third consecutive month, while the twelve-month comparison remained at 3.8%, proving that underlying pricing pressures remain stubbornly high.  Rental inflation – both for actual tenants and the imputed rental value of owner-occupied homes – continue to defy predictions of imminent reversal, rising 0.4% for the month and running at or above a 5% annualized rate over three-, six-, and twelve-month timeframes.  Housing rents have been a key driver of inflation over the last year, and we expect it to continue to do so, as it makes up a third of the weighting in the overall index and still hasn’t caught up with the rise in home prices in the past four years.  But the most troublesome piece of today’s report for the Federal Reserve came from movement in a subset category of prices that the Fed itself has told investors to watch closely – known as the “Supercore” – which excludes food, energy, other goods, and housing rents, and is a useful gauge of inflation in the services sector.  After large monthly increases in January and February, that measure jumped another 0.6% in March, driven by higher prices for motor vehicle insurance (+2.6%) and medical care services (+0.6%).  In the last twelve months, this measure is up 4.8% and has been accelerating as of late; up at 8.2% and 6.1% annualized rates in the last three and six months, respectively.  And while inflation remains stubbornly high, workers are no longer being compensated for it.  Case in point, real average hourly earnings were unchanged in March.  These earnings are up only 0.6% in the last year, a headwind for future growth in consumer spending.  Putting this all together, the Fed has little reason at this point to start cutting rates.  How they respond to the incoming economic data in the months ahead could determine whether we repeat the inflationary 1970s.

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Posted on Wednesday, April 10, 2024 @ 10:28 AM • Post Link Print this post Printer Friendly
  Is the Fed Tight, or Not?
Posted Under: CPI • Employment • GDP • Government • Inflation • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Bonds • Stocks

In the waning seconds of one of the most watched women’s college basketball games ever, a foul was called.  The University of Connecticut was playing the University of Iowa in the semi-finals of the women’s NCAA championship tournament.  Officials called a UConn player for an “illegal screen” on an Iowa defender, which helped Iowa win the game.  This happened Friday night, and on X (formerly Twitter) the debate about this call still rages.

In spite of the debate, that game is over.  On Sunday, Iowa lost to South Carolina in the finals and the world moves on.  Meanwhile, in the realm of economics, a different debate rages.  Is Federal Reserve policy tight, or not?

Ultimately, there is an ironclad two-part test to determine if monetary policy is tight.  First, has the economy weakened to below trend growth?  More clearly, is GDP falling, or unemployment rising?  And second, has inflation persistently declined.  If those things haven’t happened, it's hard to argue monetary policy has been tight.

At present, we are tracking Real GDP growth at about a 2.0% annual rate in the first quarter, which is close to the long-term average.  This follows all of 2023, and the last two quarters of 2022, where quarterly real economic growth was faster than 2.0% each and every quarter.  At the same time, unemployment remains below 4.0%.  In other words, we haven’t yet had an economic slump consistent with tight money.

For inflation – after dropping from what appears to be a supply-chain induced spike of about 9.0% in mid-2022 – CPI inflation fell to 3.1% in mid-2023.  But lately, CPI inflation has stopped its decline.  We estimate that consumer prices rose 0.3% in March and the Cleveland Fed’s CPI Nowcast currently projects 0.3% for April, as well.  If so, the overall CPI will be up 3.3% in April versus the year prior.

So, both real growth and inflation show little impact from Fed tightening, in spite of many of the traditional measures of monetary policy signaling tightness.  For example, the M2 measure of the money supply peaked in April 2022 and is down 4.3% since.  We haven’t had a drop like that since the early 1930s during the Great Depression.  Yes, the monetary base is up 10.7% in the past year, but unless that base money is converted into M2, it likely has little impact.  Following the 2008-09 financial crisis, quantitative easing didn’t turn into M2 and inflation remained tame…but during COVID, QE did cause M2 to spike, and inflation jumped.

Meanwhile the slope of the yield curve between the target federal funds rate and the 10-year Treasury yield has been inverted since late 2022, a typical sign of tight money.  And while not as clear cut, the federal funds rate has been 2.0 percentage points, or more, above inflation in the past six months.  While we would say these rates are roughly neutral, not really helping or hurting growth, this is a huge change from the 2009-2021 period, when rates were held well below inflation.

Think of it this way: imagine you’re trying to freeze water, at sea level.  A thermometer shows the temperature is 25⁰F and the water isn’t freezing.  Does this mean the laws of chemistry and physics have been repealed?  Of course not!  Any sensible person would think that the thermometer must be broken, or maybe the liquid you’re trying to freeze isn’t water after all.     

Which brings us to one signal of monetary tightness that hasn’t been triggered yet.  History suggests that interest rates should be roughly equal to “nominal” GDP growth (real GDP growth plus inflation) – a cousin to what is called the “Taylor Rule.”  Nominal GDP is up 5.9% in the past year and a 6.5% annual rate in the past two years.  Yet, the federal funds rate is just 5.4%.  That’s not tight money!  Maybe that’s the measure of tightness we should have been following all along.

In other words, maybe one of the reasons we haven’t yet experienced economic turbulence is that monetary policy hasn’t been as tight as most investors thought.  If so, it could take much longer to bring inflation down to 2.0% than the Fed expects, which means short-term rates could stay much higher for much longer.

In turn, that would mean more economic pain ahead than most investors currently expect.  Some calls are hard to make no matter how much time is left in the game.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist 

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Posted on Monday, April 8, 2024 @ 10:23 AM • Post Link Print this post Printer Friendly
  Nonfarm Payrolls Increased 303,000 in March
Posted Under: Data Watch • Employment • Government • Inflation • Markets • Fed Reserve • Interest Rates
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Implications:  The labor market showed strength in March: good news for workers, but bad news for those hoping for early or more aggressive rate cuts from the Federal Reserve.  Nonfarm payrolls rose 303,000 in March, the largest increase in ten months, and were revised up by 22,000 for prior months, bucking the general trend of negative back revisions.  Meanwhile civilian employment, an alternative measure of jobs that includes small-business start-ups, increased a robust 498,000 in March.   Much has been written lately about whether the immigration surge at the border is a force behind solid continued job growth.  If so, you’d expect job growth in the payroll survey to beat the growth of civilian employment (which is based on a survey of households that probably fails to measure illegal immigrants).  That didn’t happen in March, when employment growth beat payroll growth, but it is apparent over the past year, as payrolls have grown 2.9 million while the employment measure is up only about 600,000.  The alternative reason for the general trend of slower employment growth is that this is what sometimes happens when the economy is at a turning point toward a recession.  In the meantime, there was plenty of other good news in March.  Average weekly hours increased to 34.4 from 34.3 in February, and total hours worked rose 0.5% for the month.  In addition, average hourly earnings increased 0.3% and are up 4.1% in the past year, which is running a little ahead of inflation.  The labor force rose 469,000 in March, pushing the participation rate back up to 62.7%.  However, not all the news was quite as good.  We like to follow payrolls excluding government (because it's not the private sector), education & health services (because it rises for structural and demographic reasons, and usually doesn’t decline even in recession years), and leisure & hospitality (which is still recovering from COVID Lockdowns).  That “core” measure of payrolls rose a more modest 95,000 in March and is up only 61,000 per month in the past year.  Also, the household survey shows full-time employment down in the past year, which usually only happens in and around recessions.  In addition, given the strength in headline overall payrolls, the Fed has to question whether monetary policy is really tight, given also that CPI inflation remains stubbornly above 3.0%.   As a result, the Fed could stay higher for longer, which could hurt more when the effects of tighter money eventually bite.

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Posted on Friday, April 5, 2024 @ 11:23 AM • Post Link Print this post Printer Friendly
  Three on Thursday - Looking at the S&P 500 Index Q1 Performance
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This week’s edition of “Three on Thursday” looks at the S&P 500 Index over the first quarter of 2024. Widely regarded as a barometer for the overall stock market, the S&P 500 Index tracks the performance of 500 of the largest companies listed on U.S. stock exchanges. In the first quarter, the S&P 500 Index delivered a total return of 10.6%, its 11th best start to a year in history. The S&P 500 Index hit all-time highs 22 times over the period, with only a 1.7% maximum drawdown over the quarter. 

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Posted on Thursday, April 4, 2024 @ 3:51 PM • Post Link Print this post Printer Friendly
  The Trade Deficit in Goods and Services Came in at $68.9 Billion in February
Posted Under: Data Watch • Employment • Trade
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Implications:  The trade deficit in goods and services grew to $68.9 billion in February as imports rose faster than exports.  However, we prefer to focus on the total volume of trade, imports plus exports, as it shows the extent of business and consumer interaction across the US border. This measure grew substantially in February, rising by $13.0 billion, pushing total trade volume up 3.4% from a year ago. Exports are now up 4.1% versus a year ago, while imports are up 2.8%.  Notably, there is a major shift going on in the pattern of US trade.  Through the first two months of the year, imports from China were down 1.7% versus the same period in 2023.  China used to be the top exporter to the US.  Now the top spot is held by Mexico as China has fallen to number two with Canada nipping at its heels.  Meanwhile, global supply chain pressures have eased substantially over the past few years.  This was confirmed by the New York Fed’s Global Supply Chain Pressure Index in February, with the index moving back into positive territory, 0.11 standard deviations below the index’s historical average. For some perspective, two years ago in the month of February the index sat 2.77 standard deviations above the index’s historical average.  Expect some temporary volatility though as Yemen’s Houthi rebels continue to deter container ships from transiting the Red Sea and Bab-el-Mandeb Strait, adding volatility to shipping costs.  Also in today’s report, the dollar value of US petroleum exports exceeded imports once again.  This marks the 24th consecutive month of the US being a net exporter of petroleum products. In employment news this morning, initial claims for jobless benefits rose 9,000 last week to 221,000, while continuing claims declined by 19,000 to 1.791 million. We expect Friday’s payroll report to show a nonfarm payroll gain of 212,000 in March.

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Posted on Thursday, April 4, 2024 @ 12:12 PM • Post Link Print this post Printer Friendly
  The ISM Non-Manufacturing Index Declined to 51.4 in March
Posted Under: Autos • Data Watch • Employment • Inflation • ISM Non-Manufacturing • Markets
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Implications:  The services sector continued to expand in March, but the pace of growth slowed. The headline index declined to 51.4 in March, missing the consensus expected 52.8, with twelve out of eighteen major industries reporting growth, four reporting contraction, and two reporting no change.  Looking at the details, the indexes for business activity and new orders – the two forward-looking pieces of the report – were a mixed bag in March. The index for new orders took a breather from the six-month high it set in February, while the index for business activity ticked up to a solid 57.4.  Along with slower new orders, the pullback in the headline index was due to faster deliveries in March (signaled by a lower sub-50 reading in the supplier deliveries index), and the employment index remaining in contraction territory.  (Faster deliveries signal fewer bottlenecks and therefore the potential of weaker demand.). Hiring activity in the services sector looks to be cooling, as the index sat in contraction territory for the third time in four months.  Survey comments reiterate the continued struggle finding qualified labor, while the number of major industries reporting an increase in employment in March versus a decrease was nearly the same.  On the inflation front, prices continued to rise in the services sector, now for the 82nd month in a row.  Although the index is well below the back-breaking pace from 2021-22, inflation remains a problem in the services sector; thirteen industries reporting paying higher prices during the month of March. What do we expect this year?  An eventual weakening in services activity as the economic morphine from COVID wears off and the impact of the recent reductions in the M2 measure of the money supply make their way through the economy.  We continue to believe a recession is on the way and think investors should stay cautious as we move through these unprecedented times.  In other news this morning, ADP’s measure of private payrolls increased 184,000 in March versus a consensus expected 150,000. We expect Friday’s payroll report to show a nonfarm payroll gain of 212,000. Also yesterday, cars and light trucks were sold at a 15.5 million annual rate in March, down 1.3% from February, but up 3.7% from a year ago.

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Posted on Wednesday, April 3, 2024 @ 11:49 AM • Post Link Print this post Printer Friendly
  The ISM Manufacturing Index Rose to 50.3 in March
Posted Under: Data Watch • Employment • Government • Inflation • ISM • Markets • Fed Reserve
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Implications:  The ISM Manufacturing Index showed some signs of life in March, rising to 50.3, and beating even the most optimistic forecast from any economics group surveyed by Bloomberg.  The reading above 50 signals that activity in the US manufacturing sector expanded in March (albeit barely), snapping sixteen consecutive months of contraction.  Looking at the details of the report, half of the eighteen major manufacturing industries reported growth in March, with six reporting contraction, and three reporting no change.  Both demand and production were responsible for the rise in the overall index, as the index for production jumped to 54.6 from 48.4, while the new orders index broke back into expansion territory for only the second time in the last nineteen months.  Survey comments described continued demand softness, but optimism that order activity will pick up in the second quarter.  Despite this optimism, demand remains soft in the manufacturing sector.  When looking at the big picture, goods-related activity was artificially boosted during the COVID lockdowns, but then the economy reopened, and consumers began shifting their spending preferences back to a more normal mix, away from goods and back to services. The ISM index peaked in March 2021 (the last month federal stimulus checks were sent out) and has been weaker ever since.  We continue to believe a recession is coming this year and the manufacturing sector is likely to lead the way.  Case in point, hiring activity in the manufacturing sector contracted for the sixth consecutive month as companies continued reducing headcounts in March with significant layoff activity. We believe investors should remain cautious as the monetary and fiscal stimulus during COVID wears off.  Last but not least, the highest reading of any category in the report came from the prices index, which increased to 55.8 in March.  After sitting in contraction territory for most of 2023, the prices index has been above 50 each month in 2024, signaling higher prices.  This is not a good sign for the Fed, as the goods sector has been a key driver for lower inflation readings over the last year.  In other news this morning, construction spending declined 0.3% in February, as a sizeable increase in homebuilding was not enough to offset broad declines across most other major construction categories.

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Posted on Monday, April 1, 2024 @ 12:46 PM • Post Link Print this post Printer Friendly
  Personal Income Rose 0.3% in February
Posted Under: Data Watch • Government • Home Sales • Inflation • Markets • PIC • Fed Reserve • Interest Rates • Spending • Bonds • Stocks
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Implications:  Consumers remain healthy, and inflation remains a concern. Let’s start with PCE prices – the Federal Reserve’s preferred measure of inflation – which rose 0.3% in February, bringing the twelve-month comparison to 2.5% (from 2.4% last month).  If the Fed wants “confidence” and “evidence” that inflation is sustainably trending towards 2.0% before starting rate cuts, Friday’s report was not very helpful.  “Core” prices, which exclude the ever-volatile food and energy categories, also rose 0.3% in February and are up 2.8% versus a year ago.  The Fed has prioritized a subset of inflation dubbed the “Supercore,” which is services only (no goods), excluding food, energy, and housing.  That measure rose 0.2% in February and is up 3.3% versus a year ago.  No matter which measure you choose, they all remain above the Fed’s 2.0% target and, given ongoing shipping disruptions in the Red Sea as well as unexpected events like the Francis Scott Key Bridge collapse near Baltimore, we would not be surprised to see volatility in the inflation numbers in the months ahead.  Looking toward the consumer in February shows incomes and spending both on the rise.  Personal income rose 0.3% in February following an outsized 1.0% gain in January (lifted by annual cost-of-living adjustments to social security and a jump in dividend income).  Income gains in February were led by private-sector wages and salaries, which rose 0.8% on the month and are up 5.4% in the past year.    Meanwhile, government pay rose 0.7% in February and is up 8.1% in the past year, the largest twelve-month increase in more than three decades. We don’t think the growth in government pay is sustainable or good for the overall US economy. Wage gains were partially offset in February by a drop in dividend income from January’s elevated numbers. Consumer spending rose a robust 0.8% in February, with rising spending on both goods and services.  The 1.4% gain in durable goods purchases was the largest single monthly gain since January of last year, as consumers picked up spending on motor vehicles and parts.  That said, spending on goods is up a modest 0.8% in the past year (which is less than inflation), as consumption has shifted toward the service side of the economy. Spending on services rose 0.9% in February – led by financial services and insurance – and are up 6.9% in the past year.   Expect services to continue to lead the charge in 2024, but with growth tempering as the economy slows.  In other recent news on the housing front, pending home sales, which are contracts on existing homes, rose 1.6% in February after declining 4.7% in January.  Plugging these figures into our model suggests existing home sales, which are counted at closing, will decline in March.

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Posted on Monday, April 1, 2024 @ 12:30 PM • Post Link 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.
 
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