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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Industrial Production Declined 0.3% in December
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production took a breather in December, though the details of the report were much better than the headline, with the weakness coming from the volatile auto and utilities sectors.  The 4.7% decline in auto production in December represents a return to a more normal pace after the 12.8% surge in November, which was the largest monthly gain since 2009, as GM employees returned to work following the conclusion of a strike.  Excluding the auto sector, manufacturing rose a healthy 0.6%.  Notably, manufacturing has been accelerating lately, up at an annualized pace of 1.9% over the past three months versus a decline of 1.3% over the past year.  Turning to utilities, output dropped due to unseasonably warm weather in December which reduced demand for heating following unusually cold weather in November.   Finally, mining output rose 1.3% in December, fueled by an increase in oil and gas extraction.  Taking 2019 as a whole, industrial production hit a record high, eking out a 0.8% gain over 2018.  We expect faster growth in 2020 as we put some of the major headwinds for the factory sector behind us.  The GM strike is over, USMCA has been passed, and a Phase One trade deal with China has been signed.

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Posted on Friday, January 17, 2020 @ 10:51 AM • Post Link Share: 
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  Housing Starts Increased 16.9% in December
Posted Under: Data Watch • Home Starts • Housing


Implications:  Housing starts ended 2019 with a bang, posting the largest monthly gain since 2016 and absolutely crushing consensus expectations.  At an annualized sales pace of 1.608 million, starts hit the highest level since 2006.  For 2019 as a whole, builders started 1.298 million homes, a 3.9% increase versus 2018 and a tenth consecutive annual gain.  Activity was broad-based in December as well, with every major region posting gains and both single-family and multi-unit construction rising to post-recession highs.  Some of the surge in home building in December is surely weather-related, with unusually mild weather for the month in sections of the country often hit by colder winter temperatures.  As a result, expect a drop in housing starts in January.  However, 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 about 1.5 million homes to be started each year.  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.  Note that not all the news in today's report was great.  Building permits took a breather in December, falling 3.9% after hitting a post-recession high in November. The decline was due to both single-family and multi-unit properties.  As a whole, permits rose 1.5% in 2019 versus 2018.  In other recent housing news, the NAHB index, which measures sentiment among homebuilders fell one point to 75 in January after hitting a 20-year high of 76 in December.  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 Friday, January 17, 2020 @ 10:23 AM • Post Link Share: 
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  Retail Sales Rose 0.3% in December
Posted Under: Data Watch • Retail Sales


Implications: A trifecta of solid news out on the economy today. First, a solid report out of the retail sector, where sales rose 0.3% in December, matching consensus expectations, and are up 5.8% from a year ago.  In December, sales gains were broad-based, rising in twelve of the thirteen major retail categories led by gas stations and building materials.  The only decline was for autos, which dropped 1.3%.   "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) grew 0.4% in December and are up 6.0% from a year ago.  However, core sales were revised down in October and November.  Plugging today's report into our models suggests real GDP grew at around a 2.5% annual rate in Q4, although we may adjust this estimate when we get tomorrow's report on industrial production as well as late month data on inventories and international trade in December.  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.  Second, in other news this morning, initial jobless claims fell 10,000 last week to 204,000, rock-bottom levels, while continuing claims declined 37,000 to 1.767 million.  Third, on the manufacturing front, the Philly Fed Index, a measure of East Coast factory sentiment, jumped to +17.0 in January from +2.4 in December.  This is the highest level since May of 2019. In other news this morning, import prices rose 0.3% in December, driven by an increase in fuel prices.  Export prices fell 0.2% due to both lower agricultural and nonagricultural prices.  In the past year, import prices are up 0.5% while export prices are down 0.7%.  Given loose monetary policy, expect higher inflation in 2020.

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Posted on Thursday, January 16, 2020 @ 1:04 PM • Post Link Share: 
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  The Producer Price Index Rose 0.1% in December
Posted Under: Data Watch • Inflation • PPI


Implications:  Following in the tracks of yesterday's report on consumer prices, today's print on producer prices shows prices moving higher, but at a modest pace.  Producer prices rose 0.1% in December as gasoline prices – up 3.7% - led the index higher.  Food prices declined in December as rising costs for fresh fruit and pork were more than offset by a decline in prices for beef and veal.  Strip out these typically volatile food and energy categories, and "core" prices rose 0.1% in December. Over the past twelve-months, core prices are up 1.1%, the smallest year-to-year increase since late 2016.  Within core prices, the cost of goods rose 0.3% in December and has shown acceleration of late.  While goods prices are up 1.1% in the past year, they have risen at a faster 1.6% annualized rate over the past six months, and a 5.3% annualized rate over the past three months. This has flowed through to the headline index as well, where producer prices are up 1.3% in the past year but up at a 2.0% annualized rate in the past three months. Service prices, meanwhile, were unchanged in December following the 0.3% decline in November, which matched the largest monthly drop for that series since early 2015.  Within services, margins for trade wholesalers fell 0.3%, but that was offset by an increase in costs for transportation and warehousing.  We expect both headline and core prices to trend toward 2% in 2020. Further down the pipeline, prices for intermediate demand processed goods rose 0.1%, while intermediate demand unprocessed goods increased 1.8%.  Both intermediate demand categories continue to show prices broadly lower compared to year-ago levels, but, as with the measures noted above, prices have been accelerating of late.  Some may point to today's report as a sign that low inflation should still be a concern for the Fed, urging them to continue rate cuts in 2020, but we think that would be a mistake.  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 Fed intervention.  In manufacturing news this morning, the Empire State Index, which measures factory sentiment in the New York region, rose to +4.8 in January from +3.3 in December, signaling continued growth in that area of the country. 

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Posted on Wednesday, January 15, 2020 @ 11:20 AM • Post Link Share: 
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  2020 Economic and Market Outlook
Posted Under: Bullish • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Stocks • Wesbury 101
Posted on Wednesday, January 15, 2020 @ 9:17 AM • Post Link Share: 
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  The Consumer Price Index Rose 0.2% in December
Posted Under: CPI • Data Watch • Inflation


Implications:  Consumer prices rose 0.2% in December, ending the year up 2.3%. And inflation is accelerating, up at a 2.5% annualized rate over the past six months and a 3.4% annualized rate over the past three.  Energy prices rose 1.4% in December, while food prices rose 0.2%.  Strip out the typically volatile food and energy sectors, and "core" prices rose 0.1% in December.  Within core inflation, the rise in December can largely be attributed to medical care costs, up 0.6% on the month led higher by prescription drug prices, and shelter, up 0.2%.   This upward pressure on prices was partially offset by declining costs for used vehicles and airfare, down 0.8% and 1.6%, respectively, in December.  Like the headline reading, 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-two consecutive months.  That's a signal that everything is looking A-OK.  Not too fast, not too slow, just right.  Add in employment data continuing to show strength (as it has done through both rate hikes and cuts, suggesting monetary policy is having little impact on the labor market), and it makes sense that the Fed signaled at the last meeting that it doesn't expect further rate cuts unless we see a material change in the economic outlook.  On the wage front, real average hourly earnings declined 0.1% in December 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 new year. 

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Posted on Tuesday, January 14, 2020 @ 12:23 PM • Post Link Share: 
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  The Gift That Keeps Giving
Posted Under: GDP • Government • Monday Morning Outlook • Productivity • Taxes

The US economy is not in an economic boom, but growth has been consistently faster than during the Plow Horse phase from mid-2009 through the end of 2016.  Real GDP has grown at a 2.6% annual rate since the start of 2017 versus 2.2% beforehand.

But most analysts expect a noticeable slowdown in 2020; not a recession, but slimmer 1.8% real GDP growth (Q4/Q4).  This is an even steeper decline than the 2.2% consensus forecast for 2019 that analysts made a year ago.  By contrast, we're forecasting real GDP growth in the 2.5 - 3.0% range in 2020. 

We're not trying to be contrarian, and don't think that label applies to us.  We're not just saying "up" because others are saying "down."  The reason our forecast is different is that most analysts are Keynesians, and we're supply-siders; they follow money, we follow incentives. 

As a result, they think the extra economic growth related to the tax cut was a temporary phenomenon, due to putting more money in the pockets of consumers and businesses.  Instead, we're focused on what the changes to the tax law do to the incentives to work, invest, and run businesses more efficiently.

That last part is particularly important given that the incentive effects of the Trump tax cut were focused so heavily on businesses.  Some analysts have claimed those tax cuts didn't work, noting that business investment in plant and equipment hasn't boomed. 

But the way businesses operate has changed substantially over recent decades.  The old way of raising worker productivity was by giving them more equipment.  Now companies push the work, the decisions, to the consumer by using Apps.  Instead of buying a shiny new computer, they figure out how to use computers and networks most effectively.  No wonder corporate profits have remained at such high levels.

This may also explain why productivity growth has accelerated in spite of lukewarm growth in the dollar value of business investment.  Productivity growth is normally strong early in an economic expansion, and then fades later on.  For example, productivity grew 3.7% in the first year of the current expansion.  In the next 6½ years it grew at a very weak 0.7% annual rate (through the end of 2016).  Since then, productivity is up at a much more respectable 1.4% rate.         

The economic expansion isn't going to last forever, but look for the US economy to continue to outperform the doubters until the doubters realize their model of how the economy works has a fundamental flaw.  

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

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Posted on Monday, January 13, 2020 @ 11:20 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, January 13, 2020 @ 11:16 AM • Post Link Share: 
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  Nonfarm Payrolls Rose 145,000 in December
Posted Under: Data Watch • Employment


Implications:  The job market keeps chugging along.  Nonfarm payrolls increased 145,000 in December, slightly slower than the consensus expected 160,000.  However, civilian employment, an alternative measure of jobs that includes small-business start-ups, grew 267,000.  In the past year, these two measures of jobs have been very close, on average, with payrolls up 176,000 per month while civilian employment has grown 165,000 per month.  Look for faster job growth in the next few months as the government ramps up temporary hiring for the once-in-a-decade Census.  The unemployment rate remained at 3.5% in December, but the U-6 measure of unemployment, which includes discouraged workers and part-timers seeking full-time jobs, fell to 6.7%, a record low (data go back to 1994), even lower than at the peak of the first internet boom in 2000.  The weakest part of today's report is that average hourly earnings grew only 0.1% in December and are up 2.9% from a year ago, which is slower than the 3.3% gain the twelve months ending in December 2018.  However, wage gains are still beating inflation and we expect the tight labor market to generate a re-acceleration of wage growth in 2020.  Even with the recent slowdown in the growth of average hourly earnings, total earnings by all private-sector workers combined are up 3.8% in the past year, which is enough to keep pushing consumer spending higher.  Notably, labor force participation among "prime-age" workers (25-54) hit 82.9% in December, the highest level since 2009.  Overall, the report bolsters the case that the Federal Reserve will not cut short-term interest rates in 2020.  Look for another healthy year for the labor market, with the jobless rate dropping to 3.2% by year end, the lowest since the Korean War.   

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Posted on Friday, January 10, 2020 @ 11:54 AM • Post Link Share: 
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  The ISM Non-Manufacturing Index Rose to 55.0 in December
Posted Under: Data Watch • 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.  And the growth was broad-based in December, with eleven industries reporting growth, while six showed decline.    The two most forward-looking indices – business activity and new orders – moved in opposite directions in December, with activity rising but orders slowing.  Companies reported increased order activity in November as remaining 2019 budgets were put to work, and healthy orders activity continued in December – though at a modestly slower pace, in part due to reduced holiday schedules.  Meanwhile, the pickup in orders from October and November led to a rise in activity as orders are filled.  Activity could have grown faster but for increasing lead times for materials and difficulty in finding qualified labor to fill additional positions (which shouldn't be a surprise with the unemployment rate at multi-decade lows).  Speaking of workers, the employment index slipped to 55.2 from 55.5 in November.  While we are waiting on tomorrow's ADP employment report and Thursday's initial claims data to finalize our forecast, we believe that Friday's employment report will show a print of around 154,000 nonfarm jobs added.   That represents a slowdown from the 200,000+ jobs added in November as GM workers returned from strike, but healthy growth nonetheless.  On the inflation front, the prices paid index was unchanged at 58.5 in December, as rising costs for beef, cheese, and fuel were offset by a decline in prices for steel and lettuce.  At the end of the day, the service sector report from the ISM should be given more weight than the manufacturing report when it comes to the outlook on the broader economy, but the media loves negative news and these data simply don't support their dour outlook.  Fear sells, even when the fear isn't justified.

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Posted on Tuesday, January 7, 2020 @ 11:45 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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