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   Brian Wesbury
Chief Economist
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  The Consumer Price Index (CPI) Increased 0.8% in April
Posted Under: CPI • Data Watch • Government • Inflation • Fed Reserve • Interest Rates • Spending • COVID-19

Implications:  Consumer prices rose in April at the fastest pace in more than a decade as supply chains struggled to keep up with rapidly rising demand.  The April rise of 0.8% comes after increases of 0.6% in March and 0.4% in February, bringing the three-month change to a 7.2% annual rate, the fastest increase since 2008.  Usually, when we get a sudden sharp spike in inflation, it's because of energy prices, but not this time.  Energy prices declined 0.1% in April while food prices, also sometimes a source of volatility, rose a relatively moderate 0.4%.  Instead, it was "core" prices, which exclude food and energy, that led overall consumer prices higher in April.  Core prices rose 0.9%, the largest monthly increase since 1982.  The leading driver of the increase in core prices was used cars and trucks, which rose 10% in just one month, the largest gain ever for the series, which dates back to 1953.  Other key contributors were airfares (+10.2%), hotels/motels (+8.8%), and car and truck rentals (+16.2%).  Overall consumer prices are now up 4.2% versus a year ago, while "core" prices are up 3.0%.  Of course the Federal Reserve is going to claim these increases are "transitory", which is its way of saying there is no need to change monetary policy.  And yes, we do not expect prices to continue to rise at the recent rapid clip.  But that doesn't mean we aren't headed for persistently higher inflation.  The M2 measure of the money supply is up 24% from a year ago, the federal government has ramped up "stimulus" efforts, and employers need to lift wages rapidly to compete with abnormally high unemployment benefits.  Math wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.  Meanwhile, we should expect a much higher energy inflation reading in the month of May due to the cyber-attack on the Colonial Pipeline, which carries about 45% of the fuel consumed on the East Coast.  Inflation will be a front and center issue for markets and policymakers in 2021 and beyond.

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Posted on Wednesday, May 12, 2021 @ 12:05 PM • Post Link Share: 
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  Recovery Tracker 5/11/2021
Posted Under: Bullish • COVID-19

The table and charts above track high frequency data, which are published either weekly or daily. With most states reopening their economies and widespread distribution of a vaccine, these indicators show continued improvement in economic activity.  From an economic standpoint the worst is over and activity continues to improve. It won't improve in a straight line, but the trend should remain positive over the coming months and quarters. The charts highlight where the high frequency indicators were in 2019, 2020,and in 2021.

The enlarged data can be found here.
Posted on Tuesday, May 11, 2021 @ 2:38 PM • Post Link Share: 
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  Biden and Powell Versus Summers and Dudley
Posted Under: CPI • Government • Inflation • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending

One of the best economic debates that's happening right now isn't between Republicans and Democrats or liberals versus conservatives, it's between policymakers who want to go full steam ahead with as much fiscal and monetary "stimulus" as possible and center-left economists who worry about the economic effects of over-stimulating the economy. 

In one corner we have President Joe Biden and Fed Chief Jerome Powell.  Biden signed a $1.9 trillion stimulus bill back in March and is asking for more than $4 trillion in additional measures.  Powell has the Federal Reserve setting short-term interest rates at essentially zero and buying $120 billion per month in Treasury and mortgage-related securities.  Moreover, the Fed is committed to keeping these policies in place for the foreseeable future.  As far as Biden and Powell are concerned, any problems that might arise from overstimulating the economy can be dealt with when and if the economy shows clear signs of overstimulation.  

In the other corner we have Larry Summers and William Dudley, both center-left economists.  Summers was Treasury Secretary under President Clinton and ran the National Economic Council under President Obama; Dudley was the chief economist for Goldman Sachs and ran the New York Federal Reserve Bank from 2009 to 2018.  Supply-siders, conservatives, or Republicans, these are not. 

Summers has called Biden's efforts the "least responsible" macroeconomic policy in forty years (by which he means the least responsible since President Reagan's) and has argued the amount of extra spending is far in excess of what's needed to get the economy back to where it would have been in the absence of COVID-19.  "If your bathtub isn't full, you should turn the faucet on, but that doesn't mean you should turn it on as hard as you can and as long as you can," Summers said earlier this year on National Public Radio. 

In turn, Summers is concerned the extra spending will generate too much inflation, the Fed will have to address the increase in inflation by tightening monetary policy earlier than it would otherwise want to, and when the Fed tightens monetary policy to address inflation, it usually ends badly for the US economy.

Summers sees only a one-in-three chance of robust growth without inflation for the US, with the other two-thirds split between two different negative scenarios: (1) stagflation or (2) the Fed applying the brakes so hard it tips the economy into a recession.

Meanwhile, William Dudley has also issued warnings, saying that he thinks the Fed is putting itself in a position where when it eventually starts to raise rates, it's going to have to do so aggressively.  If the Fed is too slow to tighten, says Dudley, it will have to eventually "catch up," and that caching up will not be "pleasant" for financial markets.  A 10-year Treasury Note yield of 4.0% would be possible in this scenario, says Dudley.

What's notable about Summers and Dudley is not only their center-left pedigrees but also that neither is likely to pursue a position in the Biden Administration, which means they have no reason to "spin" their views to get an important appointment.  As such, they can say what they think, without fear of losing out on an offer of a political job.

The bottom line is that politics doesn't make good economics.   No one knows for sure where these unprecedented policies are going to take us.  However, at least Summers and Dudley are thinking about how risky this riverboat gamble might be.             

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

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Posted on Monday, May 10, 2021 @ 11:35 AM • Post Link Share: 
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  COVID-19 Tracker 5/7/2021
Posted Under: COVID-19
The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective.

Click here to view the one page report
Posted on Friday, May 7, 2021 @ 3:35 PM • Post Link Share: 
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  Nonfarm Payrolls Increased 266,000 in April
Posted Under: Data Watch • Employment • Government • COVID-19

Implications:  The April employment report was disappointing, but not a total dud.  It was disappointing because payrolls increased only 266,000 for the month, a huge miss versus the 1,000,000 gain the consensus expected and well lower than the forecast from any economics group.  Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased a similar 328,000 and the unemployment rate ticked up to 6.1%.  Manufacturing, retail, transportation & warehousing, professional & business services, and education all lost jobs in April.  But all the news on the labor market wasn't bad and some of it was downright positive.  Average weekly hours hit 35.0 in April, tying a record high, and the total number of private-sector hours worked increased 0.5%.  This kind of increase in hours would normally be associated with an increase in private payrolls of about 600,000, not the 218,000 by which private payrolls actually grew in April.  Meanwhile, average hourly earnings rose 0.7% in April, even as many employers were bringing back lower-paid workers; for example, leisure and hospitality payrolls increased 331,000.  Combining average hourly earnings and hours worked, total earnings rose 1.2% in April and are now 1.9% higher than they were in February 2020, pre-COVID.  Put it all together and we have a labor market where employers are willing to pay more (higher wages!) and want more workers (more hours!), but are having trouble enticing people to take jobs.  This is a sad situation that is largely a result of government policy.  We think the key factor here is the extra unemployment benefits, which will run through early September, that enable many workers to earn about as much (or more!) by not working as by getting a job.  Notably, the entire increase in the jobless rate in April was due to workers who never went to college, for whom government benefits might be a more attractive alternative.  Given the improvement in the overall economy in reaction to the distribution of vaccines, looser COVID-related rules on economic activity, and policies oriented toward short-term economic growth, look for stronger payroll reports in the months ahead, particularly if other states follow Montana's lead and reject beefed-up unemployment benefits.  In spite of today's report, the US economy is still getting back on its feet.  Removing overly generous government benefits would help it become sturdier even faster.

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Posted on Friday, May 7, 2021 @ 11:05 AM • Post Link Share: 
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  Nonfarm Productivity Increased 5.4% at an Annual Rate in the First Quarter
Posted Under: Data Watch • Employment • Productivity • COVID-19

Implications: After declining in the fourth quarter, productivity bounced back in Q1 rising at a 5.4% annualized rate. The Q1 increase in nonfarm productivity came as output and hours worked both rose.  Looking at the details shows that output in Q1 rose at a faster pace than hours worked pushing output per hour higher. The 2.9% annualized increase in the hours worked index still leaves this measure 4.3% lower than it was in the Q4 of 2019, the last quarter not affected by the COVID-19 pandemic. Output, however, with the 8.4% annualized increase in the Q1, is now only 0.6% below the level in the fourth quarter of 2019.  Productivity is up 4.1% from a year ago, the fastest four-quarter increase since 2010.  "Real" (inflation-adjusted) compensation per hour rose at a 1.3% annualized rate in Q1.  This is good news as it's still most likely being artificially held down by many lower-paid workers finally getting hired back after being furloughed in early 2020.  That process of rehiring lower-paid workers has put downward pressure on the average amount paid per hour.  Looking at the year-over-year change to cut through some of the volatility from the past few quarters shows "real" compensation is up 3.8%.  On the manufacturing front, productivity grew at a 0.1% annualized rate as output rose slightly faster than hours.  Problems with supply-chain management are holding down output growth in the manufacturing sector.  It may sound counterintuitive, but big increases in productivity regularly occur during recessions because businesses tend to let go of their least productive workers as they focus on managing costs and boosting efficiency. We are now well into a recovery but expect these efficiencies to continue to play out over the coming quarters. In other news this morning, initial jobless claims fell 92,000 last week to 498,000, a new pandemic low. Meanwhile, continuing claims for regular benefits rose 37,000 to 3.690 million. These numbers are consistent with our forecast that nonfarm payrolls rose 990,000 in April with the unemployment rate falling to 5.8%.

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Posted on Thursday, May 6, 2021 @ 2:07 PM • Post Link Share: 
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  The ISM Non-Manufacturing Index Declined to 55.3 in February
Posted Under: Data Watch • Inflation • ISM • ISM Non-Manufacturing

Implications:  Growth in the service sector cooled in April from the record-setting pace in March, but it didn't slow by much.  In fact, the April reading of 62.7 is the second highest level recorded for the index since the series began back in 1997.  In other words, the service sector is off to a very strong start in the second quarter of 2021.  Seventeen of eighteen industries reported growth in April, with agriculture, forestry, fishing & hunting (that's one combined category) reporting a decline.  Given the broad-based pickup in activity, it's little surprise that survey respondent comments remain overwhelmingly positive.  A respondent from the accommodations & food services industry put it best, noting "Restaurant capacity is increasing quickly as restrictions are removed. Consumers have pent-up demand; sales are increasing, and the labor pool is tight.  Supply chain is challenged at every level as businesses across the U.S. ramp up."  Where cautious comments did appear, they revolved heavily around labor shortages and continued supply-chain issues (note the supplier deliver index – which rises as companies report longer delivery delays - rose to 66.1 from 61.0 in March), which in turn puts upward pressure on prices.  Thirty-two commodities were reported up in price (and seventeen listed in short supply) in April, driving the prices paid index to 76.8, the highest reading in more than a decade.  The two most forward-looking indices – business activity and new orders – cooled in April, as they came off all-time highs.  Remember, levels above 50 signal growth, so both orders and production continue to grow at a very healthy clip, just a modest easing from the blistering pace of March. A combination of the vaccine roll-out and states' easing restrictions provided a tailwind.  Case in point, New York and New Jersey are lifting capacity constraints in the coming weeks, with New York City dining in particular opening back to levels not seen since shutdowns began last spring.  With demand strong, companies are moving to fill positions, as shown by the employment index rising to 58.8 from 57.2 in March.  In other news this morning, the ADP employment report showed 742,000 private-sector jobs gained in April, falling short of the consensus expected 850,000. While tomorrow's data on initial claims may alter our forecast, we currently expect this Friday's official employment report to show a nonfarm payroll gain of 990,000.  And we forecast strong job growth to continue as we move toward the second half of the year.  With each passing day, we get one step closer to getting back to "normal."  That – not checks out of Washington - is the best possible stimulus the U.S. economy could possibly ask for. 

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Posted on Wednesday, May 5, 2021 @ 1:39 PM • Post Link Share: 
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  Recovery Tracker 5/4/2021
Posted Under: COVID-19

The table and charts above track high frequency data, which are published either weekly or daily. With most states reopening their economies and widespread distribution of a vaccine, these indicators show continued improvement in economic activity.  From an economic standpoint the worst is over and activity continues to improve. It won't improve in a straight line, but the trend should remain positive over the coming months and quarters. The charts highlight where the high frequency indicators were in 2019, 2020,and in 2021.

The enlarged data can be found here.
Posted on Tuesday, May 4, 2021 @ 3:31 PM • Post Link Share: 
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  Coronavirus High Frequency Data 05/04/21
Posted Under: COVID-19

Source: First Trust Advisors, Bloomberg, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, OpenTable, Transportation Security Administration, Energy Information Administration, American Staffing Association, Flight Radar 24

2019 Level and % Change 2019 is from the same week in 2019, unless otherwise noted.

1 Data for level and 2019  level are both YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows change in seated diners from 2021 to 2019 at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.
Posted on Tuesday, May 4, 2021 @ 1:58 PM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $74.4 Billion in March
Posted Under: Data Watch • Trade • COVID-19

Implications: The trade deficit in goods and services grew to $74.4 billion in March, the largest on record, as both exports and imports rose, but imports increased faster than exports. But what really matters is that both exports and imports increased, consistent with the economic recovery in the US and global economic activity slowly  picking back up. The total volume of trade (imports plus exports), which signals how much businesses and consumers interact across the US border, grew 6.5% in March, and is up 13.7% versus a year ago.  Imports now stand at an all-time high, while exports are still down 7.0% from a peak in 2018.  March's gains easily reverse the drops we experienced in February as severe winter weather wreaked havoc across much of the United States.  What did continue into March, though, was the petroleum deficit.  After 13 months of a petroleum product surplus, the trend reversed in February as the dollar value of US petroleum exports was smaller than imports and it continued in March.  We do not believe this will continue for more than a few months, if that long, as weather was a one-off factor.  Horizontal drilling and fracking have transformed the global energy market and the US is no longer hostage to foreign oil. Supply-chain issues continue as ports remain overwhelmed in the US.  The port of Los Angeles, the largest in the US, currently has nine container vessels at anchor waiting to be unloaded with the average anchorage time right now at 6.8 days. The good news is this is a massive improvement from a month or two ago.  Expect trade to keep expanding in the coming months as businesses across the US get back on their feet as the COVID-19 vaccine continues to roll out.  We could continue to see larger deficits in the months ahead as the US is recovering from the coronavirus pandemic faster than most other countries. This means the demand for imports should continue to outstrip the demand for exports to the rest of the world. As we have said over and over, the best stimulus the economy could possibly ask for is a COVID-19 vaccine. There have now been over 312 million doses distributed in the US with over 246 million administered, mostly to those over 65 years of age. The economy is starting to return to normal; the last thing it needs is too much fiscal stimulus.  In other recent news, cars and light trucks were sold at a 18.5 million annual rate in April.  Sales increased 3.1% from March and are up a massive 112.2% from a year ago, when hard restrictions were in effect across the country.  Expect sales to continue at a solid pace over the next few months as the weather warms and the economy reopens.

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Posted on Tuesday, May 4, 2021 @ 12:15 PM • 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.
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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