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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  Will Turkey Trigger the Next Recession?
Posted Under: Video • TV • Fox Business
Posted on Monday, August 13, 2018 @ 2:24 PM • Post Link Share: 
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  The Kevlar Economy
Posted Under: Bullish • GDP • Government • Markets • Monday Morning Outlook • Fed Reserve • Spending • Taxes • Stocks

Since March of 2009, the predictions of economic, and stock market collapse have been non-stop.  Doom-and-gloomers have been unrelenting.  And it's doubly frustrating since you can't disprove a negative until it doesn't happen.

We have written hundreds of pieces since the recovery - and bull market – began, arguing that the pessimism was unjustified.  We've argued that Brexit, Grexit, resetting ARMs, student loans, government debt, Obamacare, no QE4, tapering,...etc., would not stop growth.  The doomsayers have been wrong. Constantly.  For our troubles we get labeled "perma-bulls", despite our arguments proving true.  Meanwhile, the "perma-bears" have never had to answer for their fallacious forecasts.

Now they're talking Turkey, tariffs, a strengthening dollar, China selling US debt, Fed rate hikes.  They never give up.  But, we still aren't worried. 

The United States, for the time being, is a Kevlar economy.  It's practically bulletproof.  By allowing other countries to maintain higher tariffs, America, the world's biggest consumer, has helped those countries grow.  By holding corporate tax rates higher than most other countries, the US has subsidized non-US growth.

But under new management, the self-sabotage is being eliminated.  Cutting corporate tax rates and reducing regulation have made the US more competitive.  No, we are not ignoring the negative impact of tariffs on some US producers and consumers, but tariffs hurt foreign countries more than they hurt America.

Countries without the Constitutional rule of law, property rights and true free markets need foreign help to grow.  The US is removing some of that help in making itself more competitive.  As a result, the US will continue to grow, while other countries suffer a loss of investment and sales.  Once again doomsayers will be proven wrong.

Yes, it's true that a slowdown in the growth of other countries can impact corporate earnings, or even have some impact on US growth, but the damage will not be nearly as great as the pouting pundits proclaim.  We still forecast 3%+ real GDP growth over the next few years, along with continued jobs growth and the lowest unemployment rate in decades.

Doomsayers, take note.  There are five real threats to prosperity: 1) Excessively tight Fed policy.  2) Excessive government spending.  3) Excessive regulation.  4) Tax hikes and 5) Trade protectionism.

Right now, the Fed is not tight, far from it.  Government spending is too high, that's why growth isn't even higher.  The Regulatory environment is improving.  Tax rates have been cut and are not likely to be hiked anytime soon.  Finally, tariffs are going up, but by a much smaller amount than taxes were cut.  We also do not expect a protracted trade war because that would harm other countries much more than the US.  Ultimately, we expect deals to bring tariffs down.

In other words, of the five threats, two are negatives (with trade likely to turn) and three are positives – and don't forget new and unbelievably positive technologies!  Someday, a recession will happen again, but for now the Kevlar economy will only get stronger.   

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

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Posted on Monday, August 13, 2018 @ 10:40 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, August 13, 2018 @ 8:22 AM • Post Link Share: 
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  The Consumer Price Index Rose 0.2% in July
Posted Under: CPI • Data Watch • Inflation

 

Implications:  Consumer prices continue to march higher, rising 0.2% in July and, at 2.9%, matched June's reading for the largest 12-month increase going back to 2011-12.  While rising energy prices have certainly contributed to the trend since oil prices bottomed in early 2016, inflation has been broad-based.  "Core" consumer prices – which exclude both food and energy costs – also rose 0.2% in July and are up 2.4% in the past year.  More importantly, this is a trend, not a one-month anomaly. Consumer price inflation has now exceeded 2.0% on a twelve-month basis in each of the last eleven months, while "core" prices have surpassed 2.0% on a twelve-month basis for each of the last five months.  To put the rise in perspective, consumer prices increased 1.7% for the twelve-months ending July 2017 and 0.8% for the twelve-months ending July 2016.  Taking a deeper look at today's report shows energy prices fell 0.5% in July, as prices for gasoline, natural gas, and electricity all declined.  Meanwhile food prices rose 0.1% in July, led higher by costs for fruits and vegetables.  Stripping out the food and energy components shows the 0.2% increase in core prices was once again led by owners' equivalent rent (the amount an owner would need to pay in order to rent their home on the open market).  On the wages front, real average hourly earnings were flat in July and are down 0.2% in the past year.  These inflation-adjusted hourly earnings have been stubbornly slow to move, however this earnings data does not include irregular bonuses – like the ones paid by companies after the tax cut or to attract new hires.  We expect a visible pickup in wage pressures in the year ahead. Paired with continued strength in employment (see the sneaky-strong July data released last Friday), the trend in inflation has put pressure on the Fed to keep up the pace of steady rate hikes. Expect two more hikes this year (for a total of four in 2018) with four more to follow in 2019, leaving monetary policy still accommodative but at a much more appropriate level given the pace of economic growth.

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Posted on Friday, August 10, 2018 @ 10:32 AM • Post Link Share: 
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  The Producer Price Index was Unchanged in July
Posted Under: Data Watch • Inflation • PPI

 

Implications:  Producer prices were flat in July – the first month of 2018 not to show an increase of at least 0.2% - as declining prices in a few select sectors held down inflation.  But even with the flat reading in July, the producer price index is up 3.3% in the past year, behind just last month for the largest twelve-month increase going back to late 2011.  A look at the details in July shows the ever-volatile food and energy sectors declined 0.1% and 0.5%, respectively.  Strip out these two components, and "core" prices rose 0.1% in July and are up 2.7% in the past year.  In other words, both core and headline PPI measures show inflation easily exceeds the Fed's 2% inflation target, reinforcing our projection for two more rate hikes this year and four hikes in 2019.  In addition to declines in food and energy prices, trade services prices (think margins to wholesalers and retailers) also dropped 0.8% in July.  This was likely the result of companies accepting smaller margins in the short-term, rather than raise prices for consumers, as input prices increase.  A look at recent ISM reports suggests strong order activity paired with difficulty finding qualified labor and freight truck drivers is putting pricing pressure on some industries.  Excluding declines in food, energy, and trade services, producer prices rose 0.3% in July.  We view July as an aberration and expect monthly data to show higher inflation in the months ahead.  In other news this morning, initial jobless claims declined 6,000 last week to 213,000.  Continuing claims rose 29,000 to 1.76 million.  These figures suggest job creation continues at a healthy pace in August.      

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Posted on Thursday, August 9, 2018 @ 10:13 AM • Post Link Share: 
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  No Recipe for Weak Housing

Something strange happened after last Friday's jobs report - the yield on the 10-year Treasury Note fell, finishing Friday at 2.95%, down four basis points from Thursday's close.  To us, this makes no sense. If anything, it serves to reinforce our view that the bond market is making a big mistake. 

Yes, we realize that July nonfarm payrolls (at +157,000) were lighter than the consensus expected 193,000.  But, as we wrote in our Data Watch, May and June were revised upward by a total of 59,000.  In other words, July payrolls were 216,000 higher than the Labor Department estimated in June.  If we assume these new workers make the average weekly wage, that equals $10.5 billion more in annualized earnings for American workers (216,000 x $933.23 x 52) – in just one month!

Meanwhile, civilian employment (an alternative measure of jobs that includes small-business start-ups) rose 389,000 in July, helping push the jobless rate down to 3.9%.  Even more impressive, the U-6 unemployment rate - what some people refer to as the "true" rate, which includes discouraged and marginally-attached workers as well as and those with part-time jobs who say they want full-time work - fell to 7.5%, the lowest reading since 2001. 

The Hispanic unemployment rate dropped to 4.5% in July, the lowest on record dating back to the early 1970s.  At 6.6%, the black jobless rate was not at a record low, however, these figures are volatile from month to month and have averaged 6.9% in the past year, the lowest 12-month average on record.  Notably, the unemployment rate among those age 25+ who never finished high school is 5.1%, also the lowest on record dating back to the early 1990s.  You sensing a trend?   

Put it all together and we see plenty of reasons to be optimistic about economic growth in the third quarter.  It's early, but right now we're tracking 4.5% real GDP growth in Q3, which would boost the year-over-year increase to 3.3%.  Some analysts tried to discount the growth in the second quarter because of a surge in exports, but we think the more important quirk in Q2 was that companies reduced inventories at the fastest pace since 2009.  A return to a more normal pace of inventory accumulation means a large boost to growth in Q3, more than offsetting any impact from trade.              

The conventional wisdom just can't wrap their collective heads around the idea that tax cuts and deregulation are truly boosting underlying growth.  And, like much of the previous nine years, keep looking for a reason to be bearish about the economy.  This time they think housing will collapse.  After all, housing starts fell in June, so did new home sales, and existing home sales have fallen for three straight months.

That said, it's too early to rule out that this is simply statistical noise.  These figures will go through some quite substantial revisions in the months and even years ahead.  The softness could be completely revised away.      

And remember, home building is still below fundamental levels, based on population growth and scrappage.  The US has about 138 million housing units, so annual population growth of 0.7% per year suggests we need to build about 950,000 new housing units per year (0.7% of 138 million).  Add to that homes replaced due to scrappage (voluntary knock-downs, fires, floods, hurricanes, tornadoes) and the 1.25 million housing starts of the past year simply isn't enough.             

Finally, while higher mortgage rates would pose a problem for homebuyers if everything else were unchanged, that's not the case.  Mortgage rates have moved higher because of faster anticipated economic growth.  In that environment, mortgage rates should be higher, and home-buying should move higher as well.  An economy with 3% real GDP growth and a jobless rate below 4% is going to create more buyers than the Plow Horse economy that prevailed from mid-2009 through the start of 2017.

In spite of our optimism, one of the things we know for sure about the next couple of years is that, from time to time, one part of the economy (or more) will lag others.  We expect the pouting pundits to use that weakness to predict doom and gloom.  We can't prove they will be wrong, just like we can't "prove" the sun will come up tomorrow.  But, for the past nine years we've disagreed with the pessimism, and we still do.  The economy - and housing - will continue to grow.  

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

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Posted on Monday, August 6, 2018 @ 11:11 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, August 6, 2018 @ 8:03 AM • Post Link Share: 
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  The ISM Non-Manufacturing Index Declined to 55.7 in July
Posted Under: Data Watch • Employment • ISM Non-Manufacturing

 

Implications:  If tariff-talk is causing some companies concern, it isn't stopping broad-based growth in the service sector.  While the pace of growth slowed in July, the ISM non-manufacturing index reading of 55.7 remains comfortably in expansion territory.    Sixteen of eighteen service sector industries reported growth in July, while two showed decline.  The most forward-looking indices – new orders and business activity – showed the largest declines in July, but they are coming off elevated levels (including June's business activity reading that represented the fastest pace of growth since 2005), and provide no cause for concern.  Given the continued healthy pace of activity, expect the service sector to continue humming along in the coming months.  The supplier deliveries index also showed a decline in July, returning to more "normal" levels after a decade-high reading in May.  That said, deliveries continue to be delayed due to driver shortages in freight trucking.  These delays, paired with continued strength in new orders are putting upward pressure on prices that looks likely to remain over the intermediate term.  While this is not a sign that prices are going to take off any time soon, it does suggest inflation will continue to run above the Fed's 2% target, which has already been breached by all three key inflation measures – PPI, CPI, and the Fed's favored PCE index.  When considered alongside the stronger wording in Wednesday's FOMC Statement, two more rate hikes in 2018 look very likely, and we expect four rate hikes in 2019.  On the labor front, the employment index rose to 56.1 from 53.6 in June.  That's in-line with this morning's employment report, which we analyze in more detail here.  Taken together, today's report on the service sector shows the boost in growth thanks to tax cuts and deregulation is continuing into the second half of 2018.

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Posted on Friday, August 3, 2018 @ 1:55 PM • Post Link Share: 
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  Nonfarm Payrolls Rose 157,000 in July
Posted Under: Data Watch • Employment

 

Implications:  The July employment report was sneaky strong.  The big headline was that nonfarm payrolls rose 157,000 in July, which was less than the forecast of any economics group.  However, payroll growth was revised up 59,000 for May and June, meaning the net gain for the July report was 216,000, which beat the consensus expected gain of 193,000.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups rose 389,000.  In the past year, nonfarm payrolls are up 200,000 per month while civilian employment is up 179,000 per month, both strong numbers.  The gain in civilian employment in July helped push the unemployment rate down to 3.9%, despite an increase in the labor force, which is up 1.5 million in the past year.  Moreover, the U-6 unemployment rate, which includes discouraged and marginally-attached workers, as well as those working part-time who say they want full-time jobs, fell to 7.5%, the lowest level since 2001.  The participation rate remained at 62.9% in July, near the higher end of its past 4+ year range (62.3% and 63.1%).  Meanwhile, the share of the age 16+ population that's working hit 60.5%, the highest since 2009.  As always, we like to measure growth in workers' total cash earnings.  Average hourly earnings rose 0.3% in July and are up 2.7% in the past year.  Total hours worked are up 2.2% in the past year.  As a result, total cash earnings – which exclude extra earnings from irregular bonuses and commissions, like those paid out after the tax cut was passed – are up 5.0% in the past year, more than enough to keep pushing consumer spending higher.  Looking ahead, don't be surprised by a soft August report given the past pattern of soft initial jobs reports for that month.  However, we expect any weakness to be revised up in later months and for job growth to remain robust in the year ahead, while the jobless rate keeps trending down.  The bottom line is that nothing in today's report derails our forecast that the Federal Reserve will raise rates twice more this year – 25 basis points each time – and four more times in 2019. 

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Posted on Friday, August 3, 2018 @ 1:45 PM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $46.3 Billion in June
Posted Under: Data Watch • Trade

 

Implications: With all the "trade war" rhetoric getting thrown around lately, many are getting the impression that the age of globalization is coming to an end. What you will not hear about as much is how trade continues to show strength in the global economy!  We like to follow the total volume of trade – imports plus exports – which signals how much value consumers find in the global economy. Total US trade hit a new record all-time high in June.  Pharmaceuticals played an outsized role for the month, driving two-thirds of the increase in the trade deficit.  The Trump Administration's initial round of tariffs on $34 billion of Chinese goods went into effect at the beginning of July.  It looks like pharma companies may have stocked up on the ingredients to create certain drugs in June – many of which come from China and are under threat of a 25% tax – to dodge higher costs.  Despite this, in the past year exports are up 9.8%, outpacing the growth in imports, which are up 8.6%, signaling very healthy gains in the overall volume of international trade and outstripping nominal GDP growth of 5.4% in the past year.  While many are worried about protectionism from Washington, 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.  Most likely, what will ultimately come from all the chaos will be better trade agreements for the United States.  According to the World Trade Organization, average tariffs in the US are 3.4% compared to 5.1% in the EU, 9.8% in China, 4.0% in Canada and 6.9% in Mexico.  It's time for tariffs to be lowered around the world, and the US holds a lot of leverage.  For example, President Trump and the EU recently announced a trade "ceasefire" and a tentative deal to move toward zero-tariffs on all non-auto industrial goods. Moreover, many of the policies President Trump has passed, including cutting tax rates and allowing for construction of more energy infrastructure, will make the US an even stronger magnet for capital from abroad.   We will continue to watch trade policy as it develops, but don't see any reason yet to sound alarm bells.

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Posted on Friday, August 3, 2018 @ 12:37 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.
 
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