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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  Existing Home Sales Increased 1.4% in June
Posted Under: Data Watch • Home Sales • Housing • COVID-19

 

Implications: Existing home sales broke a losing streak in June, rising for the first time in five months due to modest gains in the supply of homes for sale and very strong demand.  The best news is that there are reasons to believe the worst of the inventory crunch is behind us.  New home construction remains strong, and now that the pandemic seems to be ending and vaccines are widely available, it's likely that more sellers will feel comfortable listing their homes.  Both of these factors probably contributed to the 3.3% increase in inventories in May, which was also the fourth consecutive month of gains.  Though inventories are still down 18.8% from a year ago (the most accurate measure for inventories given the seasonality of the data) that year-to-year rate of decline is slowing. The months' supply (how long it would take to sell today's inventory at the current sales pace) of existing homes for sale rose to 2.6 in June from May's reading of 2.5, though these readings still remain near record lows.  Despite the ongoing shortage of listings, it looks like there is still significant pent-up demand from the pandemic, with buyer urgency so strong in June that 89% of the existing homes sold were on the market for less than a month. The combination of strong demand and sparse supply has pushed median prices up 23.4% in the past year, the second fastest rate (behind last month's report) on record going back to 2000.  However, despite these issues we expect sales in 2021 to ultimately post the best year since 2006.  Why?  First, more listings as the pandemic ends should help alleviate the worst of the supply crunch and help keep a lid on price growth.  Moreover, a trend toward work-from-home is likely to remain in place even as pandemic-related measures are eased around the country.  That means people who were previously tied to specific locations, typically in urban areas, will have more flexibility, making more space in the suburbs an attractive proposition.   Finally, there are significant demographic tailwinds coming together for home sales for the foreseeable future.  Census Bureau population projections show that the key homebuying population of those 30-49 years old is set to grow significantly through 2039.  In other news this morning, initial jobless claims unexpectedly rose 51,000 last week to 419,000.  Continuing claims declined 29,000 to 3.236 million.  We're not worried about the increase in initial claims, which are often buffeted by auto shutdowns at this time of year, but the federal government and its payments to individuals continue to hold back job gains.  Meanwhile, the Kansas City Fed Manufacturing Index, which measures factory sentiment in that region, rose to a very strong reading of 30 in July from 27 in June.

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Posted on Thursday, July 22, 2021 @ 3:43 PM • Post Link Share: 
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  Recovery Tracker 7.22.21
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 Thursday, July 22, 2021 @ 11:54 AM • Post Link Share: 
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  Housing Starts Increased 6.3% in June
Posted Under: Data Watch • Home Starts • Housing • Inflation

 
Implications: Housing construction rose for the second month in a row in June, a signal that builders may be beginning to find their footing amidst the widespread supply-chain issues that have been a weighing on activity so far in 2021.  Looking at the 12-month moving average, which sifts through the recent volatility in the data, shows construction now stands at the fastest pace since 2007.  While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to remain in an upward trend.  A big reason for our confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started. In fact, the backlog of projects that have been authorized but not yet started is currently at the second highest reading (behind last month) since the series began back in 1999.  There has been a long running deficit in new home construction in the US, which needs roughly 1.5 million housing starts per year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.).  We haven't built that many new homes in any calendar year since 2006.  Now, with plenty of future building activity in the pipeline and builders looking to boost the inventory of homes as well as meet consumer demand, it looks likely construction in 2021 will approach the 1.6 million unit benchmark.  This positive outlook is reinforced by yesterday's NAHB index, a gauge of homebuilder sentiment, which declined to 80 in July from 81 in June. While this index has been falling since hitting a record high of 90 in November 2020, it's important to keep in context that until the red-hot housing market at the tail-end of 2020, readings in the 80s had never happened in the history of this indicator going back to the mid-1980s.  Moreover, the current reading of 80 sits well above the pre-pandemic 2019 average of 66, signaling just how strong the housing market remains versus a "normal" year. Looking at the details, the recent declines have been driven by rising materials costs, which have more than offset strong consumer demand for homes and low mortgage rates.

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Posted on Tuesday, July 20, 2021 @ 10:27 AM • Post Link Share: 
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  Strong Growth in Q2
Posted Under: GDP • Government • Housing • Markets • Monday Morning Outlook • Retail Sales • Trade • Bonds • Stocks • COVID-19
Another quarter for consumers to rely on massive stimulus payments, extremely loose monetary policy, and the continued re-opening of the US economy combined to push real GDP up at a very rapid pace in the second quarter, with the federal government preparing to release its initial estimate of economic growth on July 29.

At present, we are estimating that real GDP grew at an 8.3% annual rate in Q2, an acceleration from the 6.4% growth rate in Q1 and, with the exception of the massive surge in output in the third quarter of 2020, which offset the massive plunge in production in Q2 of 2020, the fastest growth rate for any quarter since the early 1980s.

Remember, though, that much of the recent rapid growth we've seen is really just a "sugar high."  Look for economic growth to slow in the second half of the year, and then even more so in 2022.

In the meantime, it's important to recognize that although rapid growth is welcome, that the economic glass remains half empty.  Yes, real GDP likely hit a new all-time high.  Yes, if our estimate is correct, real GDP will be up 0.7% annualized versus the last quarter of 2019, which is when we hit the previous peak in quarterly real GDP. 

However, in the absence of COVID-19, the economy almost certainly would have grown faster than that pace in the meantime, which means that, even at an all-time high, real GDP is still smaller than it would have been if COVID had never happened.
 
Note, also, that as the economy emerges from the COVID disaster, changes in international trade flows and inventories can have an outsized effect on GDP numbers.  A day before the government releases the GDP report it will release some preliminary figures for trade and inventories in June, which may alter our forecast. 

In the meantime, an 8.3% growth rate is our best estimate and here's how we get there:

Consumption:  Car and light truck sales rose at a 3.7% annual rate in Q2, while "real" (inflation-adjusted) retail sales outside the auto sector soared at a 12.7% annual rate. We only have reports on spending on services through May, but it looks like real services spending should be up at a rapid rate, as Americans got back toward normal (think recreation, restaurants, bars,...etc.).  As a result, we estimate that real consumer spending on goods and services, combined, increased at a 9.8% annual rate, adding 6.7 points to the real GDP growth rate (9.8 times the consumption share of GDP, which is 68%, equals 6.7).

Business Investment:  The second quarter should continue the pattern of recovery, led by investment in business equipment.  Investment in intellectual property should also gain, as usual, and we may eke out a small gain in commercial construction, as well.  Combined, business investment looks like it grew at a 7.6% annual rate, which would add 1.0 points to real GDP growth.  (7.6 times the 13% business investment share of GDP equals 1.0).

Home Building:  Residential construction continued to grow in Q2, although not as quickly as in recent prior quarters, a reflection of higher construction costs and less labor availability.  Look for faster growth in this sector in the year ahead as excessive jobless benefits run out.  We estimate growth at a 2.1% annual rate in Q2, which would add 0.1 point to the real GDP growth.  (2.1 times the 5% residential construction share of GDP equals 0.1).

Government:  It's hard to translate government spending into GDP because only direct government purchases of goods and services (and not transfer payments like extra unemployment insurance benefits) count when calculating GDP.  We estimate federal purchases grew at a 1.1% annual rate in Q2, which would add 0.2 points to real GDP growth.  (1.1 times the 18% government purchase share of GDP equals 0.2). 

Trade:  Faster economic growth in Q2 brought a larger trade deficit (at least through May), a by-product of a faster recovery in the US than in Europe.  At present, we're projecting net exports will subtract 0.2 points from real GDP growth in Q2.

Inventories:  Inventories look like they fell again in Q2 as businesses with supply-chain issues had to dip into inventories to meet strong consumer demand.  However, inventories didn't fall as rapidly as they did in Q1, and in the arcane world of GDP accounting, that means inventories will make a positive contribution to growth in Q2, which we are estimating at 0.5 points.

Add it all up, and we get 8.3% annualized real GDP growth for the second quarter, very high by historical standards, but representing an economy that is still smaller than it would have been in the absence of COVID.

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

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Posted on Monday, July 19, 2021 @ 11:34 AM • Post Link Share: 
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  Retail Sales Increased 0.6% in June
Posted Under: Data Watch • Government • Retail Sales • Spending • COVID-19

 
Implications:  Retail sales rose 0.6% in June coming in much higher than the consensus expected decline of 0.3%.  Nine of thirteen major categories rose in June, with restaurants & bars leading the way as people are taking advantage of being able to get out and be social again.  Overall sales are up a robust 18.0% from a year ago, and some may say this is only due to an easy comparison because a great deal of business activity was shut down due to COVID-related restrictions.  But another way to look at it is that sales are up 18.2% versus February 2020, which was pre-COVID.  "Core" sales, which exclude the most volatile categories of autos, building materials, and gas station sales, rose 1.3% in June, and are up 16.4% from a year ago and up 16.5% versus February 2020.  In other words, due to temporary government support, retail sales are running hotter than they would have been in the absence of COVID, even as the level of output (real GDP) is still running lower than it would have been in the absence of COVID.  It has not been an even recovery for all major categories, though.  For instance, sporting goods stores (+39.2%), non-store retailers (+34.1%), and auto sales (+25.2%) have all grown significantly faster than overall retail sales since February 2020.  The last category of sales to get above February 2020 levels were restaurants & bars, which finally moved into the green in April and are now up 6.6% from sixteen months ago.  Looking ahead, given that overall retail sales are far still far above the pre-COVID trend, we expect a modest trend decline in the year ahead.  However, we also expect sales at restaurants & bars to buck that trend and move higher, along with sales of services not counted by the retail trade report, as America gets back toward normal.  In the months ahead, the path of retail sales will be a battle between a number of opposing factors.  Rising wages, jobs and inflation will all be tailwinds for retail sales, while the temporary and artificial boost from "stimulus" checks waning, along with the end to overly excessive jobless benefits will be headwinds.

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Posted on Friday, July 16, 2021 @ 10:44 AM • Post Link Share: 
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  Industrial Production Increased 0.4% in June
Posted Under: Data Watch • Employment • Industrial Production - Cap Utilization • COVID-19

 
Implications:  Industrial production rose for a fourth consecutive month in June, but the details of the report were a mixed bag.  Ongoing supply chain issues were highly visible in today's report, with overall manufacturing activity falling 0.1% in June, the result of a 6.6% decline in auto production. A major contributor to this drop was the ongoing shortage of semiconductors which continues to keep finished cars from rolling off assembly lines.  Meanwhile, manufacturing outside the auto sector rose 0.4% in June, and now sits above its pre-pandemic high.  Keep in mind that the manufacturing sector continues to be hamstrung by not only supply chain issues, but also a severe labor shortage, with job openings in that sector near a record high and more than double pre-pandemic levels. Mining activity continued to recover in June, rising 1.4%, and is likely to be an ongoing tailwind in the months ahead.  Oil prices are now above where they were pre-pandemic and nearing levels not seen since 2014.  With upward pressure on prices likely to continue as the US reopens, and the mining index still down 9.3% from pre-pandemic levels, activity should continue to expand to meet surging demand. Look for a continued upward trend in overall industrial production in the months ahead as reopening continues, supply chain issues are gradually ironed out, and labor disincentives dissipate. In employment news this morning, initial jobless claims fell 26,000 last week to 360,000.  Meanwhile continuing claims declined 126,000 to 3.241 million. These both represent new lows so far during the pandemic recovery, signaling ongoing improvement in the labor market. In other factory related news this morning, the Empire State Index, a measure of New York factory sentiment, soared to +43.0 in July from +17.4 in June.  This is the highest level on record back to 2001 and reflects a surge in both new orders and shipments, as well as a record number of manufacturers surveyed raising their selling prices. Meanwhile, the Philadelphia Fed Index, a measure of factory sentiment in that region, fell to a still very robust 21.9 in July from 30.7 in June. Finally, we also got trade inflation data this morning.  Import prices rose 1.0% in June while export prices increased 1.2%.  In the past year, import prices are up 11.2%, while export prices are up 16.8%, a sign that monetary policy has been too loose for too long.

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Posted on Thursday, July 15, 2021 @ 12:21 PM • Post Link Share: 
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  The Producer Price Index (PPI) Rose 1.0% in June
Posted Under: Data Watch • Government • Inflation • PPI • Fed Reserve • Interest Rates • COVID-19

 
Implications:  Producer prices continued to surge higher in June, rising at the second fastest monthly pace (behind just January of this year) in more than a decade.  While for years after the financial crisis the question from many was whether the Fed could induce 2% inflation, the question has now shifted to if they can keep prices from rising too far and too fast.  The producer price index once again outpaced expectations, rising 1.0% in June and pushing the headline reading to 7.3% year-to-year, the highest in more than a decade.  And prices are accelerating, up at a 10.6% annualized pace in the past six months.  While the Fed has continued the line that this inflation is "transitory," it's getting more difficult to play down rising numbers.  Extensive "supply-chain" issues continue to be a significant pressure on prices, with no end in sight.  From the shortage in semiconductors that has slowed production of everything from cars and trucks to household appliances, to difficulties finding labor to fill the record number of job openings in the US, supply simply hasn't kept up with demand.  And that demand is being supported by an M2 money supply that stands 32% above pre-COVID levels, leaving both consumer and corporate pockets flush with cash.  While supply-chain issues are temporary, the huge increase in the money supply is what will drive inflation over the long term.  The Fed seems to anticipate that inflation will subside later this year and into 2022, but we think any waning in inflation later this year will be temporary, as the increase in the money supply continues to gain traction.  In terms of the details for June, prices for services led the overall index higher, rising 0.8% (while prices for goods rose a faster 1.2%, services represent more than twice the weighting of goods in the producer price index).  The most notable increase came from final demand trade services, which tracks margins received by wholesalers and retailers.  While prices for producer inputs are rising, they have the pricing power to pass on those costs, and more, to consumers.  This is seen clearly in auto retailing, where a significant supply/demand mismatch paired with consumer cash to spend led margins 10.5% higher in June alone.  Goods prices rose 1.2% in June, marking the fifth monthly rise of 1% or more in just the past six months.  Energy prices jumped 2.1% in June while food prices rose 0.8%.  Strip out these two typically volatile components shows "core" prices rose 1.0% in June and are up 5.6% in the past year.  In spite of inflation running well above the 2% target no matter how you cut it, we don't expect the Fed to signal any change in the plan to keep short-term rates near zero for the foreseeable future.  The Fed wants inflation to trend above the 2% target for a prolonged period, while the labor market – the other side of the Fed's dual mandate – also has to heal considerably further to get the Fed to seriously consider a move higher.

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Posted on Wednesday, July 14, 2021 @ 10:39 AM • Post Link Share: 
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  Recovery Tracker 7/13/2021
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, July 13, 2021 @ 2:57 PM • Post Link Share: 
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  The Consumer Price Index (CPI) Increased 0.9% in June
Posted Under: CPI • Government • Inflation • Fed Reserve • Interest Rates • Spending • COVID-19

 
Implications:  Consumer prices continued to accelerate in June, rising at the fastest pace in more than a decade and pushing the 12-month increase for the CPI to 5.4%. The June rise of 0.9% comes after increases of 0.8% in April and 0.6% in May, bringing the three-month change to a 9.7% annual rate. The six-month annualized change rose to 7.3% in June, the fastest increase since the early 1980s.  Some say this is just a rapid return to normal, offsetting price declines in early 2020 as COVID set in.  But consumer prices are now up 3.5% annualized since February 2020 (pre-COVID) which suggests inflation is up for more than just reasons of timing.  "Core" prices, which exclude food and energy, are up 3.1% annualized during the same timeframe (since February 2020).  Used car and truck prices led the CPI higher in June, rising 10.5%, the largest increase on record, dating back to the 1953.  To be clear, that's not an increase at a 10.5% annual rate, that's a 10.5% increase in one month.  Used car and truck prices alone accounted for about half of the increase in the core CPI.  Food and energy were also factors in the rise in the overall CPI.  Food prices rose 0.8%, mostly due to meats, poultry, fish, and eggs, which increased 2.5%.  Energy rose 1.5% on the back of higher costs for gasoline and natural gas. After stripping out these typically volatile food and energy categories, "core" prices matched June's headline increase of 0.9%, which ties for the largest monthly increase since 1982.  Besides used cars and trucks, other sources of the increase in the core CPI included new vehicles, which rose 2.0%, the largest monthly increase since 1981. New and used autos prices are up 23.7% since February 2020.  Higher prices for autos, along with an increase in prices for foods such as meats, poultry, fish, and eggs, highlight the continued struggle supply chains are facing in the wake of federally mandated shutdowns and overly-generous unemployment benefits that are keeping a large portion of the workforce at home.  Other key contributors were hotels/motels (+7.9%) car and truck rentals (+5.2%)  and airfares (+2.7), all of which signal a disconnect between supply and demand as travel starts to pick up.  Compared to a year ago, overall consumer prices are up 5.4% while core prices are up 4.5%.  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.  Some analysts will say there is no need to worry, that recent inflation is just a bounce back from lower prices during the COVID shutdown disaster, or come from areas where supply chains are squeezed.  But that doesn't mean we aren't headed for persistently higher inflation than the Fed now anticipates.  The M2 measure of the money supply has grown tremendously since February 2020, up about 32%, and while price increases are not even across all goods and services, to assume the overall pressure will subside just because there are a few items up rapidly would be a mistake.  Math wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.

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Posted on Tuesday, July 13, 2021 @ 12:34 PM • Post Link Share: 
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  4,500…Or Higher
Posted Under: Bullish • Government • Inflation • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Spending • Bonds • Stocks
Many are convinced that a US stock market correction, or even a bear market, is inevitable.  So, when the S&P 500 was down 1.6% last Thursday, many thought it had arrived.  Then, the S&P 500 rebounded and hit a new all-time high on Friday.  Being bearish on equities has not worked for a long time.

This does not mean the market always goes up.  It doesn't mean that the government is not creating future problems.  But, we don't try to time the market.  What we do is focus on fundamentals, like profits and interest rates.  And right now, we believe the S&P 500 is still undervalued.

Late last year, when the S&P 500 was at 3,638, we used those fundamentals to project a year-end 2021 target of 4,200, for an increase of 15.4%.  However, with profits returning toward normal even faster than we had anticipated, the S&P 500 hit 4,185 in mid-April and we upped our projection to 4,500, which would be a full-year gain of about 19%.

Now, with the S&P 500 just 3% from our target, we choose to stand pat.  Why?  We do not want to leave the impression that we are traders, shifting our target over and over.  We are investors.  It's the long-term that matters.  The US stock market has been undervalued relative to our Capitalized Profits Model since 2009. 

Our model takes the government's measure of economy-wide profits from the GDP reports, discounted by the 10-year US Treasury note yield, to calculate fair value.  If we use a 10-year Treasury yield of 1.36% (Friday's closing yield) to discount profits (from the first quarter, the most recent available), then our model suggests the S&P 500 is 45% undervalued.  And with profits likely to grow 20% or more this year, fair value will rise more as the year unfolds.

Right now, the Fed is artificially holding interest rates down across the yield curve.  So, when we calculate our estimate of fair value, we use a 2.0% 10-year yield. Using this 2.0% rate gives us a fair value of 5,240.  It would take a 10-year yield of about 2.4% for our model to show that the stock market is currently trading at fair value (with no increase in profits.)  If rates do rise, because the economy is stronger than the Fed expects, it would likely be accompanied by even faster profit growth.

We fully understand that current monetary policy is inflationary, and that past government spending, plus what some politicians are asking for right now has lifted US Federal debt above 100% of GDP.
 
These policies could shift economic growth, the level of interest rates and our estimate of the fair value of stocks in the years ahead.  But for the foreseeable future, re-opening, easy money and deficit spending are all pushing economic growth and profits up.  With the Fed holding rates down and profits booming, and with our model saying stocks are undervalued, we are still bullish.  And right now we think if our 4,500 target is wrong, it is likely too low.

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

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Posted on Monday, July 12, 2021 @ 11:16 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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