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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Housing Starts Declined 0.3% in March


Implications:  Housing starts continued to struggle in March, falling 0.3% as groundbreaking on new units remained at the slowest pace since mid-2017.  However, we still believe there is sunshine on the horizon for new construction in the months ahead. There has been a rapidly growing backlog in planned housing projects over the past several months as evidenced by the number of units authorized but not yet started, which hit a post-recession high in January and remained there through March.  Backlog concerns were also echoed in the survey responses to March's ISM manufacturing report, where a wood products industry respondent blamed bad weather for the recent slowdown in activity.  That said, it looks like progress to alleviate these problems has already begun, with the number of units under construction falling noticeably over the past couple of months as home completions have surged.  This should help free up badly needed workers to start development on new projects.  The increasingly tight labor market has made hiring difficult across industries, and construction is no exception, with job openings in that sector remaining elevated.  The National Association of Home Builders recently released their survey of top challenges for builders in 2019, and concerns related to the cost and availability of labor were the most prevalent, with 82% of developers surveyed citing them as their biggest challenge in the year ahead.  Despite the headwinds from labor, fundamentals for potential buyers have improved markedly over the past several months, with falling mortgage rates and wages that are now growing faster than new home prices boosting affordability and underpinning demand.  Although housing starts are down 14.2% from a year ago, this is largely due to the effects of the unusually strong hurricane season in late 2017, which spurred a surge in building in early 2018.  With that in mind, it's not surprising that March 2019 looks weak by year-ago comparison.  The forward-looking data in today's report show that permits for new construction fell 1.7% in March due to weakness in both single and multi-unit authorizations.  Despite recent softness, our outlook on housing hasn't changed: we anticipate a rising trend in home building in the next few years.  Based on fundamentals – population growth and scrappage – the US needs about 1.5 million new housing units per year but hasn't built at that pace since 2006. 

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Posted on Monday, April 22, 2019 @ 11:47 AM • Post Link Share: 
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  Existing Home Sales Declined 4.9% in March
Posted Under: Data Watch • Home Sales • Housing


Implications:  Existing home sales retreated in March after posting the second largest monthly gain on record in February.  Sales fell 4.9% for the month, returning to a more moderate pace.  Despite the negative headline number, Q1 as a whole posted a 1.2% gain over the Q4 2018 average, the first quarterly gain after four consecutive declines.  We don't believe this is just coincidence; the fundamentals have improved of late for existing homes.  First, despite median prices rising for the 85th month in a row on a year-over-year basis, the rate of growth has been slowing, with March showing a modest increase of 3.8%.  This means wages are now growing nearly as fast as prices, which – along with falling mortgage rates –boosts affordability.  The primary culprit behind the tempered existing housing market in 2018 was lack of supply, but here too there's been progress.  Inventories have turned a corner, rising on a year-over-year basis (the best measure for inventories given the seasonality of the data) for the eighth month in a row.  It looks like sellers really are changing their behavior, and a reversal in the steady decline of listings from mid-2015 through mid-2018 is a welcome reprieve for buyers, boosting supply and sales, while keeping a lid on price growth.  That said, some headwinds for sales remain.  First, potential homebuyers in high-tax states are likely still reeling from the $10,000 cap on state and local tax deductions.  Second, the months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – was only 3.9 months in March and has now stood below 5.0 (the level the National Association of Realtors considers tight) since late 2015.  It won't be a straight line higher for sales in 2019 but fears the housing recovery has ended are overblown.

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Posted on Monday, April 22, 2019 @ 11:40 AM • Post Link Share: 
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  Resilient Economy
Posted Under: GDP • Monday Morning Outlook

It wasn't that long ago that some economists and investors were seriously concerned about US growth going negative for the first quarter.  Now, based on our calculations, which we discuss below, it looks like real GDP grew at a respectable 2.6% annual rate in Q1, meaning that US real output was 3.1% larger than Q1-2018.

What makes this even more impressive is that, in spite of attempts by the government to fix seasonal adjustment issues, the first quarter has been weaker than other quarters, averaging only 1.7% growth between 2010 and 2018 versus 2.5% growth for the other three quarters.  Time will tell, but we think growth will be higher, on average, for the remainder of 2019 as well.

Remember all those obsessing about the "second derivate" of GDP? That is just a fancy way of saying whether the growth rate is getting faster or slower.  The economy grew at a 2.2% annual rate in Q4, which was slower than the 3.4% pace in Q3, which, in turn, was lower than the 4.2% pace in Q2.  The theory was that the trend would continue until we were back in recession. 

But now it looks like real GDP re-accelerated in Q1.  The "second derivate" argument doesn't work unless fundamentals have changed enough to push the economy into recession.  Clearly, this hasn't happened.

Monetary policy is not tight, companies are still adapting to lower marginal tax rates, and the odds of a full-blown trade war are diminishing.  In addition, deregulation is having a positive effect on the willingness to invest in businesses. The only major problem is an unwillingness to tackle the long-term spending path the federal government is following, but we don't see that taking down the economy in the near or medium term.  We still have time to address spending before it seriously threatens growth.   

Here's how we get to our 2.6% real growth forecast:

Consumption:  Automakers say car and light truck sales fell at a 13.4% annual rate in Q1 while "real" (inflation-adjusted) retail sales outside the auto sector slipped 0.1%.  However, most consumer spending is on services, where the data are more sparse.  We estimate real personal consumption (goods and services combined) grew at a 1.0% annual rate, contributing 0.7 points to the real GDP growth rate (1.0 times the consumption share of GDP, which is 68%, equals 0.7).

Business Investment:  Reports on durable goods shipments and construction suggest that all three components of business investment – equipment, commercial construction, and intellectual property - rose in the first quarter.  A combined growth rate of 3.6% translates into adding 0.5 points to real GDP growth.  (3.6 times the 14% business investment share of GDP equals 0.5).

Home Building:  If there's one area of the US that remains a conundrum it's housing, where it looks like we had the fifth straight quarter of slowed activity. We expect that to change moving forward, but for the time being we see a decline at a -2.6% annual rate, which translates into a 0.1 point drag on real GDP growth.  (-2.6 times the 4% residential construction share of GDP equals -0.1).

Government:  Looks like a relatively large 2.3% increase in real public-sector purchases in Q1, which would add 0.4 points to the real GDP growth rate.  (2.3 times the government purchase share of GDP, which is 17%, equals 0.4).

Trade:  Net exports' effect on GDP has been very volatile in the past year, possibly because of companies front-running, and then living with, some tariffs and (hopefully) temporary trade barriers.  First quarter data suggest net exports should add an unusually large 1.1 points to real GDP.

Inventories:  We only have data for inventories through February, but what we have suggests companies continued the same rapid pace of inventory-building that was happening late last year.  As a result, inventories should neither add to nor be a drag on real GDP growth in Q1.

Add it all up, and we get 2.6% annualized growth.  The US economic expansion is alive and well.  

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

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Posted on Monday, April 22, 2019 @ 11:07 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, April 22, 2019 @ 10:18 AM • Post Link Share: 
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  Retail Sales Rose 1.6% in March
Posted Under: Data Watch • Employment • Retail Sales


Implications: Today's booming retail sales report confirms there is no recession in sight and that the consumer remains on very solid footing.  Retail sales soared 1.6% in March, beating even the most optimistic forecast by any economics group and rising by the most since September 2017.  The gains in March were broad-based, with twelve of thirteen major categories showing rising sales. The largest gain in dollar terms was for autos.  But even outside of autos, retail sales rose 1.2%.  "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) were up 1.0% in March, and are up 3.7% from a year ago, while overall retail sales are up 3.6% over the same period.  Plugging in today's data shows that real GDP grew at close to a 2.5% annual rate in the first quarter.  Meanwhile, the severity of the December decline in sales will remain a complete mystery given how inconsistent the report was with other economic data.  December's 4.5% decline in sales at non-store retailers, which includes internet sales, was the largest percentage drop since November 2008!  Give us a break! Something is wrong with that December report – seasonals, missing data, or an error in the spreadsheets. Unsurprisingly, it only took non-store sales two months to completely wipe out this strange December decline.  Non-store sales rose 1.2% in March, are up 11.6% from a year ago, and sit at all-time highs. In fact, for the first time ever, in February non-store retailers surpassed general merchandise stores. This trend continued in March and we don't expect it to change.  Some stores will continue to close, but it's not due to a weak consumer, just a shift in preferences.   Given the tailwinds from deregulation and tax cuts, we expect an average real GDP growth rate of close to 3% in 2019, just like we saw in 2018.  Jobs and wages are moving up, tax cuts have taken effect, consumer balance sheets look healthy, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  Some may point to household debt at a record high as reason to doubt that consumption growth can continue.  But household assets are near a record high, as well.  Relative to assets, household debt levels are hovering near the lowest in more than 30 years.  For these reasons, expect solid gains in retail sales over the coming months. In other big news this morning, initial claims for unemployment fell 5,000 last week to 192,000, the lowest level since 1969.  Continuing claims, meanwhile, fell 63,000 to 1.653 million.  Both of these figures suggest another month of solid job growth in April.  In turn, we expect continued reductions in investors' assessment of the odds of a Fed rate cut later this year.  On the manufacturing front, the Philly Fed Index, a measure of East Coast factory sentiment, declined to a still solid +8.5 in April from +13.7 in March, signaling continued growth. In observance of Good Friday, First Trust offices will be closed tomorrow. Our analysis of the housing starts data out tomorrow morning will instead be sent Monday morning. We hope you have a blessed and happy Easter!

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Posted on Thursday, April 18, 2019 @ 10:35 AM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $49.4 Billion in February
Posted Under: Data Watch • Trade


Implications: The trade deficit shrunk unexpectedly in February to $49.4 billion.  More important, there was a rebound in the total volume of trade – imports plus exports – which signals how much businesses and consumers interact across the US border.  Exports rose by $2.3 billion, while imports grew by $0.6 billion.  Total trade is still off of the record high set in October of 2018, but expect it to hit new highs later this year as global growth starts to reaccelerate and trade deals continue to progress.  In the past year, exports are up 2.4% while imports are down 0.5%.  In the meantime, one positive implication of today's report is that net exports look like they will make a large positive contribution to real GDP in the first quarter.  As a result, we are estimating real GDP grew in the 2.0 - 2.5% range for the quarter, much better than many analysts have recently been forecasting.  Despite lamentations by the pouting pundits, the China trade battles appear largely behind us, and the worst-case-scenarios much discussed on the financial "news" over the past year have (once again) proved excessively pessimistic.  We never believed an all-out trade war would materialize, but that short-term skirmishes would lead to longer-term gains for all countries involved.  We have already seen it happen with several countries, and now China looks to be extending an olive branch, too.  Average tariffs in China were cut from 9.8% in 2017 to 7.5% in 2018. We see this as real progress, and just the start.  The US's negotiating position is strong, in no small part due to the rise of the US as an energy powerhouse.  As recently as 2005, the US was importing more than ten times the petroleum products that we were exporting.  As of February, petroleum imports are down to only 1.09 times exports and this trend should continue.  This massive shift means the US has changed power dynamics on a global scale (witness the political turmoil in Saudi Arabia and elsewhere in the Middle East).  We will continue to watch trade policy as it develops, but don't see any reason to sound alarm bells yet.

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Posted on Wednesday, April 17, 2019 @ 9:56 AM • Post Link Share: 
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  Industrial Production Declined 0.1% in March


Implications:  Industrial production disappointed in March, falling short of expectations and posting its second decline in three months.  The March weakness also pulled Q1 into negative territory, representing the first such quarterly decline since late 2017.  That said, there is no need to sound alarm bells on the industrial sector or shoehorn in the narrative of slowing global growth as many analysts are doing.  The primary source of weakness over the past three months has come from the typically volatile auto sector, which fell 6.7% in January and 2.5% in March.  Meanwhile, industrial production excluding autos was unchanged in March and rose a modest 0.1% in the first quarter.  The bright spot in today's report was that manufacturing production outside the auto sector (which represents the majority of activity) rebounded 0.2% in March after two months of weak readings.  In the past year auto production is down 4.5%, while manufacturing outside the auto sector is up 1.5%, demonstrating the ongoing divergence in activity between the two sectors.  Further, the various capital goods indices within manufacturing continue to show healthy growth at a pace above headline industrial production, with business equipment up 3.7%, machinery up 4.3%, and high-tech equipment up 3.5%.  Comparing this with the slower year-over-year growth of 1.0% for manufacturing as a whole, or 0.2% for non-durable goods shows that companies are continuing to invest.  In turn, more capital goods should help push productivity growth higher, making it easier for the economy to grow in spite of a tight labor market.  The other source of weakness in today's report came from mining, which fell 0.8% due to a slowdown in oil and gas extraction.  That said, the overall index remains near a record high and represents the fastest year-over-year growth of any major category at 10.5%.  Today's reports shows once again why it's important to analyze the details of economic reports.  Rather than cause for concern (as a brief glimpse at the headline reading might suggest), industrial production continues to show an economy on very solid ground. In other recent news, the Empire State Index, which measures factory sentiment in the New York region, rose to 10.1 in April from 3.7 in March. This signals a rebound in optimism after the index touched its lowest reading since mid-2017 in March. 

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Posted on Tuesday, April 16, 2019 @ 11:31 AM • Post Link Share: 
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  Market Fears Overblown, Economy Strong
Posted Under: Bullish • GDP • Government • Markets • Video • Fed Reserve • Interest Rates • Stocks • Wesbury 101
Posted on Tuesday, April 16, 2019 @ 8:40 AM • Post Link Share: 
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  New Highs, Still a Buy
Posted Under: Bullish • GDP • Markets • Monday Morning Outlook • Stocks

The Dow Jones Industrials Average and S&P 500 are breathing down the neck of record highs set last Fall.  Some take that as a sign to sell, time to shift out of equities and realize gains.  We think that would be a mistake.

At the end of last year, we forecast the Dow would finish this year at 28,750 while the S&P 500 hit 3,100.  At the time, those goals seemed outlandishly optimistic to many investors.  We wrote that "[W]e do best by our readers when we tell them exactly what we think is going to happen, without altering our projections so we can run with the safety of the herd.  Grit your teeth if you have to; those who stay invested in the year ahead should earn substantial rewards."

Now we think we were too pessimistic. 

Through Friday's close, the Dow is up 13.2% year-to-date, while the S&P 500 is up 16.0%.  To reach our year-end targets, the Dow would have to gain another 8.9% while the S&P 500 would have to rise 6.6%.

We think investors should be undeterred by new record highs.  To assess market valuations, we use a capitalized profits model, which takes the government's measure of profits from the GDP reports and divides by interest rates.  Think of it this way: if profits are higher, stocks should be higher, too; if interest rates are higher, stocks should be lower, as they compete against an alternative with a higher rate of return.

Our traditional measure - using a current 10-year Treasury yield of about 2.57% - suggests the S&P 500 is still massively undervalued.  At the end of last year we used 3.40% for the 10-year yield, and generated a fair value on the S&P 500 of 3,100.  Now that looks like an aggressive call for long-term yields.  Using, say, 3.00% for the 10-year puts fair value at 3,500.  The model needs a 10-year yield of nearly 3.6% to conclude the S&P 500 is already at fair value, with recent profits.

What would obviously throw the cap profits model for a loop would be a recession, but we don't see one on the horizon.  As we wrote last week, the US economy is on very solid ground, with Q1 real GDP estimates up from near-zero to now over 2%.    In addition, we lack the imbalances we often see before recessions.  Household debts are near a multi-decade low relative to assets, and household debt service is very low relative to after-tax income.  Banks, meanwhile, have ample capital, and are no longer tied to the overly strict mark-to-market accounting rules that exacerbated the financial crisis.

In addition, the economy is still adapting to lower tax rates, particularly on corporate profits. We expect a continued shift of corporate operations toward the US.

Another angle to consider is that recessions often follow drops in home building, but the US is still building fewer homes than we'd expect given population growth and the scrappage of homes (knockdowns, fires, floods, hurricanes, tornadoes,...etc.).  In other words, we think the number of housing starts, which have grown every calendar year since bottoming in 2009, will rise again in 2019.

Notice, however, what we're not worried about:  quantitative tightening, which is one of President Trump's favorite recent targets.  We still don't think quantitative easing helped equities, because the extra reserves in the banking system sat on balance sheets earning near-zero returns.  Withdrawing those previously inert reserves won't hurt markets either.   

To be sure, we are not saying stocks will go up today or this week, or even this quarter. Corrections happen.  But, given the level of corporate profits and our outlook for economic growth, it looks more likely than not that equities will move substantially higher in the year ahead.

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

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Posted on Monday, April 15, 2019 @ 11:10 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, April 15, 2019 @ 9:49 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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