Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  High Frequency Data Tracker 9/30/2022
Posted Under: High Frequency Data Tracker
Supporting Image for Blog Post

 

We live in unprecedented times. The recession in 2020 was not so much a recession as it was a lockdown. Using “normal words” to describe the economy in the last 2 years, we believe, does not make sense. Now with two consecutive quarters of declining real GDP, many are saying we are back in a recession. The charts in the High Frequency Data Tracker follow data that are published either weekly or daily, providing a good real-time look at where the economy stands. As of now we believe these measures, along with other monthly economic data coming in, show we are not in a recession.

Click here to view the report

Posted on Friday, September 30, 2022 @ 3:01 PM • Post Link Share: 
Print this post Printer Friendly
  Personal Income Rose 0.3% in August
Posted Under: Data Watch • GDP • Government • Inflation • Markets • PIC • Fed Reserve • Interest Rates • Spending • Bonds • Stocks • COVID-19
Supporting Image for Blog Post

 

Implications:  Income, spending, and inflation all rose in August, as the U.S. economy continues the transition from a stimulus-fueled misadventure toward a slower path of growth.  Today’s report gives a great example of the shift taking place from the shutdown-induced measures that mainly supported the goods side of the economy, back to the service side, which was discouraged (or outright prohibited) during the pandemic.  Consider for a moment that from February 2020 to December of that year, spending on goods rose by more than $300 billion, while spending on services fell by over $500 billion.  This government-induced shift caused a massive reallocation of resources – employees, consumer dollars, and investment – that will be felt for years to come.  As we return to more “normal” spending patterns, the goods side of the economy is feeling the pain.  While consumer spending rose 0.4% in August, spending on goods fell 0.5% following a 0.7% drop in July.  This shift will eventually bring with it layoffs, inventory issues, and a host of other economic ills.  Meanwhile the services side of the economy is feeling the benefit, with services spending up a hearty 0.8% in August.  In addition to shifting what we could do and where we could do it, the stimulus checks, PPP loans, and extra unemployment benefits of 2020 and 2021 dramatically boosted consumer spending power, more than replacing lost wages.  That economic morphine, which was meant to dull the pain of shutdowns, has led to a multi-decade high in inflation and the economic pain that now comes with trying to get said inflation in check.  PCE prices – the Fed’s preferred measure of inflation – rose 0.3% in August and are up 6.2% from a year ago.  Core prices, which exclude food and energy, rose 0.6% in August and are up 4.9% from a year ago.  While energy prices will ebb and flow, core inflation is likely to remain higher for longer than most anticipate. No, we are not in a recession yet, but the Fed is almost very likely to cause one as they try to undue the effects of the policy decisions made over the last two and a half years.  

Click here for a PDF version

Posted on Friday, September 30, 2022 @ 10:40 AM • Post Link Share: 
Print this post Printer Friendly
  Real GDP Growth in Q2 Remained at a -0.6% Annual Rate
Posted Under: Data Watch • Employment • GDP • Government • Home Starts • Housing • Industrial Production - Cap Utilization • Inflation • Markets • Fed Reserve • Interest Rates • Spending • Stocks • COVID-19
Supporting Image for Blog Post

 

Implications:   The third report on second quarter real GDP growth was unchanged at a -0.6% annual rate.  An upward revision to personal consumption offset downward revisions to net exports, residential investment (mainly reflecting a decline in brokers’ commissions), and inventories.  Today we also get our second look at corporate profits for the second quarter, and they were revised lower.  Still, corporate profits rose 4.6% versus Q1, are up 7.7% from a year ago, and up 23.3% versus the pre-COVID level.  Profits in Q2 rose at domestic non-financial companies as well as from operations abroad, but declined at domestic financial corporations.  Our capitalized profits model suggests US equities are roughly fairly to slightly overvalued today at current interest rates, although we believe equities will remain range bound until we eventually hit a recession starting sometime in 2023-24.  Although some investors think a recession has already started, given two straight quarters of negative real GDP growth, we don’t think that’s right.  Real Gross Domestic Income (real GDI), an alternative measure of GDP that is just as accurate, remained positive for the first two quarters, growing at a revised 0.1% annual rate in Q2 after growing at a revised 0.8% rate in Q1.  In addition, so far this year the unemployment rate has dropped, payrolls have expanded 438,000 per month and industrial production is up at a 4.0% annual rate through August.  These are just not numbers we’d get in a recession.  Where does this all leave the Federal Reserve?  Still behind the curve.  GDP inflation was revised higher to an 9.0% annual rate in Q2, the fastest pace for any quarter since 1981.  GDP prices are up 7.6% from a year ago, nowhere near the Fed’s 2.0% target.  Meanwhile, nominal GDP (real GDP growth plus inflation) rose at an 8.5% annual rate in Q2 and is up 9.6% from a year ago.  The US economy recovered rapidly from re-opening in 2021.  That period of rapid growth is now over.  But that doesn’t mean we should take the headline from today’s report at face value and that the US is in a recession.  The Fed has a lot more work to do before monetary policy is tight enough to induce a recession.  Other news this morning is consistent with continued economic growth. Initial claims for unemployment insurance declined 16,000 last week to 193,000, a five-month low.  Continuing claims declined 29,000 to 1.347 million. These figures suggest another solid month of job growth in September.  On the housing front, pending home sales, which are contracts on existing homes, declined 2.0% in August, suggesting another month of tepid existing home sales in September.  Earlier this week, we also got some welcomed news on future inflation. The M2 measure of money was essentially unchanged in August and is up at only a 1.5% annualized rate in the first eight months of 2022. M2 is up 4.1% vs a year ago, compared to a 13.6% gain in the year ending August 2021. It remains to be seen whether M2 growth remains slow.  The Treasury Department has been piling up its own savings at the Fed and this may be a reason for the sudden slowdown in M2 growth.

Click here for a PDF version

Posted on Thursday, September 29, 2022 @ 12:06 PM • Post Link Share: 
Print this post Printer Friendly
  New Single-Family Home Sales Increased 28.8% in August
Posted Under: Data Watch • Government • Home Sales • Housing • Inflation • ISM • Fed Reserve • Interest Rates
Supporting Image for Blog Post

 

Implications:  New home sales posted the largest monthly gain in more than two years in August, crushing even the most optimistic forecast by any economics group.  While the headline gain of 28.8% is a welcome piece of good news, it’s important to remember that new home sales are still down 33.9% from the peak in 2020. That said, today’s report is a sign that sales activity may be beginning to stabilize. The main issue in 2022 has been declining affordability, with potential buyers getting squeezed by both higher prices and rapidly rising mortgage rates. So, it was welcome news that median prices were up only 8.0% from a year ago versus a year-ago comparison of 24.2% in the year ending August 2021.  It looks like the relentless upward trend of the past couple of years may be beginning to level off.  This was backed up by data out this morning on the top of two home price indexes, both of which showed modest prices in August.  National Case-Schiller home prices declined 0.2% in July while FHFA prices, which measure homes financed by conforming mortgages, fell 0.6%.  These drops are the largest for any month since 2011, during the last housing bust.  Although both of these measures show a substantial increase in home prices in the past year (15.8% for Case-Shiller, 13.9% for FHFA), the following few years should be very different, with roughly unchanged home prices, as rents catch up to home price gains during COVID.  Today’s news on home prices finally beginning to ease up is doubly good news because 30-year mortgage rates remain a significant headwind, are surging upwards once again, and currently sit just below 7%.  Assuming a 20% down payment, the change in mortgage rates and home prices just since December amount to a 46% increase in monthly payments on a new 30-year mortgage for the median new home.  Although a lack of inventory has certainly contributed to price gains in the past couple of years, that should not be as much of a problem going forward.  The months’ supply of new homes (how long it would take to sell the current inventory at today’s sales pace) is now 8.1, up significantly from 3.3 early on in the pandemic.  Although the months’ supply of completed homes is still a relatively low 0.9, the inventory of completed single-family homes has begun to rise quite rapidly as builders finish more units and rising cancellation rates on purchases leave potential buyers with more options.  Meanwhile, builders still have plenty of homes under construction that they will strive to finish in the next several months.  That process, generating more finished supply, should help keep downward pressure on new home prices and, in turn, stabilize home sales, as well.  This is not the housing bust of the 2000s, a period when home prices and the pace of construction both plummeted for years on end.  Finally in manufacturing news this morning, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, rose to 0 in September versus -8.0 in August.  We expect to see the national ISM Manufacturing index to remain north of 50, signaling, growth, for the month.  

Click here for a PDF version

Posted on Tuesday, September 27, 2022 @ 12:44 PM • Post Link Share: 
Print this post Printer Friendly
  New Orders For Durable Goods Declined 0.2% in August
Posted Under: Data Watch • Durable Goods • GDP • COVID-19
Supporting Image for Blog Post

 

Implications:  Durable goods orders declined slightly in August, but the details of today’s report are much better than the headline number suggests.  Far and away the largest impact on August durable goods came from the typically volatile commercial aircraft orders, which fell 18.5%.   Strip out transportation, and orders rose 0.2% in August, matching consensus expectations. Orders for electrical equipment (+1.0%), computers and electronic products (+0.8%), primary metals (+0.4%), and machinery (+0.3%), all rose, while fabricated metal products (-0.7%) showed the lone decline.  Further back in the process, unfilled orders continue to rise, suggesting activity will remain positive as companies battle to keep up with demand that is outpacing supply.  One of the most important pieces of today’s report, shipments of “core” non-defense capital goods ex-aircraft (a key input for business investment in the calculation of GDP), rose 0.3% in August while July orders were revised higher.  If unchanged in September, these orders would be up at a 7.1% annualized rate in Q3 versus the Q2 average, providing a tailwind for third quarter GDP.  And orders for these core capital goods (which will lead to shipments in the future), rose 1.3% in August, the largest monthly increase since January. Orders for durable goods have recovered sharply since the pandemic, up 71.3% from the April 2020 bottom and now sit 17.8% above the pre-pandemic high set in February 2020.  The shift from services to goods accelerated durable goods purchases beyond where they would have been had COVID never happened, and the return toward services taking place today means activity in the goods sector will likely moderate in the year ahead.  But for the time being, the data suggest that business investment remains resilient in the face of rising borrowing costs and tepid economic growth.  

Click here for a PDF version

Posted on Tuesday, September 27, 2022 @ 12:23 PM • Post Link Share: 
Print this post Printer Friendly
  More Trouble Ahead
Posted Under: Bullish • GDP • Government • Inflation • Markets • Monday Morning Outlook • Fed Reserve • Interest Rates • Bonds • Stocks

We had been bullish on stocks all the way back to March 2009, when mark-to market accounting was fixed and the Financial Panic started to recede.  At that time the S&P 500 traded as low as 677.  What a time to buy!

After that we remained bullish.  We didn’t recommend selling in spite of a wide range of fears that spooked many others, including the Great Recession lasting through 2010, a double-dip recession, a second wave of home foreclosures, an implosion in commercial real estate, the passage of Obamacare, a Greek debt default, a potential breakup of the Eurozone, the Fiscal Cliff, Brexit, or the election of President Trump.  While others bailed out way too early on the bull, we kept riding.

We rode it so long that some called us “perma-bulls.” But as we looked at low interest rates and healthy profits, we didn’t see any other choice.

Then in June we announced we were bullish no more.  In particular, we said “we don’t expect the S&P 500 to hit a new all-time high, above the old high of 4,797, anytime soon.”  Instead, until one of our two scenarios plays out – a recession or the realization the Fed has pulled off a soft-landing – US equities are likely to be in a trading range with potential bear market rallies that come and go.”

We still expect the much more likely scenario is that a recession will arrive sometime in 2023 (possibly early 2024) and that stocks will remain in a bear market until the recession hits.  Why a recession?  Because the Federal Reserve will have to get tight enough to reduce inflation toward its target and a monetary policy that’s tight enough to control inflation is going to send the economy into a recession.  

Back in June we said that stocks could easily rally from then-current levels, when the S&P 500 was at 3675, but that such a rally wouldn’t last.  After that the S&P rallied up to a closing high of 4305 in mid-August before dropping to 3693 at Friday’s close.  Don’t be surprised by other bear-market rallies, which will also fade. 

As always, we used our Capitalized Profits Model to assess fair value for the stock market.  The model starts with the government’s measure of economy-wide corporate profits and uses the yield on the 10-year Treasury Note to discount those profits.

The yield on the 10-year Treasury Note finished last week right around 3.70%, which, when plugged into our model, suggests fair value for the S&P 500 is about 3600.  That would be a 2.5% decline versus the Friday close.

But long-term yields may go higher from here.  With a 4.00% yield on the 10-year Treasury, the model says fair value on the S&P is about 3325, which would be a 10% drop versus Friday’s close.  And even if long-term yields don’t go higher from here, approaching and entering a recession is highly likely to eventually cut corporate profits.  Either way, there are reasons to expect we haven’t seen the bottom yet for stocks.

A couple of things to keep in mind.  If you’re a very long-term investor who doesn’t want to time the market, none of this discussion matters much.  Just maintain your normal allocation to stocks and don’t be shy about continuing to buy stocks at your normal intervals.  That way you’ll be buying at low stock prices, too, and stocks should be worth substantially more when you’re spending down assets in the far away future.

However, those investors willing to take some risk on timing the market should consider that the future year or so probably includes better entry points for broad stock indexes than today’s levels.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist 

Click here for a PDF version

Posted on Monday, September 26, 2022 @ 10:33 AM • Post Link Share: 
Print this post Printer Friendly
  High Frequency Data Tracker 9/23/2022
Posted Under: High Frequency Data Tracker
Supporting Image for Blog Post

 

We live in unprecedented times. The recession in 2020 was not so much a recession as it was a lockdown. Using “normal words” to describe the economy in the last 2 years, we believe, does not make sense. Now with two consecutive quarters of declining real GDP, many are saying we are back in a recession. The charts in the High Frequency Data Tracker follow data that are published either weekly or daily, providing a good real-time look at where the economy stands. As of now we believe these measures, along with other monthly economic data coming in, show we are not in a recession.

Click here to view the report

Posted on Friday, September 23, 2022 @ 11:11 AM • Post Link Share: 
Print this post Printer Friendly
  Another 75… With More to Come
Posted Under: Employment • GDP • Government • Inflation • Markets • Research Reports • Fed Reserve • Interest Rates • Bonds • Stocks

The Federal Reserve once again voted unanimously to raise rates by three-quarters of a percentage point - 75 basis points (bps) - today, bringing the target for the federal funds rate to 3.00 – 3.25%, and signaled expectations for continued hikes ahead.  Today’s statement was also accompanied by updated forecasts from the Fed (the infamous dot plots), which show a more aggressive path of rate hikes through 2023.

The forecasts, however, were a very different story, with changes across the board.  From an economic perspective, the Fed now sees growth slower, unemployment rising faster, and inflation running slightly higher through the remainder of 2022 and throughout 2023. This forces the Fed to make a choice, do they focus on supporting the weakening economic outlook, or prioritize the fight against inflation that stands at levels last seen nearly 40 years ago?

Today’s dot plots show a notable shift higher in the expected path of rate hikes moving forward, with the Federal Funds Rate now forecast to end 2022 around 4.4%, a full percent above the June forecast of 3.4%.  That suggests another 75-basis point hike is the most likely scenario at their next meeting in November, followed by a 50-point hike in December.  And the Fed expects a single 25-point hike in 2023 – likely to start the year - before starting to ease policy in 2024.  

While we much prefer Chair Powell to channel Paul Volcker rather than Arthur Burns, we have our reservations on the Fed’s dealings.  Our biggest concern over today’s Fed activities has nothing to do with what they published or said, but rather what they continue to ignore.  The M2 money supply is and has been the biggest factor on inflation, yet Powell and the committee statement didn’t mention it once, nor did any reporter ask a question on the topic.  While Powell was questioned on the topic at a recent conference by the Cato Institute, he brushed the idea off and continued to push the same tired model of inflation drivers that have left the Fed well behind the curve and constantly revising forecasts higher. 

The bottom line is that it’s good the Fed has prioritized the fight against inflation, but it remains overly optimistic in how quickly it will get inflation back under control, especially as the tools they have to tame inflation are like using a drill to hammer a nail.  Follow the growth of M2 – which has thankfully slowed and must remain low for the foreseeable future – for guidance on the path forward from here.           

Brian S. Wesbury – Chief Economist

Robert Stein – Deputy Chief Economist

Click here for a PDF version

Posted on Wednesday, September 21, 2022 @ 3:56 PM • Post Link Share: 
Print this post Printer Friendly
  Existing Home Sales Declined 0.4% in August
Posted Under: Data Watch • Government • Home Sales • Housing • Interest Rates
Supporting Image for Blog Post

 

Implications:  Existing home sales fell for the seventh month in a row in August, posting the longest streak of declines since 2007.  However, the decline in August was also the smallest so far in 2022 at just 0.4% and while it’s too early to be certain, sales look like they may be beginning to stabilize.  Falling affordability has played a major role in the recent string of weak reports. The prime culprit is the surge in mortgage rates which are now above 6% for the first time since 2008.  While financing costs remain a burden, the good news is that median prices fell for the second month in a row in August. Part of this is just seasonality (prices typically begin to fall near the end of the summer buying season), but at least buyers aren’t getting squeezed at both ends anymore.  Moreover, median price growth in the past year has slowed to 7.7% from a peak of 25.2% in May 2021. That said, when you do the math it’s not hard to see why home sales have slowed down so rapidly. Assuming a 20% down payment, the rise in mortgage rates and home prices since December amounts to a 48% increase in monthly payments on a new 30-year mortgage for the median existing home.  Today’s report also showed that the inventory of existing homes on the market remains tight.  Available listings fell slightly in August and were flat from a year ago (the best way to look at the data given the seasonality of the housing market). While this is still a notable improvement following thirty-six straight months of annual declines ending in June, don’t expect a flood of new listings to materialize anytime soon. Many homeowners locked in mortgage rates at rock bottom levels during the pandemic and are unlikely to brave a 300-basis point increase in financing costs by reentering the market to trade up.  What is really impressive is that despite the lack of options, demand remains strong, with buyer urgency so high in August that 81% of existing homes sold were on the market for less than a month.  While sales are clearly under pressure, this is not a repeat of 2007-09. We do not foresee a widespread collapse in home sales even with higher mortgage rates, though it is likely that existing home sales wind up lower in 2022 than 2021.

Click here for a PDF version

Posted on Wednesday, September 21, 2022 @ 11:13 AM • Post Link Share: 
Print this post Printer Friendly
  Housing Starts Increased 12.2% in August
Posted Under: Data Watch • Government • Home Starts • Housing • Interest Rates
Supporting Image for Blog Post

 

Implications:  Following a string of weak reports US housing starts rose unexpectedly in August, despite relatively high mortgage rates, labor shortages, and ongoing supply-chain issues.  Looking at the details, the best news was that single-family construction rose 3.4%, the first gain in six months.  Meanwhile, the majority of today’s gain came from multi-unit starts which jumped 28.0%.  It is clear developers are becoming more cautious about future demand for new single-family projects with 30-year mortgage rates now above 6.0% and are continuing to focus resources on apartment buildings instead.  Over the past year single-family starts are down 14.6% versus multi-unit starts, which are up 33.1%.  We expect starts to resume a trend downward in the next several months. Lots of homes are already in the pipeline, with the number of homes under construction at the highest level on record back to 1970.  These figures illustrate a slower construction process due to a lack of workers and other supply-chain difficulties.  In this context, it’s not surprising to see new building permits decline 10.0% in August.  The backlog of projects that have been authorized but not yet started is currently just below the record high since the series began back in 1999.  Meanwhile, homebuilder sentiment, as measured by the NAHB Housing Index, is deteriorating. The index fell for a ninth consecutive month to 46 in September.  An index reading below 50 signals that more builders view conditions as poor vs. good.  The prime concern continues to be higher mortgage rates, which are having a negative impact on potential sales as certain buyers are at least temporarily priced out of the market, leaving some builders with a surplus of inventory.  In spite of all this, do not expect a housing bust nearly as harsh as in the 2000s. Unlike the previous housing bust, we do not have a massive oversupply of homes.

Click here for a PDF version

Posted on Tuesday, September 20, 2022 @ 10:59 AM • Post Link Share: 
Print this post Printer Friendly

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.
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2022 All rights reserved.