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   Brian Wesbury
Chief Economist
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   Bob Stein
Deputy Chief Economist
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  Industrial Production Declined 0.3% in January
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production started off 2020 on a soft note as warmer than usual weather pushed down utilities output and problems at Boeing weighed on manufacturing.  The production halt surrounding the 737 MAX caused a decline of 9.1% in the production of aerospace products and parts in January.  However, excluding the production of aircraft and parts, manufacturing rose a healthy 0.3%.  The auto sector also rebounded in January, posting a gain of 2.4%.  Notably, even with the Boeing disruption, manufacturing has been accelerating lately, up at an annualized pace of 3.9% over the past three months versus a decline of 0.9% over the past year.  It will remain difficult to get a true reading on manufacturing over the next couple months as issues surrounding coronavirus and Boeing distort the data, but we expect a rebound in activity in 2020 as we put some of the major headwinds for the factory sector in 2019  behind us.  The GM strike is over, USMCA has been passed, and a Phase One trade deal with China has been signed.  Turning to utilities, output dropped for a second consecutive month as unseasonably warm weather throughout much of the country continued in January and reduced demand for heating.  Finally, mining output rose 1.2% in January, fueled by a broad-based increase in oil, gas, and mineral extraction. This is somewhat surprising as the price of WTI crude fell 18.5% in January, demonstrating the resiliency of US producers.  In the past year mining activity is up 3.1%, the best performer of all major categories.   

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Posted on Friday, February 14, 2020 @ 11:28 AM • Post Link Share: 
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  Retail Sales Rose 0.3% in January
Posted Under: Data Watch • Retail Sales


Implications:   A respectable report on the US consumer.  Retail sales grew 0.3% in January and are up a solid 4.4% from a year ago.  The gain was widespread, as sales rose in nine of thirteen major categories.  Restaurants & bars, along with building materials, led the way rising 1.2% and 2.1% in January, respectively.  Building materials grew by the most since August of last year, partly due to the unusually mild January weather. This milder weather most likely affected sales at clothing and accessory stores, as well, holding down this category.  Less need to buy winter apparel when temperatures are higher than usual.  There should be no doubt the consumer is doing well.  "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) grew 0.2% in January, and are up 3.8% from a year ago.  Jobs and wages are moving up, companies and consumers continue to benefit from tax cuts, consumer balance sheets look healthy, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  For these reasons, expect continued solid gains in retail sales in the year ahead.  In inflation news today, import prices were unchanged in January, as falling fuel prices offset increasing prices for nonfuel imports.  Meanwhile, export prices rose 0.7%, with rising prices for both agricultural and nonagricultural exports contributing to the overall increase.  In the past year, import prices are up 0.3%, while export prices are up 0.5%.  Given loose monetary policy, expect higher inflation by later this year.

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Posted on Friday, February 14, 2020 @ 11:19 AM • Post Link Share: 
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  The Consumer Price Index (CPI) Rose 0.1% in January
Posted Under: CPI • Data Watch • Government • Inflation • Fed Reserve

Implications:  Consumer prices increased 0.1% in January, with prices rising in nearly every major category.  Prices for housing, medical care, and food led the index higher in January, partially offset by a decline in the cost of gasoline.  Consumer prices are up 2.5% in the past year, tied for the largest twelve-month increase going back to August of 2018.  Strip out the typically volatile food and energy sectors, and "core" prices rose 0.2% in January.  In addition to housing and medical care, prices for apparel, recreation, education, and airline fares pushed the core reading higher.  Core prices are up 2.3% in the past year, just a tick off the highest annual increase we have seen since the recovery started.  And "core" prices have hovered at or above the Fed's 2% inflation target for twenty-three consecutive months.  Add in employment data continuing to show strength and it makes sense the Fed doesn't expect further rate cuts unless we see a material change in the economic outlook.  On the wage front, average hourly earnings rose 0.2% in January and have increased 3.1% in the past year.  Take out inflation, and "real" earnings rose 0.1% in January and are up a modest 0.6% in the past year.  With the strength of the labor market, we believe earnings will trend higher in 2020.  Healthy consumer balance sheets, a strong job market, inflation in-line with Fed targets, and the continued tail winds from improved tax and regulatory policy, all reinforce our belief that the economy will continue to grow at a healthy pace in the year ahead.  In other news this morning, new claims for unemployment benefits rose 2,000 last week to a very low 205,000.  Continuing claims fell 61,000 to 1.698 million.  These figures are consistent with continued solid payroll growth in February.

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Posted on Thursday, February 13, 2020 @ 10:37 AM • Post Link Share: 
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  Jobs, Coronavirus, and the Budget
Posted Under: Employment • GDP • Government • Monday Morning Outlook • Spending

In January, US payrolls expanded by 225,000, not only beating the consensus forecast, but also forecasts from every single economics group.  Since January 2019 (12 months ago), both payrolls and civilian employment – an alternative measure of jobs that includes small-business start-ups – are up 2.1 million.  The labor force – those who are either working or looking for work – is up 1.5 million, while the jobless rate fell to 3.6% from the 4.0%.

The labor force participation rate (the share of adults who are either working or looking for work) increased to 63.4% in January, the highest reading since early 2013.  Participation among "prime-age" adults (25 to 54) hit 83.1%, the highest since the Lehman Brothers bankruptcy in 2008.   

Meanwhile initial claims for unemployment insurance hit 202,000 in the last week of January, and initial claims as a percent of all jobs are at the lowest level ever.  In other words, the job market and the economy look strong.

Only a few months ago, some analysts were saying that the inversion of the yield curve - with short-term interest rates above long-term rates - was signaling the front edge of a US recession.  Now a recession seems nowhere in sight.

Lately, financial markets have become very jumpy on any news – good or bad – regarding the coronavirus.  We aren't immunologists (or doctors) and would never make light of a virus that has killed more than 900 and infected over 40,000, but data released by the World Health Organization (WHO) cautiously suggests a positive turning point has been reached.

So far, the virus has had minimal impact outside of China, and the growth rate of new cases worldwide has slowed.  Yes, these numbers must be taken with a grain of salt, given that the news is coming from China.  But China's leaders have an interest in limiting the spread of the virus and the economic damage it causes, and they have allowed the WHO access.

China's President Xi Jinping has been able to accumulate more power than any leader since at least Deng Xiaoping, perhaps since Mao.  We assume he is well aware that a major failure to contain the virus could give his political opponents an opening to vent their frustration with the current leadership, and perhaps push for change.

It's true that the growth of the Chinese economy has slowed precipitously, and this is affecting many companies' sales and production.  However, we do not believe that this will damage global growth in a significant way, and the US stock market suggests that global investors agree.

Meanwhile President Trump is presenting his budget plans to Congress this week, and early reports suggest some proposals to rein in entitlement spending.  We wouldn't hold our breath waiting for these policies to get implemented.  No matter who controls Congress, the one bi-partisan thing DC is able to do is spend more taxpayer money.  And even with a slowdown in spending growth for entitlements, the President's budget proposal still won't balance the budget until 2035.

To be clear, we do not think deficits are the proper tool to use for economic forecasting.  What matters is spending, and federal spending has grown to be too large a share of US GDP.  The bigger the government, the smaller the private sector.

In 1983, according to the OMB, federal spending was 22.9% of GDP.  In 1999, under President Clinton, it had fallen to 18%, and from 1983 through 1999, real GDP grew 3.7% at an annual rate.  This trend was reversed with government spending rising to 21.1% of GDP in 2019, and from 2002 to 2019, real GDP grew just 2.1% annualized.  Bigger government leads to slower growth.

Taking all of this together, no recession on the horizon and improving news about the coronavirus suggests corporate profits will continue to grow in spite of moderate growth.  Stay bullish!  

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

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Posted on Monday, February 10, 2020 @ 11:44 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, February 10, 2020 @ 10:55 AM • Post Link Share: 
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  Nonfarm Payrolls Rose 225,000 in January
Posted Under: Data Watch • Employment


Implications:  A solid report on the labor market for January; not quite as strong as the big headline, but strong nonetheless.  Nonfarm payrolls rose 225,000 in January, beating the consensus expected 165,000 and were higher than the forecast from any economics group.  Some are saying the gain was due to unusually mild weather in January throughout much of the country.  But the government keeps track of the number of people who miss work due to weather each month and fewer people missed work due to weather back in January 2015, when overall payrolls rose only 191,000 (smaller than the gain this January), so weather is likely only a small part of the explanation for strong payrolls.  However, civilian employment, an alternative measure of jobs that includes small-business start-ups, declined 89,000.  As a result of the decline in civilian employment the jobless rate ticked up to 3.6%.  Don't get us wrong: today's report is good news overall, but the top-line increase in nonfarm payrolls isn't going to happen every month.  Looking at the past year, nonfarm payrolls have averaged an increase of 171,000 per month while civilian employment has averaged a gain of 174,000, both solid figures but closer to the underlying trend than the 225,000 gain in payrolls.  Perhaps the best news in today's report was that the labor force participation rate (the share of adults who are either working or looking for work) increased to 63.4%, the highest since early 2013.  Participation among "prime-age" adults (25 to 54), hit 83.1%, the highest since the Lehman Brothers bankruptcy in 2008.  The share of adults who are employed hit 61.2%, also the highest since 2008.  Meanwhile, workers' purchasing power continues to grow.  Average hourly earnings grew 0.2% in January and are up 3.1% from a year ago.  Total hours worked grew 0.2% in January and are up 0.9% from a year ago.  As a result, total earnings by all private-sector workers combined are up 4.1% in the past year.  Today's report pushes back against market expectations that the Federal Reserve will cut short-term rates later this year.  Monetary policy isn't tight and we don't need lower rates.   

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Posted on Friday, February 7, 2020 @ 11:42 AM • Post Link Share: 
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  Nonfarm Productivity Increased at a 1.4% Annual Rate in the Fourth Quarter
Posted Under: Data Watch • Productivity


Implications: Nonfarm productivity grew at a 1.4% annual rate in Q4. Hours grew at a 1.1% annual rate while output climbed at an even faster 2.5% annual rate so output per hour increased. Measured productivity has accelerated lately, up 1.8% from a year ago, versus a 1.0% gain in the year ending in the fourth quarter of 2018. We believe government statistics underestimate actual productivity growth. (For example, do the data fully capture the value of smartphone apps, the tablet, the cloud, Alexa...etc.?)   These numbers miss the full value of technological advances, such as all those free smartphone apps so many people carry around in their pockets.  Keep in mind, anything free, no matter how much it improves everyday life, isn't included in output, which means it's not included in productivity either.  This means our standard of living is improving faster than the official reports show.  On the manufacturing side, productivity declined 1.2% at an annual rate in fourth quarter, is down 0.7% in the past year.  The decline was probably partly attributed to a month-long strike at GM in Q4, along with cutbacks in production and hours after exports stalled specifically with China. We anticipate faster productivity growth over the next few years as business investment picks back up as uncertainty around trade abates, and better policies lead to a smaller government and a more vibrant private sector. In turn more new technology from a stronger private sector will increase output in many sectors of the economy.  Meanwhile a tighter labor market and faster growth should generate more pressure for efficiency gains, while the technological revolution continues to provide the inventions that make those gains possible.   In other news this morning, new claims for jobless benefits declined 15,000 last week to 202,000.  Continuing claims rose 48,000 to 1.751 million.  Plugging this into our models puts our final forecast for tomorrow's jobs report at an increase of 172,000 in nonfarm payrolls. 

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Posted on Thursday, February 6, 2020 @ 11:03 AM • Post Link Share: 
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  The ISM Non-Manufacturing Index Increased to 55.5 in January
Posted Under: Data Watch • ISM Non-Manufacturing


Implications:  The service sector followed manufacturing higher to start 2020, with the ISM non-manufacturing index rising to a five-month high of 55.5.  And the growth was broad-based in January, with twelve industries reporting growth, while six showed decline.  The two most forward-looking indices – business activity and new orders – both moved higher in January.  Companies reported increased orders in January thanks to higher optimism about the Q1 outlook and a pickup in demand from customers.  Business activity, meanwhile, rose as companies work to fill the continued growth in orders.  There was little mention of the coronavirus from respondents, with the exception being the health care industry which is monitoring demand for masks and safety goggles.  Unexpected events like the coronavirus can bring volatility to the data, especially with survey-based measures where emotion can play into responses.  We don't anticipate a material change to the fundamentals, which should keep the service sector expanding at a healthy pace in the year ahead.  It's worth noting that activity could have grown faster but for difficulty in finding qualified labor to fill additional positions (which shouldn't be a surprise with the unemployment rate at multi-decade lows).  The employment index slipped to 53.1 from 54.8 in December.  While we are waiting on tomorrow's initial claims data to finalize our forecast, other data on the labor market suggests Friday's employment report will show a print of around 172,000 nonfarm jobs added, a pickup from the 145,000 jobs added in December.  With the tighter labor market, we anticipate that 2020 will average around 150,000 to 160,000 jobs added per month, pushing the unemployment rate towards 3.2%, which would mark the lowest unemployment since the 1950s.  On the inflation front, the prices paid index declined to 55.5 from 59.3 in December, as a drop in fuel costs was partially offset by rising prices for beef, cheese, and labor.  With the manufacturing index rising back above 50 in January, and the service sector showing healthy growth, the pouting pundits have shifted their attention to other topics. They live on fear, even when the fear isn't justified.  We let the data do the talking, and the data show the expansion continues.

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Posted on Wednesday, February 5, 2020 @ 11:59 AM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $48.9 Billion in December
Posted Under: Data Watch • Trade


Implications: The trade deficit rose in December to $48.9 billion, slightly larger than consensus expectations, but both exports and imports rose, by $1.6 billion and $6.8 billion respectively.  It's good news when the total volume of trade (imports plus exports) increases and that's the most important takeaway from today's headline numbers.  That said, look for a temporary reversal in the next couple of months as the Coronavirus takes a toll on trade with China.  After that problem (hopefully) clears – and signs are it will – imports and exports should rebound as new trade deals with key trading partners start to go into effect.  The US now has a "Phase One" deal with China as well as USMCA, and a new trade deal that went into effect January 1st, 2020 with Japan. The media focuses so much on China, yet in 2019, China was our third largest trading partner. Mexico and Canada were one and two and Japan was number four. Total trade from these three is far larger than with China, yet China is what the media obsess over.  Today's report also showed for the fourth month in a row, the dollar value of US petroleum exports exceeded the dollar value of US petroleum imports.  Yes, you read that right: the US was again a net petroleum exporter in December.  Horizontal drilling and fracking have transformed the global energy market and the US is no longer hostage to foreign oil.  This pattern may temporarily reverse in early 2020 due to the seasonal pattern of US oil imports but should re-assert itself by Spring.  In other news this morning, the ADP index for private-sector jobs increased 291,000 in January versus a consensus-expected 157,000.  We expect Friday's official Labor Department report to show a nonfarm gain of 170,000.  In other news from earlier in the week, cars and light trucks were sold at a 16.8 million annual rate in January, up 1.2% from December and up 0.8% from a year ago.  Car and light truck sales totaled 16.9 million in 2019, so January's sales pace was slightly below that level.  Look for total sales of 16.7 million in 2020 as consumers gradually shift their ample purchasing power to other sectors.

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Posted on Wednesday, February 5, 2020 @ 11:51 AM • Post Link Share: 
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  The ISM Manufacturing Index Rose to 50.9 in January
Posted Under: Data Watch • ISM


Implications:  Manufacturing activity jumped back into gear to start 2020, increasing the most for any single month since 2013 and returning to expansion territory for the first time since July 2019.  Of the eighteen industries reporting, eight showed growth in January, eight reported contraction, and two reported no change.  While trade continues to weigh on respondents' comments, the ISM reports that "many respondents were positive for the first time in several months."  And based on the survey numbers, they have good reason to be perking up.  The two most forward-looking indices - new orders and production – both saw a notable rise in January and broke above 50, signaling expansion. The production index surged 9.5 points in January (the largest single-month increase in more than six years) to 54.3, while new orders rose 4.4 points to 52.0, moving to expansion levels after five months in contraction territory.  We expect the ISM index to continue showing moderate expansion in the months ahead, proving the fears over last year's dip below 50 to have been overdone.  The ISM data simply haven't been matching what we are seeing from other reports. Personal income and spending data for 2019 showed goods consumption rose 6.2% for the year, the largest annual increase for the series in fifteen years!  So, with consumers clearly buying and companies apparently not producing, something needed to give.   In fact, today's report showed the customers' inventories remained in contraction territory at 43.8 in January.  Customers' inventories have now been declining for 40 consecutive months, which is a positive for future factory output (and future GDP).  Given that we are also not seeing a pickup in layoffs – something you would expect to see if business had truly slowed significantly - we have leaned toward the hard data as a more reliable gauge of economic health. Speaking of workers, the employment index rose to 46.6 from 45.2 in December.  We are forecasting that manufacturing payrolls declined by 7,000 in January, but that nonfarm payrolls as a whole rose a healthy 165,000.  Finally, on the inflation front, the prices paid index rose to 53.3 in January, pushed higher due primarily to metals (namely steel and aluminum).  Paired with data on GDP growth, employment, and consumer spending, the economy remains on solid footing as we start the new decade.  In other news this morning, construction spending declined 0.2% in December (but was up 0.3% including revisions to prior months), coming in below the consensus expected gain of 0.5%.  A slowdown in the production of manufacturing facilities and commercial projects were partially offset by a pickup in home building.  Given the upward revisions to prior months, it now looks like real GDP grew at a 2.2% annual rate in Q4, a tick higher than the 2.1% rate the government reported last week. 

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Posted on Monday, February 3, 2020 @ 11:58 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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