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   Brian Wesbury
Chief Economist
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  Debt, the Economy, and Stocks
Posted Under: Government • Markets • Video • Spending • Taxes • Stocks • Wesbury 101
Posted on Friday, February 22, 2019 @ 3:40 PM • Post Link Share: 
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  Existing Home Sales Declined 1.2% in January
Posted Under: Data Watch • Home Sales • Housing


Implications:  Existing home sales continued to struggle in January, falling for the third consecutive month to the slowest pace since November 2015.  Despite the disappointing headline number, there is some sunshine on the horizon for the housing market in 2019.  One reason for the weakness in sales at the end of 2018 was the rise in mortgage rates and drop in the stock market this past fall.  However, rates have since receded and the stock market has rebounded.  Further, despite median prices rising for the 83rd month in a row on a year-over-year basis, the rate of growth has been slowing consistently, with January only showing an increase of 2.8%.  This means wages are now growing faster than prices for the first time since 2012, which should boost affordability going forward.  That being said, some headwinds for sales remain.  First, potential homebuyers in high-tax states are likely still reeling due to the new $10,000 cap on state and local deductions. But the primary culprit behind the tempered housing market has been the ongoing lack of supply.  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 January and has now stood below 5.0 since late 2015 - the level the National Association of Realtors (NAR) considers tight.  The good news is that inventories have finally been turning a corner, rising on a year-over-year basis - the best measure for inventories given the seasonality of the data - for the sixth month in a row after 38 straight months of stagnation and declines.  If sellers really are changing their behavior, a reversal in the steady decline of listings we've seen since mid-2015 would be a welcome reprieve for buyers, boosting supply and sales, as well as keeping a lid on price growth.  It won't be a straight line higher but fears that the housing recovery is over are overblown.  In other recent housing market news, the NAHB index, which measures homebuilder sentiment, rose to 62 in February from 58 in January. This signals a continued rebound in optimism from builders (primarily attributed to lower mortgage rates) after the index hit a three year low of 56 in December. 

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Posted on Thursday, February 21, 2019 @ 12:12 PM • Post Link Share: 
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  New Orders for Durable Goods Rose 1.2% in December
Posted Under: Data Watch • Durable Goods


Implications:  Durable goods rose for 1.2% in December, on the back of a 1.0% increase in November, as commercial aircraft orders continue to rise.  Truth be told, outside of orders for aircraft and automobiles, durable goods orders in December left something to be desired.  Stripping out the typically volatile transportation sector – which rose 3.3% in December – shows durable goods orders rose a modest 0.1%.  And a closer look at the details shows a pickup in orders for fabricated metal products and a modest increase in orders for computer and electronics were more than offset by a slowdown in orders for machinery and primary metals.  It was actually the catch-all "all other durable goods" category that kept orders ex-transportation in positive territory, rising 0.9% in December.  But more important than month-to-month changes, the trend continues to show a healthy pace of activity, with total orders up 3.5% in the past year, both including and excluding transportation.  The most anticipated data point in today's release was shipments of non-defense capital goods ex-aircraft (a key input for business investment in the calculation of GDP growth), which rose 0.5% in December and were up at a 2.3% annualized rate in the fourth quarter versus the third quarter average.  Further, 2018 posted the fastest full-year growth rate in "core" shipments in six years, demonstrating that the promised benefits to business investment from the Tax Cuts and Jobs Act have in fact materialized.  Plugging these figures into our GDP models suggests real GDP will be up at around a 2.1% annual rate in the fourth quarter, although figures out next Wednesday on international trade and inventories may alter that estimate.  Growth at a 2.1% pace in Q4 would mean real GDP grew 3.0% in 2018 (Q4/Q4), the fastest pace since 2005.  Healthy growth in durable goods orders, a strong labor market, and the economy on track for the fastest annual growth in more than a decade, and yet the media still rings the alarm bells of recession.  As far as the data show, companies (and consumers) don't seem nearly as worried as the pouting pundits, and political posturing has little chance of denting the strong growth track that entrepreneurs and innovators have set us on.  In employment news this morning, initial jobless claims fell 23,000 last week to 216,000.  Meanwhile, continuing claims declined 55,000 to 1.73 million.  Both measures reflect a very healthy jobs market, and suggest another month of solid payroll gains in February. On the manufacturing front, the Philly Fed Index, a measure of East Coast factory sentiment, fell to -4.1 in February from +17.0 in January, the first time the index has touched negative territory in nearly three years.  The drop was led by declines in both new orders and shipments. On a more positive note, the forward expectations index was virtually unchanged at a healthy 31.3, suggesting respondents see the current weakness as temporary.

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Posted on Thursday, February 21, 2019 @ 11:33 AM • Post Link Share: 
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  How TARP and QE Led to the "Green New Deal"
Posted Under: Government • Monday Morning Outlook • Fed Reserve • Spending • Taxes

The most important quote from the Financial Panic of 2008 came from President Bush:  "I've abandoned free market principles to save the free market system."

The quote came in defense of TARP, the $700 billion bailout of the banking system, which many still mistakenly believe prevented another Great Depression.  Many also think Quantitative Easing, the Fed's multi-trillion dollar purchases of Treasury and mortgage-backed securities, was also key in "saving" us from the free market.  But the facts dispute this.  QE began in September 2008, TARP was passed in early October, but the market fell an additional 40%.  It didn't bottom until it was clear that mark-to-market accounting rules would be changed.

The Bush Treasury, the Fed, and the SEC were all aware of the problems mark-to-market was causing.  The accounting rule forced banks to value securities at fire sale prices regardless of their actual cash flow.  This eroded bank capital which scared away investors and caused an even greater impulse to sell.  Many prominent bankers, economists, and politicians were very vocal about the damage the rule was causing.  But the Administration rallied support from journalists and hedge funds (who profited from the carnage mark-to-market accounting caused) to support a massive growth in government.  It was the wrong choice. 

In the 1980s, losses at money-center banks due to defaults by emerging market countries, losses at Savings & Loans, and farm and oil bank failures were much larger relative to bank capital than subprime losses in 2008-09.  But there was no mark-to-market accounting back then.   The Reagan Administration gave these institutions the ability to grow themselves out of the problem, which many did during the economic boom of the 1980s.  After giving them time, the banks and S&Ls that couldn't grow out of their problems were shut down.  The banking system survived without a crisis.  If the Bush Administration had followed Reagan's lead, the crisis would never have spiraled.

But that's not the worst part.  Republicans are supposed to support free markets because free markets actually work.  This matters most in the middle of a storm – either you believe in your basic philosophy or you don't.  In this case not only did Republicans violate free market principles, but argued the government had to save the world, and bailed out big banks and Wall Street – the rich guys!  What a political disaster. 

When believers in free markets support bailouts, any objection to using the government to redistribute funds to others is just snobbery or hypocrisy.  And, in turn, why not use the government to fix what are perceived by many to be major collective problems, like health care, or climate change or poverty.

Which brings us the "Green New Deal," the mother of all big-spending social programs and government micro-management rolled into one, including a massive shift in energy toward 100% renewables (think, solar and wind power, not nuclear) in about ten years, a shift from air travel to rail, retro-fitting every building in the US to save energy, the replacement of traditional car engines for electric cars, a much higher minimum wage, "Medicare for All," and a bevy of other ideas.  Mundane behavior like eating meat could also be in the crosshairs due to "emissions" from cows.           
One estimate by a Bloomberg columnist suggests these proposals could carry a total cost of $6.6 trillion per year.  To put that in perspective, in the past twelve months the federal government has raised $3.3 trillion in revenue, including $1.7 trillion in individual income taxes, and spent $4.2 trillion.  In other words, it's an impossible fantasy that would require tax collections at least three times higher than today.  To think this wouldn't reduce the incentive to work, while increasing the incentive to not work is denial.

On top of current taxes – federal, state, and local – plus the cost of regulations, the government would control around 70% of GDP.  Which is to say that the proposal will not become law, or even close. 

However, we hope this serves as a lesson to policymakers who proclaim their support for free markets.  A decade ago, too many of these "principled" politicians turned out to be "fair weather" free-marketeers.  When the going got rough, they gave up.  And they are, in large part, to blame for more radical proposals today.   

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

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Posted on Tuesday, February 19, 2019 @ 10:44 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 Tuesday, February 19, 2019 @ 9:28 AM • Post Link Share: 
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  Industrial Production Declined 0.6% in January
Posted Under: Data Watch • Industrial Production - Cap Utilization


Implications:  Industrial production started 2019 on a disappointing note, falling unexpectedly to post the first decline in eight months.  However, there are a couple reasons why you should take today's report with a grain of salt.  First, the details show that most of the decline in the overall index was due to an 8.8% drop in the volatile auto sector, which is now down 0.7% from a year ago.  By contrast, non-auto manufacturing declined a more modest 0.3% in January and remains up 3.1% versus a year ago.  Second, today's report on industrial production is in sharp contrast with the January reading on the ISM manufacturing index from earlier this month, which rebounded on strength in the new orders and production indices, which posted their largest monthly gains since 2014 and 2010, respectively.  It is too soon to tell which report will be right, but for the time being any talk of a sharp slowdown in the factory sector is too early and making too much of one month's data.  In the past year, the various capital goods indices continue to show healthy growth with business equipment up 3.8%, machinery up 5.1%, and high-tech equipment up 6.5%.  Comparing this with the slower year-over-year growth of 2.4% for nondurable goods and 2.8% for manufacturing as a whole demonstrates that capital goods production remains a valuable source of strength in the sector.  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.  Looking outside the manufacturing sector, mining activity grew for the twelfth month in a row in January and is now up 15.3% in the past year.  Finally, utilities rose 0.4% in January, rebounding as things returned toward normal after unseasonably warm weather in much of the country reduced demand for heating in December.  In other news this morning, the Empire State Index, which measures factory sentiment in the New York region, rebounded to 8.8 in February from 3.9 in January, signaling rising optimism.  On the inflation front, import prices declined 0.5% in January, while export prices fell 0.6%. In the past year, import prices are now down 1.7%, while export prices are down 0.2%.  Expect these figures to rebound soon in response to the turnaround in oil prices as well as a deal with China on some of our trade issues.

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Posted on Friday, February 15, 2019 @ 10:57 AM • Post Link Share: 
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  The Producer Price Index Declined 0.1% in January
Posted Under: Data Watch • Inflation • PPI


Implications:  With two consecutive months of declines for the producer price index – and prices down at a 0.3% annual rate in the past three months - are we seeing a softening in inflation that justifies the bears' calls for a prolonged Fed pause?  Not even close.  Strip out the ever-volatile food and energy categories - which fell 1.7% and 3.8%, respectively, in January – and producer prices rose 0.3%.  And the pace of "core" inflation stands comfortably above the Fed's inflation target, up 2.6% in the past year (if you are feeling a bit of deja vu, yesterday's report on consumer prices showed a similar pattern).  In fact, outside of food and energy, not a single other major category of final demand prices fell in January. Within core PPI, prices for trade services (think wholesaler margins) rose 0.8%, and transportation & warehousing services increased 0.5%.  Notably, private capital equipment prices rose 0.6% in January, and are up 3.7% in the past year, possibly signaling rising business investment which will provide a boost to economic activity in the year ahead.  In other words, policymakers in Washington, DC – both Republicans and Democrats – need to stop wasting time trying to manipulate how companies use their resources.  Looking further down the price pipeline suggests we will continue to see some volatility in the month-to-month readings for the producer price index.  But with both the ISM Manufacturing and Non-Manufacturing indices comfortably in expansion territory, and an increasingly-tight labor market for qualified labor to both produce and transport goods, we expect wages - and general prices – will push higher at a faster pace in the year ahead.  At the end of the day, the trend in core prices – where the Fed will focus their attention – suggests inflation of around 2.5% in 2019. 

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Posted on Thursday, February 14, 2019 @ 11:37 AM • Post Link Share: 
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  Retail Sales Declined 1.2% in December
Posted Under: Data Watch • Retail Sales


Implications:  There's no way around it, today's retail data for December were ugly.  Our first inclination, given how inconsistent the report is with other economic data – like surging employment, accelerating wages, and the Johnson-Redbook measure of same-store sales – is to suspect that the partial government shutdown hampered the Census Bureau's ability to collect and process the data.  Yes, we know Census said there was no problem, but it certainly appears to be an odd coincidence.  Another oddity is that the report shows a 3.9% decline in sales at non-store retailers, which includes internet sales, the largest percentage drop since November 2008 in the midst of the financial crisis.   We find that hard to believe and expect either a substantial upward revision or a steep rebound for January.  Looking at the report, overall retail sales declined 1.2% in December, falling by the most in nine years, and coming in much lower than any economic forecasting group expected.  The declines were broad-based, as eleven of thirteen major categories showed a drop in sales.  Sales at gas stations fell 5.1% in December.  "Core" sales, which exclude autos, building materials, and gas stations (the most volatile sectors) were down 1.6%, were revised lower for prior months, but are still up 2.3% from a year ago. Plugging today's report into our models suggests "real" (inflation-adjusted) consumer spending, on goods and services combined, will be up at around a 3.0% annual rate in Q4 while real GDP grows at around a 2.5% rate.  Given the tailwinds from deregulation and tax cuts, we expect an average real GDP growth rate of close to 3% in both 2018 and 2019, a pace we haven't seen since 2004-05.  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 near the lowest in more than 30 years.  In other news today, initial jobless claims rose 4,000 last week to 239,000.  Meanwhile, continuing claims rose 37,000 to 1.77 million.  However, both remain at very healthy levels and we expect a solid gain in payrolls for February.

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Posted on Thursday, February 14, 2019 @ 11:24 AM • Post Link Share: 
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  The Consumer Price Index was Unchanged in January
Posted Under: CPI • Data Watch • Inflation


Implications:  Consumer prices were unchanged for a third consecutive month in January, though the headline number masks the real story.  Recent months have been a textbook example of how volatility distorts readings. Energy prices fell 2.8% in November, 2.6% in December, and 3.1% in January.  But while the consumer price index showed no change in overall price inflation over that period, "core" inflation (which excludes the typically volatile food and energy categories) rose a steady 0.2% in all three months.  Over the past three months, overall inflation has declined 0.2% annualized, while "core" prices are up at a 2.6% annual rate.  In other words, the Fed (which understands the short-term volatility coming from the energy sectors) continues to see ample data to support a path of continued rate hikes if – and this is important – we see longer term interest rates begin to rise.  The Fed does not want to force a yield curve inversion, but we believe continued solid economic growth and further resolution of trade tensions will bring confidence back to the markets and a return to a more "risk on" environment will put upward pressure on interest rates.  As we stated in our annual forecasts release, we expect the 10-year Treasury to end the year at 3.4%, giving the Fed room for two, maybe three hikes in 2019.  Looking at the details of the January report shows housing and medical care led the rise in "core" prices, both up 0.2%.  Arguably the best news in today's report was that real average hourly earnings rose 0.2% in January and are accelerating.  These real wages are up 1.7% in the past year, up 2.4% at an annual rate over the past six months, and up 3.4% at an annual rate in the past three-months. Remember, "real" wage growth represents increases in earnings above the pace of inflation, so these are direct gains to consumer purchasing power. And these earnings do not include irregular bonuses – like the ones paid by companies after the tax cut or to attract new hires – or the value of benefits.  Strong employment growth, healthy corporate earnings, and the continued pickup in new orders suggest that this trend will continue through 2019.  So ignore the CPI headline and any pouting pundits that try to spin today's report as a sign of weakness. That's just sloppy reporting and a lack of understanding.   The data show pretty much exactly what you would expect from an economy growing at a healthy pace.

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Posted on Wednesday, February 13, 2019 @ 9:56 AM • Post Link Share: 
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  Where’s the Recession?
Posted Under: GDP • Government • Markets • Monday Morning Outlook • Taxes • Stocks

Whatever happened to the recession calls? 

Seems like just a few weeks ago that the correction in the stock market as well as the partial government shutdown had convinced many analysts and investors the US was about to enter a recession.  

Fortunately, the data haven't cooperated.  Ten days ago we got the employment report for January, which showed a payroll increase of 304,000 and the highest share of adults working since 2008.  Yes, February has seen both initial and continuing unemployment claims average higher than in January, but only slightly.  In other words, job growth looks set to continue shutting down economic naysayers. 

Meanwhile, the ISM Manufacturing index, which had moved down to a still-solid 54.3 in December, rebounded to a robust 56.6 for January.  Traditionally, this measure needs to fall to 45.0, or below, to signal a US recession, and we're not even close.  The ISM Non-Manufacturing (services sector) index fell to 56.7 in January, which is still robust relative to historical standards.  And that index, compared to the one for manufacturing, tends to be more sensitive to temporary shifts in sentiment rather than changes in underlying business activity.

Last week we started clearing out some of the major backlog of government economic data created by the partial shutdown, including the report on international trade which showed a much smaller trade deficit than anticipated.  This further strengthens our expectation that the economy grew at a 2.5% annual rate in the fourth quarter of last year and will continue to grow at around that pace in the first quarter of 2019.   

This week, we'll get several reports to keep an eye on.  In particular, we'll finally find out about retail sales in December and also get industrial production in January, both of which play key roles in estimating real GDP growth.  

Superficially, we're not optimistic about retail sales, estimating that they were unchanged for the month.  But that was back in December when gas prices were plummeting.  Excluding gas, retail sales were likely OK.  Industrial production comes out Friday and we expect a modest increase of 0.2%.  If we're right, that'll mean production is up about 4.5% from a year ago, another sign we're nowhere close to recession.    

And in the meantime, we continue to get reports on corporate profits as well as forward guidance.  Profits compared to a year ago are doing well; estimates for the future, not so much.  But those estimates for the future appear excessively pessimistic.  The recession many anticipated isn't happening and consumers and businesses have plenty of purchasing power, which means top-line growth should offset any pressure on margins.       

In addition, the power of improved incentives has only begun to play out.  Dropping the corporate tax rate to 21% from 35% means companies have more reason to shift operations to the US.  But these shifts take time and it's only been a year.

Those predicting the next recession are going to be waiting for a while before they finally get one "right."      

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

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Posted on Monday, February 11, 2019 @ 11:53 AM • Post Link Share: 
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