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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  New Single-Family Home Sales Increased 4.0% in March
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  New home sales surprised to the upside in March, beating even the most optimistic forecast by any economics group to post the second highest sales pace since 2007.  Sales of new homes rose 4.0% in March, and are now up 8.8% from a year ago.  Significant upward revisions to prior months also helped pull the Q1 sales pace into positive territory, now up at a 7.1% annualized rate versus the Q4 2017 average.  Note that the gains in new home sales have been made in spite of rising mortgage rates over the past year, which many analysts claimed would derail the housing recovery.  Looking forward, prospects remain good for further growth over the next few years, though month-to-month volatility is to be expected.  Prior to the end of the housing bubble, sales of new homes were typically about 15% of all home sales.  They fell to around 6.5% of sales at the bottom of the housing bust, and now have recovered to 11%.  In other words, there's plenty of room for growth in new home sales, which means room for home building to grow as well.  At first glance, inventories sitting at a post-crisis high would seem to refute this. However, completed units are now at their lowest portion of inventories since recording began back in 1999.  And jobs continuing to grow at a healthy pace, wages accelerating, and the tax cut taking effect all support optimism about home building in the years ahead.  Although the new tax law trims back the mortgage interest deduction for some high-end homes, the value of the mortgage interest deduction was affected more broadly by the marginal tax rate reductions in the 1980s, during which housing did well.  Yes, the new tax law also trims back state and local tax deductions, including the property tax, but we think that's going to affect where people live, not overall home building nationwide.  The US economy is looking up, and home sales will continue to trend higher.  In other housing news this morning, the national Case-Shiller index reported home prices were up 0.5% in February and are up 6.3% versus a year ago, an acceleration from the 5.6% gain in the twelve months ending February 2017.  In the last year, price gains were led by Seattle and Las Vegas.  Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.6% in February and is up 7.2% versus a year ago, an acceleration from the 6.7% gain in the twelve months ending February 2017.  Finally, on the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory sentiment, fell unexpectedly to -3 in April from +15 in March, its first negative reading since late 2016. Look for a rebound into positive territory in the months ahead.

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Posted on Tuesday, April 24, 2018 @ 11:57 AM • Post Link Share: 
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  Existing Home Sales Increased 1.1% in March
Posted Under: Data Watch • Home Sales • Housing

 

Implications:  Existing home sales rose more than expected in March, posting a second month in a row of increases.  Sales of previously-owned homes rose 1.1% in March to a 5.60 million annual rate. The faster pace of sales in March was driven entirely by the Northeast and Midwest regions, which were also the regions where closings slumped in February.  Although sales are down slightly from a year ago, that's not a reason for concern; March 2017 had the second fastest pace of sales for any month last year, so it's just a tough comparison point this month.  We expect sales to grow in 2018, although tight inventories remain a headwind.  Inventories have been lower on a year-over-year basis for 34 consecutive months and are down 7.2% from a year ago.  The months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – rose to a still extremely low reading of 3.6 months in March from 3.4 months in February.  According to the NAR, anything less than 5.0 months (a level we haven't breached since 2015) is considered tight supply.  Despite the lack of choices, demand for existing homes has remained remarkably strong, with 50% of homes sold in March remaining on the market for less than a month.  Higher demand and a shift in the "mix" of homes sold toward more expensive properties has also driven up median prices, which are up 5.8% from a year ago.  The strongest growth in sales over the past year is heavily skewed towards the most expensive homes, signaling that supply constraints may be disproportionately hitting the lower end of the market.  Tough regulations on land use raise the fixed costs of housing, tilting development toward higher-end homes.  Although some analysts may be concerned about the impact of tax reform on home sales, few homeowners exceed the new thresholds for deductibility.  Finally, though mortgage rates may be heading higher, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is moving higher again.

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Posted on Monday, April 23, 2018 @ 11:57 AM • Post Link Share: 
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  Modest Growth in Q1

From mid-2009 through early 2017, the US economy grew at a real average annual rate of 2.2%.  Not a recession, but not robust growth either, which is why we called it a Plow Horse Economy.

For the first quarter of 2018, we expect growth of 1.9% at an annualized rate, right in-line with a Plow Horse. 

But that doesn't mean the economy is still a Plow Horse.  It isn't.  Growth has picked up, even if last quarter doesn't show it.  Even with a 1.9% growth rate in Q1, real GDP is still up 2.7% from a year ago, and we anticipate an average growth rate of around 3% this year and next year with higher odds of growth exceeding that pace rather than falling short.
 
Taxes and regulations have been cut and monetary policy remains loose.  Look for a significant acceleration in growth in the quarters ahead. 

Here's how we get to 1.9% for Q1.  But, keep in mind that we get reports on shipments of capital goods on Thursday as well as early data on trade and inventories, so we could end up tweaking this forecast slightly later this week. 

Consumption:  Automakers reported car and light truck sales fell at a 12.4% annual rate in Q1, in large part due to a return to trend after the surge in sales late last year following Hurricanes Harvey and Irma.  Meanwhile, "real" (inflation-adjusted) retail sales outside the auto sector declined at a 0.8% annual rate.  However most consumer spending is on services, and growth in services was moderate.  Our models suggest  real personal consumption of goods and services, combined, grew at a 1.2% annual rate in Q1, contributing 0.8 points to the real GDP growth rate (1.2 times the consumption share of GDP, which is 69%, equals 0.8).

Business Investment:  It looks like another quarter of solid growth, with investment in equipment growing at about a 5% annual rate, and investment in intellectual property growing at a trend rate of 5%, as well.  Meanwhile, commercial construction looks unchanged.  Combined, it looks like business investment grew at a 4% rate, which should add 0.5 points to real GDP growth.  (4.0 times the 13% business investment share of GDP equals 0.5).

Home Building:  It looks like residential construction grew at a 5% annual rate in Q1, roughly the same pace as the average over the past five years.  This should add 0.2 points to the real GDP growth rate.  (5.0 times the home building share of GDP, which is 4%, equals 0.2).

Government:  Public construction projects were up in Q1, but military spending declined.  Looks like overall real government purchases rose at a 0.6% annual rate in Q1, which would add 0.1 points to the real GDP growth rate.  (0.6 times the government purchase share of GDP, which is 17%, equals 0.1).

Trade:  At this point, we only have trade data through February.  Based on what we've seen so far, it looks like net exports should subtract 0.7 points from the real GDP growth rate in Q1.

Inventories:  Like with trade, we're also working with incomplete figures on inventories.  But what we do have suggests companies were accumulating inventories more rapidly in the first quarter than at any time in 2017.  This should add a full 1.0 point to the real GDP growth rate.

Add it all up, and we get a 1.9% growth rate.  More data will come, and we could adjust, but hopes of a blow-out quarter have dimmed in recent months.  Nonetheless, the year-over-year growth rate has accelerated, and this slower quarter is just a temporary pause.  Corporate sales, incomes, jobs growth, investments, and construction are all accelerating.  So will GDP.

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

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Posted on Monday, April 23, 2018 @ 10:55 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 23, 2018 @ 8:41 AM • Post Link Share: 
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  The Yield Curve will NOT Invert
Posted Under: Government • Fed Reserve • Interest Rates
Posted on Monday, April 23, 2018 @ 7:42 AM • Post Link Share: 
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  Industrial Production Rose 0.5% in March
Posted Under: Data Watch • Industrial Production - Cap Utilization

 

Implications:  Higher auto production, a weather-related boost from utilities, and continued gains in mining pushed industrial production higher in March, following February's strong gains.  More importantly, industrial production has increased 4.4% in the past year, the largest 12-month increase since 2011.  Motor vehicle production helped manufacturing eke out a 0.1% increase in March on the back of February's upwardly revised 1.5% gain, the largest monthly increase going all the way back to 2009.  However, non-auto manufacturing fell 0.2% in March, which might worry some analysts. But because this drop follows a very large 1.3% jump in February, and was due to weakness in food, plastics, and textiles, we don't think it suggests any fundamental weakness in the industrial sector.  Meanwhile, after a relatively warm February, utility output surged in March as temperatures around the country returned closer to normal.  Given the late arrival of Spring across much of the U.S. in April, utilities look likely to provide a boost to production in next month's report as well.  The other reason for growth in production in March was mining, which rose 1.0% in March on the back of healthy gains in oil and gas extraction.  In the past year, mining production is up 10.8%.  Drilling slowed in the second half of 2017, most likely associated with hurricanes Harvey and Irma, but remains up 17% from a year ago.  In addition, the rig count has continued to rise in recent weeks, suggesting gains in mining production will continue in the months ahead.  Taken as a whole, the tailwinds from tax cuts and deregulation continue to boost business investment and a general pickup in economic activity.

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Posted on Tuesday, April 17, 2018 @ 11:19 AM • Post Link Share: 
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  Housing Starts Increased 1.9% in March
Posted Under: Data Watch • Home Starts • Housing

 

Implications:  Housing starts rose much more than expected in March to eke out a gain after falling in February.  Starts rose 1.9% in March to a 1.319 million annual rate, and are now up 10.9% from a year ago.  However, today's positive number came exclusively from the very volatile multi-unit sector, which can't be relied on for consistent growth.  In fact, all the growth in housing starts in Q1 came from multi-unit starts, which are up 18.4% versus the Q4 2017 average while single family starts are down 0.5% over that period.  That said, single family starts are still up 5.2% versus a year ago, and continue to be the main driver of trend growth, as the chart above shows. Look for single-family starts to bounce back in the months ahead.  A transition to more growth in single-family construction than multi-family will be good news for the overall economy.  On average, each single-family home contributes to GDP about twice the amount of a multi-family unit.  Even though permits for new single-family construction fell 5.5% in March, the horizon continues to look bright for future activity.  Single-family permits are still up 1.7% from a year ago, while the number of single-family units currently under construction are at the highest pace since the last recession. As these projects are completed it will free up developers to start new ones which will show up in the headline numbers.  Notably, the gain in the past twelve months has happened despite a significant uptick in mortgage rates, which some analysts claimed would derail the housing recovery.  Based on population growth and "scrappage," housing starts should eventually rise to about 1.5 million units per year.  And the longer this process takes, the more room the housing market will have to eventually overshoot the 1.5 million mark.  Although tax reform trimmed the principal limit against which borrowers can take a mortgage interest deduction to $750,000 versus the prior amount of $1 million, the law only affects new mortgages.  Large reductions to marginal tax rates in the early 1980s, which reduced the value of the mortgage interest deduction, coincided with a rebound in housing.  In other words, we don't expect the changes in the deduction to cause problems for the housing industry at the national level, although we do expect some shift in building toward regions with lower taxes and land prices.

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Posted on Tuesday, April 17, 2018 @ 11:05 AM • Post Link Share: 
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  Retail Sales Rose 0.6% in March

 

Implications: Retail sales rebounded in March, rising for the first time in  four months and beating consensus expectations.  Retail sales rose 0.6% in March driven by gains in autos and internet & mail-order sales. It looks like the lull after the post-hurricane spending spree, which pulled sales forward into last Fall, is now over.  It was a solid report all around as eight of 13 major categories showed gains.  Retail sales are up a healthy 4.5% from a year ago, both overall and excluding auto sales.  That being said, plugging today's report into our GDP models suggests real consumer spending will be up at a roughly 1.2% annual rate in Q1, the slowest pace for any quarter in almost five years.  As a result, it now looks like real GDP only grew at about a 2.0% annual rate in Q1.  However, this has more to do with the timing of economic growth than the trend.  We remain very optimistic about an acceleration of growth in 2018 and still expect growth of 3.0%+ for the year, which would be the best since 2005.  As we get back to normal, expect overall retail sales to continue the trend higher in the months to come.  Why are we optimistic about retail sales growth in the months ahead?  Jobs and wages are moving up, tax cuts are taking effect, consumers' financial obligations are less than average relative to incomes, and serious (90+ day) debt delinquencies are down substantially from post-recession highs.  In other news this morning, the Empire State index, a measure of manufacturing sentiment in New York, declined to a still very healthy 15.8 in April from 22.5 in March.  Also today, the NAHB index, which measures homebuilder sentiment, fell slightly to 69 in April from 70 in March, remaining at a historically elevated level signaling optimism among builders.

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Posted on Monday, April 16, 2018 @ 10:49 AM • Post Link Share: 
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  Thoughts on Trade

When the report on international trade came out earlier this month, protectionists were up in arms.  Through February, the US' merchandise (goods only, not services) trade deficit with the rest of the world was the largest for any two-month period on record.  "Economic nationalists" from both sides of the political aisle, think this situation is unsustainable. 

Meanwhile, some investors ran for the hills when President Trump started announcing tariffs on steel, aluminum, and other goods, thinking this was the reincarnation of the Smoot-Hawley tariffs that were a key ingredient of the Great Depression.      

We think the hyperventilating on both sides needs to stop.

In general, nothing is wrong with running a trade deficit.  Many states run large and persistent trade imbalances with other states and, rightly, no one cares.  We, the authors, run persistent trade deficits with Chipotle and Chick-fil-A, and we're confident these deficits are never going away.

Running a trade deficit means the US gets to buy more than it produces.  In turn, we have this ability because investors from around the world think the US is a good place to put their savings, leading to a net capital inflow that offsets our trade deficit.  Notably, foreign investors are willing to invest here even when the assets they buy generate a low rate of return.  As a result, this process can continue indefinitely.  

It's important to recognize that free trade enhances our standard of living even if other countries don't practice free trade.  Let's say China invents a cure for cancer and America invents a cure for Alzheimer's.  If China refuses to give their people access to our cure, are we better off letting our people die of cancer?  Of course not!

Imposing or raising tariffs broadly would not help the US economy.  Nor would imposing tariffs on specific goods, like steel or aluminum.  Giving some industries special favors will only create demand for more special favors from others.  It'll grow the swamp, not drain it.   

All that said, we understand the frustration policymakers have with China, in particular, which has been levering access to its huge market to essentially steal foreign companies' trade secrets and intellectual property.  It has a long-term track record of not respecting patents or trademarks.

In theory, letting China into the World Trade Organization was supposed to stop this behavior.  But no company wants to bring a WTO case against China when it thinks China would respond by ending its access to their markets and letting in competitors who are more willing to be exploited.         

In addition – and this is very important – China is unlike any of our other trading partners in that it is a potential major military rival in the future.  There is a national security case to be made - even if one takes a libertarian position on free trade in general - that the US could accept a slightly lower standard of living by limiting trade with China, if the result is a lower standard of living for China as well.          

And China doesn't have much room to fire back at recent US proposals (none of the tariffs targeted specifically at China have been implemented, by the way).  Last year, China exported $506 billion in goods to the US, while we only sent them $130 billion. 

That gives our policymakers room to raise tariffs on China much more than they can raise them on us.  If so, China would generate fewer earnings to turn into purchases of US Treasury debt.  Yet another reason for fear among bond investors.  However, don't expect China to outright dump Treasury securities in any large amount.  They own our debt because it helps them back up their currency, not as a favor to the US.            

We're certainly not advocating a trade war.  But an approach that focuses narrowly on China's abusive behavior could pay dividends if it moves the world toward freer trade.

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

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Posted on Monday, April 16, 2018 @ 10:28 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 16, 2018 @ 7:49 AM • Post Link Share: 
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