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   Brian Wesbury
Chief Economist
 
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   Bob Stein
Deputy Chief Economist
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  The Consumer Price Index (CPI) Increased 0.6% in March
Posted Under: CPI • Data Watch • Government • Housing • Inflation • Fed Reserve • Interest Rates • COVID-19

 
Implications: What do you get when you take rising vaccinations and immunity, add in additional stimulus, all in an economy where supply-chains are still working to get back online?  Inflation rising at the fastest pace in more than a decade, on the tails of sizeable increases in January and February.  The 0.6% increase in the March CPI ties for the largest single-month increase going back to 2009.  The monthly gain in March, as well as the "base-effect" impact of comparing to last March (when prices were declining) pushed the 12-month increase in the CPI up to 2.6%.  With the largest monthly decline coming last April, even a flat reading in the CPI in the month ahead would put the 12-month CPI increase above 3%.  It's going to take time for supply-chain issues that have created shortages - and lifted prices - for things like semiconductors, lumber, and household appliance to resolve, but that is a temporary (or as the Fed likes to say "transitory") factor.  What is less temporary is the massive 27% increase in the M2 money supply and ongoing proposals for trillions more in government spending.  Simply put, math wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.  Will that change the Fed's plans to hold rates at zero for the foreseeable future?  Don't count on it.  The Fed seems to believe that this rise will ease later this year and into next as re-openings help ease supply-chain pressures.  We believe they are writing off the upward pressure in prices from the money supply growth too quickly.  Taking a look at the details of today's report shows energy led the consumer price index higher in March, rising 5.0% on the back of higher costs for gasoline and natural gas.  Food prices rose a more modest 0.1%, as higher costs for fruits and vegetables were largely offset by lower prices on dairy products.  Strip out these typically volatile categories, and "core" prices still rose 0.3% in March.  Here, housing costs were the main contributor, despite the governments measure for housing (which focuses on what homeowners would have to pay if they rented the house from someone else) being artificially subdued by the moratorium on evictions.  We like to follow "cash inflation," which is everything in the CPI except for owners' equivalent rent.  Cash inflation increased 0.7% in March and is up at a 4.9% annual rate since prices began to rise again last June.  Prices for used cars (impacted by the semiconductor shortage slowing production of today's ever more tech-heavy vehicles), auto insurance, and medical care also moved higher.  Inflation will be front and center in 2021 as the Fed – and markets – try to untangle just how quickly, and how sustained, will be the impact the of the unprecedented spending in response to COVID-19.  There is no free lunch.

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Posted on Tuesday, April 13, 2021 @ 11:43 AM • Post Link Share: 
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  Housing Boom to Continue
Posted Under: Home Sales • Home Starts • Housing • Inflation • Monday Morning Outlook • COVID-19

Housing prices have soared in the past year.  The national Case-Shiller index is up 11.2% in the past twelve months, the largest gain since 2005-06.  The FHFA index is up 12.0% in the past twelve months, the largest on record (going back to 1991).

Given these gains, some are wondering whether housing is back in a 2000s-type bubble.  But a deep dive into the data suggests we are not. 

To assess home prices we use the market value of all owner-occupied homes calculated by the Federal Reserve.  We then compare that to the "imputed" rent calculated by the Commerce Department for the GDP report.  (Imputed rent means what people would pay to rent their homes if they rented them from someone else.)  In the past 40 years, home values have typically been 16.4 times annual rent.  At the peak of the bubble in 2005, they were 21.4 times annual rent, or 33% above normal.  Now, home prices are 17.8 times annual rent, about 11% above normal.

We also compare home prices to the Fed's measure of replacement cost.  In the past 40 years, home prices have typically been 1.59 times replacement cost.  In 2005, they peaked at 1.94 times replacement cost, a premium of 22.5%.  Now homes are selling for 1.63 times replacement cost, only 2.5% above normal, which is minimal.

Does this mean housing is at risk?  We don't think so.  The recent price surge is based on fundamentals and the housing market should continue to boom.

The primary problem is a lack of homes.  Based on population growth and scrappage (voluntary knockdowns, fires, floods, hurricanes, tornadoes...etc.), we would normally expect housing starts of 1.5 million per year.  But in the past twenty years (March 2001 through February 2021), builders have only started 1.256 million per year.  Builders haven't started more than 1.5 million homes in a calendar year since 2006.          

No wonder the inventory of homes for sale is so low!  Single-family existing home inventories are at rock bottom levels, with only 870,000 for sale in February.  To put this in perspective, the lowest inventory for any February on record from 1982 through 2016 was 1.55 million.  Meanwhile, there are only 40,000 completed new homes for sale, versus 77,000 a year ago and an average of 87,000 in the past twenty years. 

Two other factors are likely at work.  One issue is that there's a moratorium on evictions, so some tenants are paying less in rent than they normally would, which is temporarily holding down rental values versus home prices (therefore elevating the price-to-rent ratio).  This is also holding down the housing component of the Consumer Price Index, which is calculated using rents, not home prices.

Another factor is that people have moved away from places where renting is popular to places where home ownership is popular.  If you leave New York City or San Francisco for Nashville or Boise, there's a good chance you went from renting to owning.  This helps boost home prices as well.

Yes, home prices are up and, yes, they look somewhat expensive relative to normal, but this is more about the unprecedented events of the past decade, not some problem with the market.  With the Fed so easy, and the stock of housing constrained, prices will continue to rise.  The housing boom will continue.   

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

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Posted on Monday, April 12, 2021 @ 12:12 PM • Post Link Share: 
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  The Producer Price Index (PPI) Rose 1.0% in March
Posted Under: Data Watch • Employment • Government • Inflation • PPI • Fed Reserve • Interest Rates • Spending • COVID-19

 
Implications: The Federal Reserve wanted more inflation and now we have more inflation.  For the second time in three months, producer prices jumped by a massive 1%+ on a month-to-month basis, pushing the headline reading to 4.2% year-to-year, the highest in nearly a decade.  And prices are accelerating, up at a 7.6% annualized pace in the past six months.  Three things are going on.  First, a "base effect" is making year-to-year comparisons higher because producer prices fell steeply last March during the onset of COVID-19.  Expect more of that in the near future as prices fell even faster in April 2020.  Second, extensive "supply-chain" issues are affecting the economy and leading to higher prices. Think the shortage in semiconductors for cars and trucks as well as delays in meeting demand for household appliances.  Third, the M2 measure of the money supply is up 27% versus a year ago.  The first two factors, the base effect and supply-chain issues, are temporary; the third issue, the huge increase in the money supply, will affect inflation over the long term.  The Fed seems to anticipate that after peaking later this year due to the base effect and supply-chain issues, inflation will subside later this year and into 2022. We think any waning in inflation later this year due to the first two factors will be temporary, as the increase in the money supply gains traction.  In other words, the Fed thinks recent higher inflation is temporary, but we think any deceleration in inflation later this year is the temporary phenomenon.  In terms of the details for March, prices for goods led the overall index higher, with the bulk of that coming from a 5.9% increase in energy costs (the index for gasoline alone increased 8.8%).  The food index rose 0.5% in March as increased costs for poultry were partially offset by lower prices for beef and veal.  Prices for services jumped 0.7% in March.  Within services, final demand trade services (think margins received by wholesalers and retailers) were the key contributor to higher costs, consistent with supply-chain problems.  Meanwhile, transportation and warehousing services had an outsized increase for the third consecutive month.  Further down the pipeline, prices for intermediate demand processed goods rose 4.0% in March, while intermediate demand unprocessed goods rose 9.3% (and are up at an astonishing 70.1% annualized rate in the past six months).  Intermediate unprocessed goods are up 41.6% from a year ago, and have shown significant movement since bottoming at a 28.6% twelve-month decline back in April 2020.  However, don't expect the Fed to signal any change in the plan to keep short-term rates near zero for the foreseeable future.  The Fed wants inflation to trend above the 2% target for a prolonged period, while the labor market – the other side of the Fed's dual mandate – also has to heal considerably further to get the Fed to seriously consider a move higher.  Expect inflation pressures to remain a dominant topic of conversation throughout the year ahead.  In recent news on the labor market, initial jobless claims rose 16,000 last week while continuing claims declined 16,000.  As we saw with March's nonfarm payroll gain of 916,000, jobs growth is re-accelerating with the easing of restrictions across the country as vaccinations continue to rise.  Expect significant job gains in the months ahead as we get back toward "normal."

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Posted on Friday, April 9, 2021 @ 11:12 AM • Post Link Share: 
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  COVID-19 Tracker 04/08/2021
Posted Under: COVID-19

The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective.

Click here to view the one page report.

Posted on Thursday, April 8, 2021 @ 4:33 PM • Post Link Share: 
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  Coronavirus High Frequency Data 04/08/2021
Posted Under: COVID-19

 

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level and year ago level are YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. Starting Mar. 11th 2021, data compares 2019 to 2021. % change month over month is the current reading minus the month ago reading.

Posted on Thursday, April 8, 2021 @ 12:36 PM • Post Link Share: 
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  The Trade Deficit in Goods and Services Came in at $71.1 Billion in February
Posted Under: Data Watch • Trade • COVID-19

 
Implications: The trade deficit in goods and services grew to $71.1 billion in February, the largest on record, as both exports and imports declined, but exports declined faster than imports. These drops come on the back of some very solid months of trade and we do not believe it is a new trend. Severe winter weather wreaked havoc across much of the United States in February, basically shutting down many states for an extended period, which took a large toll on trade.  In fact, after 13 months of a petroleum surplus, the trend reversed in February as the dollar value of US petroleum exports was smaller than US petroleum imports.  We do not believe this will continue for more than a few months, if that long, as weather was a one-off factor. Horizontal drilling and fracking have transformed the global energy market and the US is no longer hostage to foreign oil.  Expect trade to keep expanding in the coming months as businesses across the US get back on their feet as the COVID-19 vaccine continues to roll out. But we could continue to see larger deficits in the months ahead as the U.S. is recovering from the coronavirus pandemic faster than most other countries. This means the demand for imports should continue to outstrip the demand for exports to the rest of the world right now. As we have said over and over, the best stimulus the economy could possibly ask for is a COVID-19 vaccine. There have now been 219 million doses distributed in the US with 169 million of them administered, mostly to those over 65 years of age. The economy is starting to return to normal, the last thing it needs right now is too much fiscal stimulus.

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Posted on Wednesday, April 7, 2021 @ 11:50 AM • Post Link Share: 
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  Coronavirus High Frequency Data 04/06/2021
Posted Under: COVID-19

 

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level and year ago level are YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. Starting Mar. 11th 2021, data compares 2019 to 2021. % change month over month is the current reading minus the month ago reading.

Posted on Tuesday, April 6, 2021 @ 12:35 PM • Post Link Share: 
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  The ISM Non-Manufacturing Index Rose to 63.7 in March
Posted Under: Autos • Bullish • Data Watch • ISM Non-Manufacturing

 
Implications: Following in the footsteps of last week's report on manufacturing, today's ISM report on the service sector was a blowout.  The 8.4 point jump in the headline index represents the second largest monthly rise in series history, behind just June of last year when the index was emerging from the shelter-in-place orders that decimated activity, and the March reading of 63.7 is the single best reading since recording began back in 1997.  All eighteen industries reported growth on the month, a feat rarely seen even in the best of months.  Given the broad-based pickup in activity, it's little surprise that survey respondent comments remain overwhelmingly positive.  Where cautious comments did appear, they tended to revolve around continued supply chain issues (note the supplier deliver index – which rises as companies report longer delivery delays - rising to 61.0 from 60.8 in February), which in turn is putting upward pressure on prices.  Thirty commodities reported up in price (and sixteen listed in short supply) in March, driving the prices paid index to the highest reading in more than a decade at 74.0.  The two most forward-looking indices – business activity and new orders – surged in March, both hitting new series highs.  A combination of the vaccine roll-out, state's easing restrictions, and some make-up activity following February's harsh winter weather and blackouts provided a tailwind.  With demand rising, companies moved to fill positions, as shown by the employment index rising to 57.2 from 52.7 in February.  As last Friday's report on employment shows, job gains accelerated in March due to the same factors that boosted the ISM reports, and we forecast strong job growth to continue as we move toward the second half of the year. We now have three vaccines being distributed, and all three are ramping up production. With each passing day, we get one step closer to getting back to "normal." That – not checks out of Washington - is the best possible stimulus the U.S. economy could ask for.  In other recent news, cars and light trucks were sold at a 17.75 million annual rate in March.  Sales increased 12.6% from February and were up a massive 56.2% from a year ago, when restrictions began to go into place across the country.  The rebound in March also included some delayed activity due to February storms, so expect sales to temper in April but continue at a solid pace as the weather warms and the economy reopens.

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Posted on Monday, April 5, 2021 @ 11:34 AM • Post Link Share: 
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  Jobs Are Booming
Posted Under: Employment • GDP • Monday Morning Outlook • COVID-19

When the scientists said "15 days to slow the spread," some of us actually believed that by Easter the shutdowns would end.  That was last year.  Now, a full year, and $5 trillion in government spending later, we may finally be getting our wish.

On Good Friday, the Bureau of Labor Statistics released the March 2021 employment data, and payrolls increased a staggering 916,000 for the month, easily beating the consensus expected 660,000.  Jobs increased most in leisure & hospitality (up 280,000), construction (up 110,000), and education and health services (up 101,000).  Meanwhile, manufacturing jobs increased 53,000, while government jobs rose 136,000 (almost all in education services).

This is what we should expect as unprecedented shutdowns ease.  As we wrote weeks ago, the best stimulus is a COVID vaccine (and herd immunity) which gives people confidence to return to more normal life.

We expect similar gains in jobs in the months ahead.  In fact, we would not be surprised if some months of 2021 had job gains topping one million.  We need it.  In spite of the surge in jobs in March, total payrolls are still 8.4 million short of where they peaked pre-COVID, with the leisure & hospitality sector, all by itself, accounting for 3.1 million of that deficit.  Most of those gaps should be closed by the end of this year. 

But, completely closing those gaps won't mean the labor market has fully healed.  Jobs would have been growing in the past year if COVID-19 had never happened, perhaps adding two million new jobs or more.  Nonetheless, this is the world we have created, and we have a hole to dig out of.  And we are digging rapidly, indeed.

The payroll data comes from a survey of businesses, while the household employment data is captured by talking directly to workers.  As a result, it includes small-business start-ups that haven't yet made it into the business payroll survey.  This alternative measure of employment increased 609,000 in March and the unemployment rate dropped to 6.0%, even as the labor force (people who are either working or looking for work) grew 347,000 and the labor force participation rate ticked up to 61.5%.

The March data was also lifted by the fact that February was held back by harsh winter weather.  We can see this in the length of the average workweek, which fell in February, but rebounded strongly in March.  Total hours worked (the average workweek x total employment) rose 1.9% in March – that is a huge lift to overall economic output.

If there was a negative part of the March jobs report it was that average hourly earnings declined 0.1% for the month.  However, we think that decline is a side-effect of the otherwise very strong jobs report.

COVID-19 and related shutdowns caused the most economic damage among service businesses that need many workers to interact directly with customers, like at restaurants and bars.  These workers are often younger and earn lower than average pay.  So, when these firms are re-hiring workers, which is a good thing, that process can also temporarily drive down average earnings.  In other words, we don't think the dip in average hourly earnings is worth worrying about.          

When you combine the path of total hours worked and average hourly earnings, they show a robust private-sector recovery.  This measure of total private earnings hit a new all-time record high in March, up 0.7% versus the pre-COVID peak.  When combined with trillions of dollars in stimulus spending that will roll out in the months ahead, we expect economic activity to boom.  Job gains in the seven million range for all of 2021 and real GDP growth of 6%, or more, are highly likely if renewed shutdowns do not occur.

Collectively, adding the increased savings rate to the gains in income we expect households to have more money to spend than at any point we can find in historical data.

Growth and increased spending themselves don't cause inflation, and neither do budget deficits.  Inflation is too much money chasing too few goods.  So, if the government takes money from one person to redistribute it to another person, then there is no increase in overall demand.  But if government prints money to fund itself, then that debt represents an increase in potential spending.  And if government lifts tax rates, then output is hampered.  That's our biggest worry for the next few years – watching demand soar due to 27% growth in the M2 money supply, while higher tax rates and more redistribution hold back output, leading to inflation.  In the meantime, the economy is booming.     

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

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Posted on Monday, April 5, 2021 @ 11:06 AM • Post Link Share: 
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  COVID-19 Tracker 04/01/2021
Posted Under: COVID-19
The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective.

Click here to view the one page report.
Posted on Thursday, April 1, 2021 @ 3:50 PM • 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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