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Brian Wesbury
Chief Economist
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Bob Stein
Deputy Chief Economist
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| Markets are Smarter than Government |
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Posted Under: Government • Markets • Monday Morning Outlook • Spending |
To paraphrase Milton Friedman: There are four ways in which you can spend money. You can spend your own money on yourself. You can spend your own money on somebody else. You can spend somebody else’s money on yourself. Finally, you can spend somebody else’s money on somebody else.
Spending your own money (whether on yourself or on someone else) means you will care about it. But, when you spend somebody else’s money, especially on somebody else, you don’t care how much you spend or what you get for it.
We were reminded of this recently when reading the news. Google and Amazon inked what are likely multiple-billion-dollar deals with power companies to build small scale, modular nuclear reactors. At the same time, Microsoft has agreed to pay for the revival of the shuttered Three Mile Island nuclear power plant in Pennsylvania.
Why? Because they want to power their own insatiable needs for electricity that will come from data centers to support generative Artificial Intelligence (AI). Solar and Wind won’t get the job done because they are intermittent power sources. To efficiently run an AI data center they need non-stop, reliable, 24/7 electricity. For green energy, that’s nuclear!
What’s so amazing about this is that the Green New Deal movement shunned nuclear power. California, Michigan, and Germany have all closed nuclear plants in a single-minded mission to only use solar and wind. We assume they believe using natural things, like sunlight and wind is better than using man-made things, like nuclear energy. Otherwise, these decisions make no sense.
But isn’t that what spending other people’s money is all about? You don’t have to care about how it is spent. And boy did they spend.
In the past 20 years, governments around the world have spent or have incentivized companies to spend $18.8 trillion dollars on green energy and just 1.4% of that was on nuclear. Last year alone, the total was $3.5 trillion, with less than 1% going toward nuclear. As we said, many governments have shut down nuclear power plants.
Interestingly, over 40% of this spending was based on what the movement calls “sustainable debt issuance,” which includes government subsidized loans. We have always believed much of this investment would not have been made without government subsidies, including the Federal Reserve holding interest rates below the rate of inflation for 80% of the time during the past fifteen years, with nine of those years at near 0% interest rates.
Unfortunately, it isn’t sustainable…while few focus on this, this area of the debt markets is likely to have problems in the future. How do we know? Because when it comes to spending their own money, Google, Amazon, and Microsoft aren’t relying on the politically-favored flavors of energy.
They are buying electricity provided by nuclear power. When you have to spend your own money, you go with what works, not what is politically palatable with the greens. Let’s go back to markets…that’s actually the only sustainable course.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
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| New Orders for Durable Goods Declined 0.8% in September |
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Posted Under: Data Watch • Durable Goods • GDP |
Implications: New orders for durable goods declined 0.8% in September – the third drop in four months – as transportation led orders lower, while prior months data were revised down as well. Transportation orders can swing wildly from month to month as big aircraft orders tend to come in chunks rather than steadily over time. That was the case once again in September, as commercial aircraft orders fell 15.1% and defense aircraft orders declined 2.5%. Excluding the transportation sector, orders for durable goods rose 0.4% versus a consensus expected decline of 0.1%. Fabricated metal products led non-transportation orders higher, rising 2.1% in September, and, along while primary metals (+0.5%), more than offset declines in orders for computers and electronic products (-0.3%) and machinery (-0.2%). The most important number in the release, core shipments – a key input for business investment in the calculation of GDP – fell 0.3% in September following a 0.1% decline in August and a 0.4% drop in July. As a result, these shipments declined at a 2.8% annualized rate in Q3 versus the Q2 average. This represents the largest quarterly decline since the second quarter of 2020, and the third quarter in the last four where core shipments were down, a clear sign that all is not well on the economic front. Meanwhile, overall orders for durable goods – both including and excluding transportation – are failing to keep pace with inflation. Add in potential volatility in the data due to labor strikes, hurricane impacts, and businesses potentially pausing investment decisions as they await the results of the elections and the resulting policy changes that could follow, and the Fed’s already hazy view into the future gets even harder to parse. While GDP readings continue to run positive (click here for our breakdown of what to expect from next week’s first look at Q3 GDP), we expect a rocky path forward as the economy feels the lagged effects of the Federal Reserve’s tightening of monetary policy.
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| Three on Thursday - Inflation Simplified |
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Contrary to popular belief, inflation doesn’t stem from rising wages, greedy businesses, government deficits, or even rapid economic growth—it results from the excessive printing of money. In this week’s “Three on Thursday,” we break down inflation in the simplest terms.
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| New Single-Family Home Sales Increased 4.1% in September |
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Posted Under: Data Watch • Government • Home Sales • Housing • Fed Reserve • Interest Rates |
Implications: New home sales rose to the highest level in sixteen months in September continuing the upward trend that began late last year. Given that new home sales are a timelier barometer of the housing market because they are calculated when contracts are signed, while existing homes are only counted after the sale is closed, it looks like the anticipation of rate cuts from the Fed and the announcement itself may have gotten some buyers off the fence in the market for new homes. That said, while thirty-year fixed mortgage rates were falling in the lead up to the Fed announcement, that has recently reversed with rates up over 50bps since then. So, it remains to be seen if the recent trend will continue, with new home sales still roughly where they were in 2019 before COVID. One piece of good news for potential buyers is that the median sales price of new homes is down 7.4% from the peak in 2022. It does look like a small part of this decline reflects a lower price per square foot as developers cut prices. The Census Bureau reports that from 2022 to 2023 (the most recent data available) the median price per square foot for single family homes sold fell 1.1%. While that decline is modest, it represents a stark reversal from the 45% gain from 2019 to 2022. That said, most of the drop in median prices is likely due to the mix of homes on the market including more lower priced options as developers complete smaller properties. Supply has also put more downward pressure on median prices for new homes than existing homes. The supply of completed single-family homes is up over 200% versus the bottom in 2022. This contrasts with the market for existing homes which continues to struggle with an inventory problem, often due to the difficulty of convincing current homeowners to give up the low fixed-rate mortgages they locked-in during the pandemic. While the future cost of financing remains a question, lower prices and an abundance of inventories giving potential buyers a wider array of options will help fuel a rebound in new home sales. In other news this morning, initial jobless claims fell 15,000 last week to 227,000. Meanwhile, continuing claims rose 28,000 to 1.897 million.
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| Existing Home Sales Declined 1.0% in September |
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Posted Under: Data Watch • Government • Home Sales • Housing • Inflation • Markets • Interest Rates |
Implications: The recent downward trend in existing home sales continued in September, with activity falling to the slowest pace since the aftermath of the 2008 Financial Crisis. One surprise recently is that since Federal Reserve rate cuts began last month, 30-year fixed mortgage rates have risen back above 7%. So at least so far, the widely anticipated shot in the arm to the housing market from improved affordability hasn’t happened and buyers continue to sit on the fence. Meanwhile, home prices are rising again with the median price of an existing home up 3.0% from a year ago. While most of the housing market remains stuck in low gear, certain segments have shown signs of life. Notably, sales of homes priced at $1 million and above have risen 8.3% in the past year versus a decline of 3.5% for all existing home sales. This demonstrates that, at least at the higher end of the market, both buyers and sellers are beginning to adjust to the new reality of higher rates. However, outside the most expensive segment many existing homeowners remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022. This remains a major impediment to activity by limiting future existing sales (and inventories). However, there are signs of progress with inventories rising 23% in the past year. That has helped push the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) up to 4.3 in September, the highest since May of 2020 although still below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market. A tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate to a big decline in prices. In recent news on the manufacturing sector, the Richmond Fed index rose to -14 in October from -21 in September, highlighting ongoing weakness in that sector. Finally, the Federal Reserve released monthly figures on M2 yesterday, showing it up 0.4% in September but still up only 2.6% in the past year. The faster monthly gains recently demonstrate the Fed needs to be cautious with rate cuts if it wants to prevent a resurgence of inflation in 2025-26.
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| GDP Growth Still Solid |
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Posted Under: GDP • Government • Housing • Markets • Monday Morning Outlook • Trade • Fed Reserve • Spending • Bonds • Stocks |
With third quarter GDP being reported next Wednesday – less than a week before election day – the US is still not in recession.
Yes, monetary policy has been tight, but the lags between tighter money and the economy are long and variable. In addition, massive budget deficits continue to provide incomes for a wide range of occupations. The official figures for Fiscal Year 2024 arrived Friday afternoon (isn’t it just like the government to announce bad news right before the weekend!) and the deficit was $1.832 trillion, or what we estimate to be 6.4% of GDP. That’s the second straight year with a deficit in excess of 6.0% of GDP, in spite of an unemployment rate averaging less than 4.0%. These deficits, which are unprecedented in size given peacetime and low unemployment, may have temporarily masked the effects of tighter money.
Meanwhile, innovators and entrepreneurs in high-tech industries and elsewhere have been overcoming government obstacles to push the economy forward. It’s hard to tell how much each factor (government spending or innovation) deserves credit for recent GDP growth, but roughly half of job creation in the past year has been in government and healthcare.
In the meantime, we estimate that Real GDP expanded at a 3.0% annual rate in the third quarter, mostly accounted for by growth in consumer spending. (This estimate is not yet set in stone; reports on Friday about durable goods and next Tuesday about international trade and inventories might lead to an adjustment.)
Consumption: In spite of tepid auto sales, overall consumer spending continues to rise, possibly because of continued government deficits. We estimate that real consumer spending on goods and services, combined, increased at a 3.5% rate, adding 2.4 points to the real GDP growth rate (3.5 times the consumption share of GDP, which is 68%, equals 2.4).
Business Investment: We estimate a 1.7% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined slightly. A 1.7% growth rate would add 0.2 points to real GDP growth. (1.7 times the 14% business investment share of GDP equals 0.2).
Home Building: Residential construction dropped in the third quarter, hampered by the lingering pain from higher mortgage rates as well as local obstacles to construction. Home building looks like it contracted at a 5.0% rate, which would subtract 0.2 points from real GDP growth. (-5.0 times the 4% residential construction share of GDP equals -0.2).
Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases were up at a 1.8% rate in Q3, which would add 0.3 points to the GDP growth rate (1.8 times the 17% government purchase share of GDP equals 0.3).
Trade: Looks like the trade deficit shrank slightly in Q3, as exports and imports both grew but exports grew faster. We’re projecting net exports will add 0.2 points to real GDP growth.
Inventories: Inventory accumulation looks like it was slightly faster in Q3 than Q2, translating into what we estimate will be a 0.1 point addition to the growth rate of real GDP.
Add it all up, and we get a 3.0% annual real GDP growth rate for the third quarter. Not a recession yet, but that doesn’t mean that the US economy is out of the woods.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
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| Housing Starts Declined 0.5% in September |
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Posted Under: Data Watch • Government • Home Starts • Housing • Markets • Fed Reserve • Interest Rates |
Implications: Housing starts moderated in September after a big rebound in August. Looking at the details, the decline in starts was entirely due to a 9.4% drop in the volatile multi-unit category. Meanwhile, single-family starts rose 2.7% to a five-month high. Permits for new builds followed a similar tune, as a headline 2.9% drop was completely due to falling permits for multi-unit homes (-8.9%) while single-unit permits ticked up 0.3%. Starts and permits both seem to be stuck in low-gear and sit at roughly the same levels as 2019. The same cannot be said for completions. Despite a 5.7% drop for the month, completions were at the fourth strongest pace since the run-up before the Great Financial Crisis in 2008-09. With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, now down 11.6% since the start of 2024. That type of decline is usually associated with a housing bust or recession. The lack of new construction is why home prices have remained elevated while rents are still heading up in much of the country: we are building too few homes while lax enforcement of immigration laws mean rapid population growth. The home building sector seems strangely slow given our population growth and the ongoing need to scrap older homes due to disasters or for knockdowns. We think government rules and regulations are likely the major hurdle for builders in much of the country, but home construction might also be facing headwinds from a low unemployment rate (which makes it hard to find workers) as well as relatively high mortgage rates. That said, there are some tailwinds for housing construction, as well. Many owners of existing homes are hesitant to sell and give up their fixed sub-3% mortgage rates, so many prospective buyers will need new builds. In addition, Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for activity. Finally, the widely anticipated commencement of the Federal Reserve’s easing began in September with a 50bps cut. As more rate cuts arrive, mortgage rates should trend lower as well, helping put a floor under housing as we close out 2024. Putting it together, we don’t see housing as a major driver of economic growth in the near term, but we’re not expecting a housing bust like the 2000s on the way, either.
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| Three on Thursday - SpaceX: Leading Space Innovation |
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In this week’s “Three on Thursday,” we explore the latest developments in space exploration. Advancements in space travel technology have dramatically reduced the cost of launching payloads into space. From the iconic Apollo missions of the 1960s to today’s cutting-edge innovations, breakthroughs in materials science and propulsion—driven largely by private companies like SpaceX—have brought down what were once astronomical costs.
Click here to view the report
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| Industrial Production Declined 0.3% in September |
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Posted Under: Data Watch • Housing • Industrial Production - Cap Utilization |
Implications: Industrial production gave up ground in September, falling slightly more than expected in what has been a choppy past few months for the sector. Moreover, data from previous months were revised down, and when included brought the decline to 0.5%. That said, today’s headline looks worse than the details. The Federal Reserve points out that a strike at a major producer of civilian aircraft held down total IP growth by an estimated 0.3 percent in September, and the effects of two hurricanes subtracted an estimated 0.3 percent, as well. Manufacturing was the biggest source of weakness, falling 0.4%. Production in the volatile auto sector dropped 1.6% following an August gain that was the largest since 2021. Non-auto manufacturing (which we think of as a “core” version of industrial production) posted a more modest decline of 0.3% in September. The only bright spot in this “core” measure came from production in high-tech equipment which rose 1.5% in September, likely the result of investment in AI as well as the reshoring of semiconductor production. High-tech manufacturing is up at a 13.8% annualized rate in the past six months and 10.0% in the past year, the fastest for any major category. The mining sector was also a drag in September, declining 0.6%. Lower production of oil and gas more than offset a gain in the extraction of other minerals and metals. Finally, the utilities sector (which is volatile and largely dependent on weather) was the only category that posted an increase in September, rising 0.8%. In other manufacturing news this morning, the Philadelphia Fed Index, a measure of factory sentiment in that region, rose to +10.3 in September from +1.7 in August. Meanwhile, the Empire State Index, its counterpart for the New York region, fell to -11.9 in September from +11.5 in August. Finally, on the housing front, the NAHB Housing Index (a measure of homebuilder sentiment) rose to 43 in October from 41 in September. However, a reading below 50 signals a greater number of builders view conditions as poor versus good.
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| Retail Sales Rose 0.4% in September |
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Posted Under: Data Watch • Employment • Government • Inflation • Markets • Retail Sales • Trade • Fed Reserve • Interest Rates |
Implications: The US consumer closed out the third quarter on a respectable note as retail sales rose by slightly more than expected in September and the underlying details of the report were solid. Sales rose 0.4% in September versus a consensus expected rise of 0.3%, while revisions to previous months’ activity pushed the overall gain to 0.5%. The monthly advance was broad-based with ten out of thirteen major sales categories rising, led by a 1.0% increase for sales at restaurants and bars, the largest increase for that category in 2024. Last month’s activity in this category was revised higher too, now showing a 0.5% increase versus an initial reading of no change. Sales in this category are up a solid 3.7% in the last year, but much lower than the 10.1% advance in the year ending in September 2023. We will be watching this category closely since it is the only glimpse we get at services in the retail sales report, which have been an important driver of economic growth the last couple of years as consumers have shifted their preferences back toward a more normal mix of goods and services after the COVID years. Looking at the other details of the report, the largest decline was at gas stations (-1.6%) as gas prices fell in September. Stripping this out along with the other often-volatile categories for autos and building materials, “core” sales jumped 0.8% in September and were up 1.0% when factoring in revisions. These sales – which are crucial for estimating GDP – were up at a 6.2% annualized rate in the third quarter versus the second quarter average. Notably, while overall sales are up only 1.7% in the past year, core sales are up a more respectable 3.9%. What does the report mean for investors? The Fed is much more likely to cut rates by a quarter point the day after the election, not a half. In other news this morning, initial jobless claims fell 19,000 last week to 241,000 after hitting a recent high of 260,000 the week prior. Meanwhile, continuing claims rose 9,000 to 1.867 million. On the trade front, import prices declined 0.4% in September while export prices fell 0.7%. In the past year, import prices are down 0.1% while export prices are down 2.1%.
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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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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
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