US Economy, the stock market , and other investment/savings strategies

[Crafty_Dog]

And some of us here have been wrong all the times it went up , , , and that includes me 

[G M]

And some of us here have been wrong all the times it went up , , , and that includes me 

http://www.topgunfp.com/brian-wesbury-is-clueless/
Brian Wesbury Is Clueless
May 5, 2009 at 4:16 pm  ·  Category: Sentiment Analysis
Brian Wesbury, Chief Economist at First Trust Advisors and a regular on CNBC, especially The Kudlow Report, has a piece up at Forbes today titled: “The Recession Is Over”:

Now it looks like our V-shaped recovery is underway.  When the NBER eventually gets around to declaring the recession end date, we think it will be May 2009.

……

In our view, there are no more shoes to drop.javascript:void(0);

Wesbury is notable mainly for his ability to get everything wrong.  Usually, even bad forecasters get something right, even if it is by accident.  Not Wesbury.

Here are some excerpts from an editorial he wrote for The Wall Street Journal on January 28, 2008 titled “The Economy Is Fine (Really)” (subscription required):

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

……

With housing so weak, the recent softness in production and durable goods orders is understandable.  But housing is now a small share of GDP (4.5%).  And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself.  Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.

…….

Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%.

……

Yet many believe that a recession has already begun because credit markets have seized up.  This pessimistic view argues that losses from the subprime arena are the tip of the iceberg.  An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market.  It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire “house of cards,” otherwise known as the U.S. financial system, to collapse.  At a minimum, they fear credit will contract, causing a major economic slowdown.

For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire.

This outlook is both perplexing and worrisome.  Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest.  What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations.  Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets.

……

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm…… Dow 15,000 looks much more likely than Dow 10,000.  Keep the faith and stay invested.  It’s a wonderful buying opportunity.

He has no credibility and no shame.  I don’t dislike Brian Wesbury as he seems like a nice guy.  But he should be held accountable for getting everything wrong.  And nobody should pay any heed to his forecasts.

More on this topic (What's this?)
“V” Shaped Recovery? Nah, They Have the Chart Upside Down… (The Cynical Economist, 5/11/09)
You can't really see it on this chart so you'll have to trust me (www.thedailytradingrisk.blogspot..., 9/1/15)
Pounding the Table for a V-Shaped Recovery (Contrarian Profits, 5/5/09)
Read more on Trust, V-shaped recession at Wikinvest

[Crafty_Dog]

Monday Morning Outlook
________________________________________
Labor Market Strength To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 5/14/2018

The US labor market has rarely been stronger.

Recent figures from the Labor Department show US businesses had a total of 6.550 million job openings in March versus 6.585 million people who were unemployed. That's a gap of only 35,000 workers. By contrast, this gap never fell below 2 million in the previous economic expansion that ended in 2007, and stood at 638,000 in January 2001, at the end of the expansion that started in mid-1991 and ran through early 2001.

Of course, these figures have to be put in context. The measure of unemployed workers doesn't include "discouraged" workers, for example, nor does it include part-time workers who say they want full-time jobs. And it's not like all the unemployed have the skill sets needed for the job openings that are available.

Still, the negligible gap between the number of job openings and the number of unemployed who are pursuing work shows that the demand for labor is intense.

Reports on jobless claims show companies are clinging to their workers. In the past four weeks, the average pace of initial jobless claims has been the lowest since 1969; meanwhile, continuing claims have averaged the lowest since 1973.

And new jobs continue to be created. In the past year, nonfarm payrolls are up an average of 190,000 per month, matching the pace of the year ending in April 2017. As a result of this continued job creation, the jobless rate has dropped to 3.9% in April, the lowest since the peak of the internet boom in 2000.

Assuming a real GDP growth rate of 3.0% this year and next, we think the jobless rate will finish 2018 at 3.7%. That would be the lowest rate since 1969.

Then, in 2019, the jobless rate should drop to 3.2%, the lowest since 1953. Beyond that, continued solid growth could realistically push the jobless rate below 3.0%.

Maybe it's optimism about the labor market that's behind President Trump's recent tick upwards in popularity and the GOP's better performance in the "generic" ballot, which measures whether potential voters are inclined to support Republicans or Democrats in House races this November. Either way, it doesn't seem like an environment that favors a tidal wave of change for the Democrats this fall. The odds of the GOP keeping the House are rising, and the GOP looks more likely to gain Senate seats than lose them.

Although some still bemoan slow growth in wages, April average hourly earnings were up a respectable 2.6% in the past year. And that doesn't include the kinds of one-time bonuses that have become more widespread since the tax cut was enacted in late 2017.

The biggest blemish on the labor market is that the participation rate – the share of adults who are either working or actively looking for work – is still low by the standards of the last forty years. After peaking at 67.3% in early 2000, the participation rate has declined to the current reading of 62.8% in April.

This drop is mainly due to three factors: the aging of the Baby Boom generation into retirement years, overly generous student aid (which has reduced the willingness of young Americans to work), and disability benefits that are too easily available. Hopefully, the coming years will see policymakers find ways to tighten rules on disability while limiting student aid to truly needy students who are taking economically useful coursework.

But even if these changes don't happen, look for more good news – and an even stronger labor market - in the year ahead.

[Crafty_Dog]

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/5/21/u.s.-acts-good-things-happen

[Crafty_Dog]

https://www.wsj.com/articles/u-s-gdp-growth-revised-down-to-2-2-rate-in-first-quarter-1527683513

[DougMacG]

https://www.wsj.com/articles/u-s-gdp-growth-revised-down-to-2-2-rate-in-first-quarter-1527683513

That makes 4 latest quarter growth rate:  2.9%.   The news 3 months from now will be GDP growth over 3%, twice the growth rate under Obama:

Average annual GDP growth: 1.48% during Obama's two terms
https://www.zerohedge.com/news/2017-01-27/barack-obama-now-only-president-history-never-have-year-3-gdp-growth

[DougMacG]

NYT:  "The American economy roared into overdrive last month, delivering the strongest job gains since February. The report underscored other recent signs of strength, like robust personal income and spending data reported earlier this week. The unemployment rate for May was at lows not seen since the heady days of the dot-com bubble."
"...unemployment rate could sink as low as 3 percent by the end of 2019. That would bring it to levels last seen in 1953"
..."“It’s just a matter of time before wages start going up more strongly."
https://www.nytimes.com/2018/06/01/business/economy/jobs-report.html

That has to hurt!  This is NOT what Speaker(?) Pelosi wanted to hear.  Meanwhile, how are the Hillary-Bernie-NYT policies doing in the Venezuelan test market?

[ccp]

Doug writes:

"That has to hurt!  This is NOT what Speaker(?) Pelosi wanted to hear. "

They will take the fall back position :

What Don Lemon (pun intended on last name) said yesteray :
Trump is benefitting from Obama's economic policies and Obama deserves all the credit "everyone knows that "

He obviously does not realize what a fool he sounds like.

[Crafty_Dog]

The ISM Manufacturing Index Rose to 58.7 in May To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/1/2018

The ISM Manufacturing Index rose to 58.7 in May, beating the consensus expected 58.2. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)

The major measures of activity were all higher in May, and all stand comfortably above 50, signaling growth. The production index jumped to 61.5 from 57.2 in April, while the new orders index rose to 63.7 from 61.2. The employment index increased to 56.3 from 54.2, and the supplier deliveries moved to 62.0 from 61.1 in April.

The prices paid index rose to 79.5 in May.

Implications: In case you missed it, the manufacturing sector is having its best year since 2004. Including May's reading of 58.7, the ISM manufacturing index has averaged a very impressive reading of 59.0 through the first five months of the year, and a look at the details of today's report show the healthy pace of expansion should continue in the months ahead. Similar to this morning's employment report, growth was broad based in May, with sixteen of eighteen industries reporting growth in May (no industries reported contraction).

Meanwhile the two most forward-looking indices - new orders and production – both stand at robust levels in the 60's (remember, levels above 50 signal expansion). In fact, the new orders index has seen readings of 60 or higher for thirteen consecutive months, tying the longest stretch above 60 going all the way back the early 1970's. In other words, the strength in manufacturing isn't a blip on the radar, it's a sustained trend. The employment index rose to 56.3 from 54.2 in April, supporting the gain of 18,000 manufacturing jobs reported in this morning's employment report. And survey respondents suggest that employment would be higher, but for difficulties in finding both skilled and unskilled labor to fill positions. Prices, meanwhile, rose once again in April to a reading of 79.5, the highest since 2011. A total of twenty-two commodities were reported up in price, while none showed declines. Yet another sign (see yesterday's reported on the PCE price index) that inflation is picking up pace as economic growth accelerates, and a signal to the Fed that a total of four rate hikes in 2018 are not just appropriate, but warranted. In addition to a rate hike that is essentially locked in for this month's Fed meeting, look for updates to both the Fed statement and economic projections to show an acknowledgement that both employment and inflation are running ahead of prior forecasts. In sum, it's hard to find much not to like in today's report. In other news this morning, construction spending rose 1.8% in April (and up 2.0% including upward revisions to prior months). For April itself, a surge in home building and a pickup in spending on power projects more than offset a decline in commercial construction (think retailers and wholesalers).

[Crafty_Dog]

Is 2020 the Year for Recession? To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/11/2018

According to former Fed Chair Ben Bernanke, the U.S. economy will get a Wile E Coyote surprise in 2020. You know, just when everyone thinks he caught the Roadrunner, Wile notices he has run straight off a cliff, plummets seemingly forever before hitting the bottom in a cloud of dust, and then, just for spite, an anvil lands on his head.

In other words, Bernanke sees a 2020 recession looming. Other analysts are saying it, too. And whenever they do, they get their name in the headlines. Scaremongering attracts attention.

But there is good news here: The Pouting Pundits of Pessimism don't think the crisis starts tomorrow. No longer does some exogenous crisis event – say, Brexit, or Grexit, student loan defaults, etc., – threaten imminent collapse. Now, the recession doesn't happen for another two years.

Another interesting detail: the new problem is that the economy is growing too fast. Remember when analysts used to say, "since the economy is growing less than 2% annually, it means a recession is coming"? Now, Bernanke says the U.S. applied stimulus (in the form of a tax cut) "at the very wrong moment," with the economy already at full employment. In other words, real GDP growth is too strong, so the Fed will over-tighten and a recession is inevitable.

Now we agree that a recession is coming – someday. Recessions are a fact of life, like death and taxes. But predicting one in 2020 - and being right about it – is like reading tea leaves, it's pure chance. No one, and we mean no one, can honestly see that far in the future – not with the clarity expressed by these dated forecasts.

No one knows exactly what the Fed will do, not even the Fed. Let's say they follow their forecasts, raising fed funds to 3.5% in 2019. That alone doesn't tell us if policy is "tight."

While most recessions are caused by an excessively tight Fed, we don't think the Fed is too tight until it drives the federal funds rate close to, or above, the rate of growth in nominal GDP. Over the past five years, nominal GDP has averaged about 3.9%. Which means if the Fed were to raise the funds rate by 0.25% three more times in 2018 and four times in 2019 (reaching 3.5%), and if nominal growth slowed to 3.5%, the Fed would be tight at that point. A recession would be possible.

However in the past year, nominal GDP growth has accelerated to 4.7%, and next year it could be as high as 6%. That means a 3.5% federal funds rate would not be restrictive. The Fed would have to raise rates faster and farther than any forecast we have seen in order to be "tight" going into 2020. At the same time, there are still at least $1.9 trillion in excess bank reserves. Until those reserves are eliminated, no one knows if raising rates can actually cause a recession.

We do have one major worry. Government spending is rising rapidly, and the deficits this spending creates will put pressure on politicians. If they were to raise tax rates, this could cause potential problems for U.S. growth.

But the bottom-line remains: the U.S. is not facing an imminent threat. That's why doom and gloomers have shifted to forecasting future recessions, not looming crises. But we think it's not going to be the economy that gets an anvil on its head in 2020. More likely, it'll be investors who believe in the recession forecast.

[Crafty_Dog]

Personal Income Rose 0.4% in May To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/29/2018

Personal income rose 0.4% in May, matching consensus expectations. Personal consumption increased 0.2% in May (+0.1% including revisions to prior months), lagging the consensus expected rise of 0.4%. Personal income is up 4.0% in the past year, while spending is up 4.6%.

Disposable personal income (income after taxes) rose 0.4% in May and is up 4.0% from a year ago. The gain in May was led by private-sector wages and salaries and dividend income.

The overall PCE deflator (consumer prices) rose 0.2% in May and is up 2.3% versus a year ago. The "core" PCE deflator, which excludes food and energy, also rose 0.2% in May and is up 2.0% in the past year.

After adjusting for inflation, "real" consumption was unchanged in May but is up 2.3% from a year ago.

Implications: While comfortable May weather held down consumer spending on utilities, incomes continued to rise. Personal income rose 0.4% in May, led by private-sector wages and salaries and dividend income. Incomes have seen a healthy 4.0% gain over the past twelve months, while disposable (after-tax) income is also up 4.0% in the past year, matching the largest twelve-month increase since 2015. On the spending side, personal consumption increased 0.2% in May and is up 4.6% in the past year. In recent years consumer spending has been growing faster than incomes, leading to concerns that consumers may be digging themselves into a financial hole. But it's important to put this into perspective. While consumer debt has risen to a record high in dollar terms, consumer assets have grown faster, so liabilities continue to decline relative to household assets. Meanwhile the financial obligations ratio – which compares debt and other recurring payments to income – remains near multi-decade lows. In other words, consumers still have plenty of room to increase spending. One of the best pieces of news in today's report is that government transfers continue to grow at a slower pace than overall income. So while government transfers are up 3.6% in the past year, total income has grown at a faster 4.0% over the same period (and private sector wages & salaries have risen 5.3%!), transfer payments are making up a smaller – though still too high - portion of income. On the inflation front, the PCE deflator rose 0.2% in May and is up 2.3% in the past year. More important is that "core" prices, which exclude food and energy, are up 2.0% in the past year, the first time the core index has touched 2.0% on a twelve-month basis in more than six years. In other words, the Fed looks set to be tested sooner, rather than later, on how they will react as PCE prices breach their "symmetric" inflation target. On the manufacturing front, the Chicago PMI, which measures manufacturing sentiment in that region, rose to 64.1 in June from 62.7 in May. Look for another strong reading of about 58.7 in Monday's national ISM Manufacturing report, showing robust growth in the factory sector.

[Crafty_Dog]

Real GDP Growth in Q1 was Revised to a 2.0% Annual Rate To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/28/2018

Real GDP growth in Q1 was revised to a 2.0% annual rate from a prior estimate of 2.2%, coming in slightly below the consensus expected 2.2%.

The downward revision was due to smaller net exports and inventories, along with a smaller gain in personal consumption. Business investment was revised slightly higher.

The largest positive contributions to the real GDP growth rate in Q1 came from business investment and consumer spending.

The GDP price index was revised higher to a 2.2% annual rate. Nominal GDP growth – real GDP plus inflation – was unchanged from the prior estimate of 4.2%. Nominal GDP is up 4.7% versus a year ago.

Implications: Today's "final" GDP report for the first quarter showed a slower pace of economic growth but higher corporate profits compared to prior readings. Real GDP grew at a 2.0% annual rate in Q1 versus last month's estimate of 2.2% and the initial reading of 2.3%. The downward revision was due to a smaller inventory build than originally expected, lower net exports, and slower growth in consumer spending on services. Business investment was revised higher, growing at a 10.4% annual rate, the fastest growth since Q3 2014. Meanwhile, economy-wide corporate profits were revised up by 2.4%, and now show a 1.8% gain in Q1 from Q4. Corporate profits are up 6.8% from a year ago. Plugging the new profits data into our capitalized profits model suggests US equities remain cheap, not only at today's interest rates but even using a 10-year Treasury yield of 3.5%. And while corporate profits data are reported with a lag, we expect that tax reform and regulatory relief will be a tailwind for profits in the quarters ahead. In terms of monetary policy, nothing in today's report suggests we should change our forecast that the Federal Reserve will raise rates again in September and December, and four times in 2019. Nominal GDP – real GDP growth plus inflation – grew at a 4.2% annual rate, easily outpacing a short-term interest rate target of 1.75% to 2.00%. The Fed is nowhere near tight and needs to continue to raise rates. In other news this morning, initial jobless claims rose 9,000 to 227,000. Continuing claims declined 21,000 to 1.71 million. These figures suggest another month of solid job creation in June.

[Crafty_Dog]

Economic growth surged in the second quarter this year. The only question is, by how much?

Predicting this Friday's GDP report is trickier than usual. First, it's the initial report for the quarter. Second, we have to wait until Thursday for key data on exports and imports, which is particularly important because the trade sector looks to have had an unusually large influence on second quarter growth. And third, this is the release each year where the government goes back several years and makes revisions to its methods and calculations.

Over recent years, GDP releases have suffered from problems with "seasonality." For example, over the past eight years, real GDP has grown at a 2.2% annual rate. But the average annualized growth rate in the first quarter each year has been 1.3%, while the second quarter has averaged 2.8%. The government is supposed to apply seasonal adjustments to make sure normal winter weather doesn't artificially drive down GDP growth, but apparently those adjustments haven't been working.

So what happens if the government fixes this problem, resulting in upward revisions to Q1 growth rates and slower growth rates in Q2? We have no way of knowing if the government plans to tweak their methodology and, if so, by how much. As a result, our forecast faces atypical risks.

All that said – and keeping in mind that we might make adjustments when we get Thursday's data on durable goods, inventories, and trade – our forecast for real GDP growth in Q2 stands at 4.8%. If so, and assuming no net revisions to recent quarters, real GDP growth would be at a 3.4% annual rate so far this year and 3.2% in the past year.

Here's how we get to 4.8%:

Consumption: Automakers reported car and light truck sales declined at a 1.4% annual rate in Q2. Meanwhile, "real" (inflation-adjusted) retail sales outside the auto sector grew at a 6.0% annual rate. However most consumer spending is on services, and growth in services was moderate. Our models suggest real personal consumption (goods and services combined), grew at a 3.2% annual rate, contributing 2.2 points to the real GDP growth rate (3.2 times the consumption share of GDP, which is 69%, equals 2.2).

Business Investment: It looks like another quarter of solid growth, with commercial construction growing at a 10% annual rate, equipment investment growing at about a 2% rate, and intellectual property growing at a trend rate of 5%. Together, that means business investment grew at a 4.5% rate, which should add 0.6 points to real GDP growth. (4.5 times the 13% business investment share of GDP equals 0.6).

Home Building: Residential construction paused in Q2, although we think the recovery in this sector will pick right back up in Q3. For the time being, though, the sector will have no impact on the real GDP growth rate.

Government: Both public construction projects and military spending were up in Q2. As a result, it looks like real government purchases rose at a 1.8% annual rate, which would add 0.3 points to the real GDP growth rate. (1.8 times the government purchase share of GDP, which is 17%, equals 0.3).

Trade: At this point, we only have trade data through May. Based on what we've seen so far, net exports should add 1.2 points to the real GDP growth rate. However, an advance glimpse at June trade figures arrives Thursday, which could shift this key estimate up or down.

Inventories: We're also working with incomplete figures on inventories. But what we do have suggests companies were accumulating inventories more rapidly in Q2 than in Q1. This should add 0.5 point to the real GDP growth rate.

Add it all up, and we get 4.8% annualized growth. The Plow Horse economy is dead. That doesn't mean we're in a boom like the mid-1980s or late 1990s, but tax cuts and deregulation have finally killed off the plodding roughly 2% growth rate of 2010-2016.

[DougMacG]

"Our forecast for real GDP growth in Q2 stands at 4.8%."

Wow! 

Did anyone see this coming?   

[Crafty_Dog]

No Recipe for Weak Housing To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/6/2018

Something strange happened after last Friday's jobs report - the yield on the 10-year Treasury Note fell, finishing Friday at 2.95%, down four basis points from Thursday's close. To us, this makes no sense. If anything, it serves to reinforce our view that the bond market is making a big mistake.

Yes, we realize that July nonfarm payrolls (at +157,000) were lighter than the consensus expected 193,000. But, as we wrote in our Data Watch, May and June were revised upward by a total of 59,000. In other words, July payrolls were 216,000 higher than the Labor Department estimated in June. If we assume these new workers make the average weekly wage, that equals $10.5 billion more in annualized earnings for American workers (216,000 x $933.23 x 52) – in just one month!

Meanwhile, civilian employment (an alternative measure of jobs that includes small-business start-ups) rose 389,000 in July, helping push the jobless rate down to 3.9%. Even more impressive, the U-6 unemployment rate - what some people refer to as the "true" rate, which includes discouraged and marginally-attached workers as well as and those with part-time jobs who say they want full-time work - fell to 7.5%, the lowest reading since 2001.

The Hispanic unemployment rate dropped to 4.5% in July, the lowest on record dating back to the early 1970s. At 6.6%, the black jobless rate was not at a record low, however, these figures are volatile from month to month and have averaged 6.9% in the past year, the lowest 12-month average on record. Notably, the unemployment rate among those age 25+ who never finished high school is 5.1%, also the lowest on record dating back to the early 1990s. You sensing a trend?

Put it all together and we see plenty of reasons to be optimistic about economic growth in the third quarter. It's early, but right now we're tracking 4.5% real GDP growth in Q3, which would boost the year-over-year increase to 3.3%. Some analysts tried to discount the growth in the second quarter because of a surge in exports, but we think the more important quirk in Q2 was that companies reduced inventories at the fastest pace since 2009. A return to a more normal pace of inventory accumulation means a large boost to growth in Q3, more than offsetting any impact from trade.

The conventional wisdom just can't wrap their collective heads around the idea that tax cuts and deregulation are truly boosting underlying growth. And, like much of the previous nine years, keep looking for a reason to be bearish about the economy. This time they think housing will collapse. After all, housing starts fell in June, so did new home sales, and existing home sales have fallen for three straight months.

That said, it's too early to rule out that this is simply statistical noise. These figures will go through some quite substantial revisions in the months and even years ahead. The softness could be completely revised away.

And remember, home building is still below fundamental levels, based on population growth and scrappage. The US has about 138 million housing units, so annual population growth of 0.7% per year suggests we need to build about 950,000 new housing units per year (0.7% of 138 million). Add to that homes replaced due to scrappage (voluntary knock-downs, fires, floods, hurricanes, tornadoes) and the 1.25 million housing starts of the past year simply isn't enough.

Finally, while higher mortgage rates would pose a problem for homebuyers if everything else were unchanged, that's not the case. Mortgage rates have moved higher because of faster anticipated economic growth. In that environment, mortgage rates should be higher, and home-buying should move higher as well. An economy with 3% real GDP growth and a jobless rate below 4% is going to create more buyers than the Plow Horse economy that prevailed from mid-2009 through the start of 2017.

In spite of our optimism, one of the things we know for sure about the next couple of years is that, from time to time, one part of the economy (or more) will lag others. We expect the pouting pundits to use that weakness to predict doom and gloom. We can't prove they will be wrong, just like we can't "prove" the sun will come up tomorrow. But, for the past nine years we've disagreed with the pessimism, and we still do. The economy - and housing - will continue to grow.

[Crafty_Dog]

The Kevlar Economy To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/13/2018

Since March of 2009, the predictions of economic, and stock market collapse have been non-stop. Doom-and-gloomers have been unrelenting. And it's doubly frustrating since you can't disprove a negative until it doesn't happen.

We have written hundreds of pieces since the recovery - and bull market – began, arguing that the pessimism was unjustified. We've argued that Brexit, Grexit, resetting ARMs, student loans, government debt, Obamacare, no QE4, tapering,...etc., would not stop growth. The doomsayers have been wrong. Constantly. For our troubles we get labeled "perma-bulls", despite our arguments proving true. Meanwhile, the "perma-bears" have never had to answer for their fallacious forecasts.

Now they're talking Turkey, tariffs, a strengthening dollar, China selling US debt, Fed rate hikes. They never give up. But, we still aren't worried.

The United States, for the time being, is a Kevlar economy. It's practically bulletproof. By allowing other counties to maintain higher tariffs, America, the world's biggest consumer, has helped those countries grow. By holding corporate tax rates higher than most other countries, the US has subsidized non-US growth.

But under new management, the self-sabotage is being eliminated. Cutting corporate tax rates and reducing regulation have made the US more competitive. No, we are not ignoring the negative impact of tariffs on some US producers and consumers, but tariffs hurt foreign countries more than they hurt America.

Countries without the Constitutional rule of law, property rights and true free markets need foreign help to grow. The US is removing some of that help in making itself more competitive. As a result, the US will continue to grow, while other countries suffer a loss of investment and sales. Once again doomsayers will be proven wrong.

Yes, it's true that a slowdown in the growth of other countries can impact corporate earnings, or even have some impact on US growth, but the damage will not be nearly as great as the pouting pundits proclaim. We still forecast 3%+ real GDP growth over the next few years, along with continued jobs growth and the lowest unemployment rate in decades.

Doomsayers, take note. There are five real threats to prosperity: 1) Excessively tight Fed policy. 2) Excessive government spending. 3) Excessive regulation. 4) Tax Hikes and 5) Trade protectionism.

Right now, the Fed is not tight, far from it. Government spending is too high, that's why growth isn't even higher. The Regulatory environment is improving. Tax rates have been cut and are not likely to be hiked anytime soon. Finally, tariffs are going up, but by a much smaller amount than taxes were cut. We also do not expect a protracted trade war because that would harm other countries much more than the US. Ultimately, we expect deals to bring tariffs down.

In other words, of the five threats, two are negatives (with trade likely to turn) and three are positives – and don't forget new and unbelievably positive technologies! Someday, a recession will happen again, but for now the Kevlar economy will only get stronger.

[Crafty_Dog]

http://scottgrannis.blogspot.com/2018/09/chart-of-shame.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29

[Crafty_Dog]

second post

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/9/4/the-kevlar-economy

[Crafty_Dog]

Get Ready for the Next Financial Crisis
The post-2008 fixes piled on more debt. And when rates rise and credit turns, equity won’t be far behind.
53 Comments
By Daniel J. Arbess
Sept. 14, 2018 6:08 p.m. ET
A financial-news update in London, Sept. 15, 2008.
A financial-news update in London, Sept. 15, 2008. Photo: Getty Images

It’s the 10th anniversary of the Lehman Brothers debacle. Do we need reminding that debt crises take place when markets underwrite and buy too much bad debt? Yes.

The 2008 crisis was clearly visible before it struck. So is the next one. The short-term fixes produced by America’s broken political system failed miserably to reduce debt. Instead they substantially increased, nationalized and redistributed it—from household mortgages to sovereign, corporate and consumer balance sheets. We may be about to experience the consequences of piling on more debt to solve a debt crisis.

Anyone who followed housing markets could see what was coming a decade ago. Speculators with the lowest credit scores were buying more homes than they cared to occupy—financed with deferred interest and sometimes no money down. Those mortgages were securitized, pooled together in CDOs, “collateralized debt obligation” funds that issued small slices of equity leveraged with huge debt tranches backed by pools of mortgages.

Investors in CDO debt couldn’t know the credit risk they were assuming. How could they perform due diligence on thousands of mortgages? Fund sponsors and placement agents reassured investors and credit-rating firms that “housing prices never go down, so mortgages don’t default.” One Wall Street participant recently told me that Moody’s “stress case” assumed home prices would rise “only” 4% to 5% annually.

Buying credit-default-swap protection to short this assumption was nearly free (19 basis points for supersenior AAA-rated bonds), probably the most asymmetric trade ever. I know, because the Xerion hedge fund I managed did it in 2006, applying lessons learned in structured finance asset management, when we were offered and declined the opportunity to sponsor and manage one of the first mortgage-backed CDOs in 1998.

Wall Street firms started out serving their traditional and essential purpose of intermediating capital during the mortgage boom. But when yield-seeking institutions filled their capacity for mortgage CDO notes, the bankers convinced their firms to warehouse the leftovers on their own balance sheets to keep the gravy train of placement revenues on the tracks. Managements bought the bankers’ never-default narrative, and the financial system paid the price.

Investor appetite, and the industry’s legitimacy, ultimately relied on investment-grade ratings for the CDO notes conferred by government-certified credit-rating firms Moody’s, Fitch and Standard & Poor. But they were hired by the placement agents and fund sponsors. Guess how much independent work did they did, and on whose models they relied?

A sophisticated few CDO investors wisely laid off the risks for a nominal fee to regulated insurers like AIG and financial-guarantee insurance companies such as MBIA and AMBAC. Some “first loss” investors in CDO equity even cleverly hedged by shorting notes senior to their position. It was free money for everyone—until it wasn’t. When Lehman was left to fail, the ensuing contagion and panic left the Fed and other sovereign balance sheets as the lenders of last resort.

Decision-making leadership across society has great technical expertise. Its incentives are another question. But the finance industry’s market discipline maximizes efficiency, aiming to produce the most revenue at the lowest cost. That led professionals throughout the system—sponsors, placement agents, credit-rating firms and investors—to take the easy way out. Nobody bears specific responsibility for the last crisis. Everyone does: It was an entire industry ecosystem built on mindless heuristics, shortcuts and failures of common-sense investment diligence.

Talented Fed and Treasury leadership saved the day. Congress, paralyzed by partisan bickering, failed. It barely managed to enact the triage of the Troubled Asset Recovery Program, authorizing the Treasury to purchase defaulted bonds. Then it spent years blaming and vilifying “Wall Street,” only to restrict its critical market-making and liquidity-providing functions while leaving the credit-rating firms and their conflict-laden model untouched. Lawmakers achieved nothing else meaningful in the eight following years.

The Obama White House did rescue the car industry, but only by impairing senior secured creditors and enriching the unions, which were subordinated unsecured creditors, with billions of dollars in equity, repudiating decades of basic bankruptcy law. The main burden of post-crisis government response fell by default to the Federal Reserve.

At least the Trump administration has moved on to reducing business regulations and cutting corporate tax rates, giving American companies an incentive to repatriate and invest overseas profits, a chance to do more than buy back stock with the savings. Call it fiscal easing. This should help the innovative, small businesses that create most of the economy’s new jobs. But it won’t be enough; Trump fiscal easing will probably be remembered as another kick-the-can palliative, paid for by adding trillions to the national debt.

In the past decade, total global debt (sovereign, corporate and household) has spiked nearly 75%. This includes a doubling of sovereign debt, from $29 trillion to $60 trillion, according to a recent McKinsey report. Total corporate debt increased by 78% over the same decade, to $66 trillion. Bank loan volumes have been stable, although low-quality “covenant lite” loans have dominated. Bond markets have filled in, with nonfinancial bonds outstanding up 172%, from $4.3 trillion to $11.7 trillion. McKinsey says 40% of U.S. companies are rated one notch above “junk” or lower, and the Bank for International Settlements estimates 10% of legacy companies in the developed world are “zombies,” meaning earnings before interest and taxes don’t cover interest expenses.

This is what zero interest rates and quantitative easing have wrought—more debt and lower credit quality. Yield-starved investors were happy to look the other way and refinance dubious credits so long as rates were low and they had no better alternative. Small wonder central banks are glacially unwinding their balance sheets and raising rates. But higher rates are coming, possibly heralding a tsunami of credit defaults. Why should that be in this disinflationary environment, when software and service technologies are displacing capital and labor from industry and keeping costs low? Simply: more supply, and declining demand for U.S. Treasurys, whether the Fed raises policy rates or not.

The U.S. owes $21.5 trillion of Treasury debt, the majority of which is scheduled to be refinanced in the next eight years, disregarding the additional $1 trillion required by the 2017 tax reform and an estimated $100 trillion of unfunded entitlement spending ahead. The Fed still owns $2.324 trillion it bought from banks as part of quantitative easing, which will need to be refinanced at maturity. Foreign sovereigns own $6.5 trillion, 40% of which is in the hands of China, Japan and Saudi Arabia.

China and Japan are increasingly refinancing their own debt. As China continues its transition from exports to domestic consumption and buys its oil in its “petro yuan” straight from Saudi Arabia, while the U.S. buys less Saudi oil, Riyadh and Beijing have less appetite for U.S. Treasurys. Finally, the European Central Bank’s anticipated policy normalization suggests Europe too will be competing with the Fed for buyers in sovereign refinancing markets. Is it prudent to assume that private institutions will pick up the slack?

Cautious as the Fed may be about raising short-term interest rates, and even should economic growth naturally slow as the one-time spike of fiscal easing subsides, supply-demand dynamics suggest the “belly” of the U.S. Treasury curve is headed higher. If the 10-year Treasury, the reference rate for corporate bonds, surpasses 3.25%, much less approaches its long-term average yield of 4.5%, “lend and pretend” refinancing could stop cold.

When credit turns, stocks have never been far behind. The longest-ever bull market may be closer to ending than we think—and that could be the least of our problems.

Mr. Arbess is CEO of Xerion Investments.

[Crafty_Dog]

The Growing Deficit To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/17/2018

The U.S. federal government reported last week that it ran a deficit of $214 billion in August, the fifth largest deficit for any single month in US history.

The Congressional Budget Office thinks these numbers are consistent with a budget deficit of about $800 billion for Fiscal Year 2018, which ends September 30. If so, that would be the largest annual deficit in raw dollar terms since FY 2012. This deficit is roughly 4.0% of GDP, which would be the highest since FY 2013.

For many, this growing deficit is a dagger to the heart of the tax cut enacted in late 2017. They say the tax cut was irresponsible. However, economic growth has picked up because of the tax cut, and growth is the key to higher fiscal receipts down the road – in fact tax receipts are still hitting record highs.

Between 2010 and 2017, the U.S. passed two large tax hikes, yet the deficit was still $665 billion in FY 2017, which was not exactly a model of fiscal purity. As a result, we call "politics" on all those now fretting about deficit spending only when a tax cut is involved.

It's important to recognize that the tax cut has, so far, reduced revenue compared to how much the federal government would have collected in the absence of the tax cut. But, total federal receipts are likely to end the current Fiscal Year up slightly from last year and at a record high. Next year, according to the CBO, revenue should be up 4.6% and at another record high.

In other words, the tax cut didn't lead to an outright reduction in revenue, it just slowed the growth of revenue.

Spending is the problem. Total federal spending will rise about 4% this year and is scheduled to rise about 8% next year. In spite of an acceleration in economic growth, government spending is rising faster than GDP.

While this is a long-term problem, it will not turn the U.S. into Greece overnight. No fiscal crisis for the nation is at hand. Last year, net interest on the federal debt amounted to 1.4% of GDP. The Congressional Budget Office projects that net interest will hit 2.9% of GDP before some of the tax cuts theoretically expire in the middle of the next decade.

That is a large increase, but net interest relative to GDP hovered between 2.5% and 3.2% from 1982 through 1998. The U.S. paid this price and the economy still grew more rapidly than it has in the past decade. The U.S. didn't become Greece.

Compare two economies of equal size. One spends $500 billion, but with zero taxes, the other spends $2 trillion, but taxes $1.5 trillion. Both have $500 billion deficits, but the first economy would be more vibrant and could finance the debt more easily. It's not that deficits don't matter, but deficits alone are not a reason for investors to run for the hills.

And when deficits are partly caused by more federal spending on interest payments you know who will hate it the most? The politicians.

Here's why. Politicians like to deliver things their constituents are grateful for, things that make voters more likely to vote for them rather than someone else. Tax cuts help politicians get more votes, at least from those who actually pay taxes. Government programs can also help incumbents corral votes. Pass out government checks and you can get more votes, too. But bondholders have no gratitude for politicians when they receive the interest they're owed on Treasury securities.

Higher net interest payments will eventually "crowd out" future tax cuts and government programs, making it tougher for incumbents to get re-elected. As net interest payments rise, more politicians will start obsessing about the deficit again, just like in the 1980s and 1990s.

The true threat to long-term fiscal health is spending. If left unreformed, entitlement programs like Social Security, Medicare, and Medicaid will take a ceaselessly higher share of GDP, leading to a larger and larger share of American production being allocated according to political gamesmanship rather than individual initiative, in turn eroding the character of the American people.

Unless we change the path of spending, last year's tax cuts - and the boost to economic growth they've already provided - risk getting overwhelmed in the long run. But, for investors, this isn't an immediate problem. After all, deficit fears have been around for decades and equities still rose. Stay bullish, for now.

[DougMacG]

https://www.frbatlanta.org/cqer/research/gdpnow.aspx

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2018 is 4.1 percent on October 1,
------------

Average annual GDP growth: 1.48% during Obama's two terms
https://www.zerohedge.com/news/2017-01-27/barack-obama-now-only-president-history-never-have-year-3-gdp-growth

[Crafty_Dog]

I thought this quarter was supposed to drop to the low 3s because the 4.2 number of the previous quarter included purchases made to get in ahead of the tariffs?

In other words this is really big news if accurate?

[DougMacG]

I thought this quarter was supposed to drop to the low 3s because the 4.2 number of the previous quarter included purchases made to get in ahead of the tariffs?

In other words this is really big news if accurate?

The first version of the so called real number for GDP growth will come out sometime between now and the election but this is probably the best estimate to use in the meantime.

[DougMacG]

Market corrected because of ... ...
 what?  Interest rate fears?  Overheated economy, tightening recession coming? I don't buy it.

Election fear of a Democratic house?  That makes more sense to me but the timing doesn't match the polling.

Scott Grannis guesses that it's just a panic attack, something short of a correction which is more like 10%, and he says that is healthy.
http://scottgrannis.blogspot.com/2018/10/just-another-panic-attack.html?m=1

It is healthy in the sense that it shakes out all the people who feel the market is overvalued until those who feel it's undervalued or accurately valued become the larger force.  

In other words, a market being a market.

Regarding potential structural reasons, the economy is not overheating. The Atlanta fed raised its third-quarter GDP growth estimate to 4.2% on October 10th. The workforce participation rate is still expanding, we are still adding jobs. Wage growth in tune with productivity growth plus a 2% inflation adjustment. The tariffs care is real but we have a new North American agreement and China is becoming more and more isolated. China's economy is 6 times more vulnerable to the trade war. China's Leverage  of the u.s. midterms vulnerability will soon be in the rearview mirror.  At some point it's in both countries interest to settle the differences and free trade will blossom on both sides of the Pacific.

Reasons to be pessimistic are about the lowest of the last 12 years.

[Crafty_Dog]

https://www.wsj.com/articles/u-s-is-worlds-most-competitive-economy-for-first-time-in-a-decade-1539727213?fbclid=IwAR3azj2hPkGRLSAZ3pYclBJcfTFv0WggNdna9GLrskOCq3I98e578WaH5O0

[Crafty_Dog]

Is 3Q GDP number out yet?

[DougMacG]

"Is 3Q GDP number out yet?"

Look for the first release on Oct 26 at 8:30am.

BEA   Gross Domestic Product (advance estimate)   Q3 2018   October 26, 2018   8:30
BEA   Gross Domestic Product (second estimate)   Q3 2018   November 28, 2018   8:30
BEA   Gross Domestic Product (third estimate)   Q3 2018   December 21, 2018   8:30
https://www.commerce.gov/page/2018-release-schedule-economic-indicators

Current estimate at Atlanta Fed GDP Now is 3.8%.
https://www.frbatlanta.org/cqer/research/gdpnow.aspx

Down a little from the last post but still 2 1/2 times the growth rate of the entire Obama administration.

At more than double the growth rate, we have barely begun to drain the swamp and lower the cost and burden of government.

Too bad neither party and no states are proposing to make significant further reforms.  With a popular mandate we could make this country great again.

[ccp]

If you ask the Left the answer is always we need more taxes

If you ask the Right the answer is tax cuts and grow the economy

Neither alone works

we are doomed

thats is it.

[DougMacG]

If you ask the Left the answer is always we need more taxes
If you ask the Right the answer is tax cuts and grow the economy
Neither alone works we are doomed
that is it.

Raise taxes means kill the goose.

Lower tax rates can only be part of a strategy.  As we grow the economy, we must move people off of dependency on the government, food stamps, housing, and especially health care.  Must also move their thinking off of dependency on the government.  Then must convert that to winning elections and lowering spending.

50% of people receiving a check or subsidy from the government is NOT any kind of focus on helping those in the very most need.  It is something else, social engineering and vote buying.  It screws up incentives and disincentives, up, down and sideways in the economy.  Free money, free sh*t  is stupid thinking.  You get this subsidy.  It's not even paid for.  And your kids won't be stuck with the tab?  How so?  Your debts will be wiped out in the bankruptcy of our country and we have a major political party and half the people supporting that?

Government spending, a symbol of government running our lives, is the problem. Entitlements.  Put unnecessary government regulations and mandates right there with spending.  Moving us toward sameness and trickle up poverty.  From hunger to brain cancer to pollution, all problems are more easily and more likely solved with prosperity.

[ccp]

Same as with Reagan

cut taxes while increasing the military budget while not holding down any spending (even NPR can't be cut for goodness sakes)
and VIOLA - deficit soars

Only difference is this time Repubs controlled the Houses.

As I said we will never see another tax cut in my lifetime.  When Dems retake the House ballgame over.

https://www.breitbart.com/politics/2018/10/17/donald-trump-urges-cabinet-members-to-deliver-five-percent-cuts/

[DougMacG]

Trump's Economy Is Creating Factory Jobs 10 Times Faster Than Obama's
"In the 21 months since his inauguration, President Trump's deregulatory policies and historic tax cuts have led to a manufacturing resurgence, with 396,000 jobs added. In fact, the pace of manufacturing job growth over the past 21 months of President Trump's leadership is more than 10 times that of President Obama's last 21 months in office."
https://www.investors.com/politics/commentary/trumps-economy-creating-manufacturing-jobs/

Or as young voters and other Democrats might say to this 10-fold increase:  whatever.

[DougMacG]

https://www.cnbc.com/2018/10/26/first-read-on-us-q3-2018-gross-domestic-product.html
US ECONOMY
The US economy grew at a 3.5% pace in the third quarter, faster than expected
---------------
Faster than WHO expected??

"During the presidential campaign, Trump promised growth of 3.5% a year"
http://www.latimes.com/business/hiltzik/la-fi-3percent-20170519-story.html

"Making up the difference from 2% to more than 3% looks like a pipe dream."

"High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era."

Northwestern's Robert J. Gordon, "U.S. GDP's best years are behind it."

The only place one can find confidence about a growth rate of 3%-plus is inside the Trump administration, where Treasury Secretary Steven Mnuchin says it's "very achievable."
----------------
https://www.businessinsider.com/trump-3-gdp-growth-plan-makes-no-sense-2017-2
Feb. 27, 2017, 1:48 PM
Three percent GDP growth. Three percent GDP growth. Three percent GDP growth.
Get it stamped on your brain. Get it tattooed somewhere. Have some T-shirts made, because this is team Trump's goal for the economy. In a time of extreme policy confusion, 3% GDP growth is one of the only firm targets we have to hang onto.
The problem is that in interview after interview, Donald Trump and his surrogates have demonstrated that they have no idea how to get there.

Chief White House Economic Adviser Gary Cohn has also talked about the magic path to 3% GDP growth, mostly saying that tax reform and deregulation would get us there. Treasury Secretary Steven Mnuchin said the target was "very achievable" and spouted the same lines.

Business Insider:  "Unfortunately, that's not how GDP growth works."
----------------
https://www.pbs.org/newshour/politics/watch-live-president-obamas-town-hall-in-elkhart-indiana
President Obama:  Trump lacks ‘magic wand’ to grow economy
---------------
https://www.politifact.com/truth-o-meter/article/2017/may/26/why-economists-are-skeptical-us-can-grow-3-percent/
Politi"Fact"
"Why economists are skeptical that U.S. can grow by 3 percent"
...
"So do economists really think that 3 percent growth is no longer feasible? Basically, yes."
---------------
Crafty_Dog posted Feb 2018 in Political Economics thread
Harvard Economist & Obama Chairman of Council of Economic Advisors
« Reply #1724 on: February 16, 2018, 04:15:47 AM »
As Boomers Go Gray, Even 2% Growth Will Be Hard to Sustain
Hoping for 3% or more is folly. The fundamentals—people and productivity—seem unlikely to provide it.
By Jason Furman
https://dogbrothers.com/phpBB2/index.php?topic=1467.msg108819#msg108819
-----------------
US GDP growth rate was 1.6% during President Obama's last year in office and averaged 1.48% over his two term presidency. More than doubling the growth rate of the world's largest economy in history is a BFD.

https://www-cbsnews-com.cdn.ampproject.org/v/s/www.cbsnews.com/amp/news/u-s-economic-growth-slowed-in-2016-to-1-9/?amp_js_v=a2&amp_gsa=1&usqp=mq331AQECAFYAQ%3D%3D#referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s&ampshare=https%3A%2F%2Fwww.cbsnews.com%2Fnews%2Fu-s-economic-growth-slowed-in-2016-to-1-9%2F

https://www.zerohedge.com/news/2017-01-27/barack-obama-now-only-president-history-never-have-year-3-gdp-growth
-----------------

[Doug] I ask my liberal friends:  "Are you for or against economic growth?"

They think this is a stupid or trick question, but it isn't.  They are voting against pro-growth policies and voting for anti-growth policies, over and over, up and down the ballot.  They either are against growth or have other priorities ahead of growth - but those other priorities like full employment, affordable-this and affordable-that, or even funding big government don't work out so well without economic growth.

[DougMacG]

Great employment report came out as the last economic news before the election.

https://www.bls.gov/news.release/empsit.nr0.htm

Other than Trump tweeting and Trump rallies, just horrible messaging by the Republicans. Why can't they get a coherent message out? Challenge the voter, are you for or against economic growth? It really is that simple.  Do you want your children and grandchildren to grow up in a prosperous country or to live in decline?

[Crafty_Dog]

Real GDP Grew at a 3.5% Annual Growth Rate in Q3 To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/28/2018

Real GDP grew at a 3.5% annual growth rate in Q3, matching the initial estimate as well as consensus expectations.

Business investment and inventories were revised higher, but offset by downward revision to consumer and government spending, residential investment, and net exports.

The largest positive contributions to the real GDP growth rate in Q3 were personal consumption and inventories. The largest drag was net exports.

The GDP price index increased at a 1.7% annual growth rate, matching the prior estimate. Nominal GDP growth – real GDP plus inflation – was revised up to a 5.0% rate from a prior estimate of 4.9%.

Implications: Hold off on the GDP data for a second, because this morning's first look at corporate profit growth in the third quarter is the real headline. Pre-tax corporate profits rose 3.4% in the third quarter - the fastest quarterly growth rate since Q2 2014 – and are up 10.3% in the past year, the largest four-quarter increase since mid-2012 (and thanks to the tax cuts, after-tax profits are up nearly 20% in the past year). Plugging this data into our capitalized profits model puts our estimate of "fair value" for the S&P 500 at 3,614, or roughly 35% above yesterday's closing value. Even if the 10-year Treasury yield (the denominator in our model) rose to 3.5% today, the market would still be undervalued by nearly 20%. In other words, the correction we have seen since mid-September is emotional, not logical, and we expect markets to move higher in the months ahead. With that out of the way, on to the GDP data. Real GDP growth in the third quarter showed no net change from the first to the second estimate, staying at 3.5%. The best news in today's report was the upward revision to business investment to a 2.5% annual rate from an initial estimate of 0.8%, while the government spending estimate was revised lower. Inventories were also revised higher, helping to offset a decline in consumer spending, but not something that can be relied upon for sustained growth. We like to follow "core" real GDP, which excludes inventories, government purchases, and international trade. Inventories and government don't generate long-term growth, while the way trade is counted does a bad job of showing that rising imports signal strong spending. Core GDP grew at a 3.2% annual rate in Q3 versus a prior report of 3.1% and is up at a healthy 3.5% in the past year. Nominal GDP growth (real growth plus inflation) was revised to 5.0% annual rate in Q3 from a prior estimate of 4.9%. Nominal GDP is up 5.5% in the past year and up at a 4.8% annual rate in the past two years. All of these figures suggest the economy can sustain higher short-term interest rates, but the question looms whether the Fed will stick to its guns or blink in the face of market volatility. All eyes will be on the December FOMC meeting – where a hike looks nearly certain - for a clearer picture on the path of rates in 2019. In other recent news, the national Case-Shiller index shows home prices up 0.4% in September. In the past year prices are up 5.5%, a deceleration from the 6.0% gain in the year ending in September 2017. The major city with the fastest price growth, by far, was Las Vegas, up 13.5% from a year ago. Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, rose 0.2% in September and is up 6.0% from a year ago. That's a deceleration from the 6.7% gain in the year ending in September 2017. In other words, home prices are still rising on a national basis, just not as fast as a year ago.

[Crafty_Dog]

Data Watch
________________________________________
Personal Income Rose 0.5% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/29/2018

Personal income rose 0.5% in October, while personal consumption increased 0.6%, both beating consensus expected gains of 0.4%. Personal income is up 4.3% in the past year, while spending is up 5.0%.

Disposable personal income (income after taxes) rose 0.5% in October and is up 4.8% from a year ago. The gain in October was led by private-sector wages and salaries and government transfers.

The overall PCE deflator (consumer prices) rose 0.2% in October and is up 2.0% versus a year ago. The "core" PCE deflator, which excludes food and energy, rose 0.1% in October and is up 1.8% in the past year.

After adjusting for inflation, "real" consumption rose 0.4% in October and is up 2.9% from a year ago.

Implications: Following a lull in September, both incomes and spending surged in October, rising 0.5% and 0.6%, respectively. To put that in perspective, those both tie for the highest readings of their respective series in 2018, and show healthy consumers heading into the holiday season. Breaking down the data shows that incomes were led by a 0.3% gain in private sector wages and salaries, a 0.6% gain in government transfers, and a 1.6% gain in proprietor's income (think small businesses, partnerships, and farms). Farm income was notable in October, as it was boosted by a Department of Agriculture program to assist farmers affected by trade retaliations, pushing farm incomes up by the largest amount in more than five years. But even excluding this temporary boost, incomes were up 0.4% in the month. More important is that incomes are up a healthy 4.3% in the past year, and thanks to the tax cuts, after-tax income is up 4.8% over the last twelve months. And consumers are putting that extra spending power to work. Consumer spending rose 0.6% in October, led by increased spending on housing, healthcare, and recreation. While consumption growth has trended moderately above income growth over the past few years, this follows a period between 2010 and 2015 where income growth outpaced the growth in spending. As a result, consumer balance sheets remain very healthy, with plenty of room for increased spending in the months ahead. The worst news in today's report was that government transfers rose 0.6% in October. That said, government transfers continue to grow at a slower rate than wages and salaries, so while government transfers are up 4.2% in the past year, transfer payments are making up a smaller – though still too high – portion of income. On the inflation front, the PCE deflator rose 0.2% in October and is up 2.0% in the past year. "Core" prices, which exclude food and energy, are up 1.8% in the past year. Extra attention will be on economic and inflation data leading up to December Fed meeting, where we will get updated forecasts on where the Fed sees the economy – and rates – moving in 2019. In employment news this morning, initial jobless claims rose 10,000 last week to 234,000. Meanwhile, continuing claims rose 50,000 to 1.71 million. Despite the increases – which could have been impacted by recent holidays - we expect further strength in payroll growth in November. On the housing front, pending home sales (contracts on existing homes) fell 2.6% in October following a 0.7% rise in September. These reports suggest existing home sales, counted at closing, should move modestly lower in November.

[Crafty_Dog]

________________________________________
The ISM Non-Manufacturing Index Rose to 60.7 in November To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/6/2018

The ISM non-manufacturing index rose to 60.7 in November, easily beating the consensus expected 59.0. (Levels above 50 signal expansion; levels below 50 signal contraction.)

The major measures of activity were mixed in November, but all remain well above 50, signaling expansion. The business activity index rose to 65.2 from 62.5 in October, while the new orders index increased to 62.5 from 61.5. The employment index declined to 58.4 from 59.7 in October, and the supplier deliveries index fell to 56.5 from 57.5.

The prices paid index rose to 64.3 from 61.7 in October.

Implications: Service sector activity continues to surge, with the November ISM Services index hitting the second highest reading (behind just September) in more than a decade. And barring a massive decline in December, 2018 will average the highest full-year reading for the index since the series began in the late 1990s. A look at the details of today's report shows that the pickup in activity was broad-based, with seventeen of eighteen industries reporting growth in November (the agriculture, forestry, fishing & hunting industry reported a decline). In addition to the breadth of growth, the two most forward-looking indices – new orders and business activity – led the gain in November, suggesting we will see a strong close to this year and a healthy start to 2019. That said, two major sub-indices moved lower in November, showing continued growth, but at a slower pace than October. The employment index declined to a still robust reading of 58.4, from 59.7 in October. As we noted in today's analysis of the trade report, we expect tomorrow's employment report to show a gain of 193,000 nonfarm jobs. Growth in employment would be even faster, but the lowest unemployment rate in nearly fifty years has led to difficulties for companies in finding qualified labor (this also explains the pickup in wage growth as demand for labor exceeds supply at prior lower wages). Finally, the supplier deliveries index declined in November, signaling that delays related to labor shortages, component shortages, and freight issues (due to a lack of truck drivers), are easing somewhat. These delays, paired with the strength in new orders, are putting upward pressure on prices – as reflected in the prices paid index, which rose to 64.3 in November. While we don't expect prices will soar any time soon, this suggests inflation will continue to run at-or-above the Fed's 2% target, putting pressure on the Fed not to fall behind the curve with the pace of rate hikes in 2019. In other recent news, automakers reported they sold cars and light trucks at a 17.5 million annual rate in November, down 0.2% from October, and down 0.8% from a year ago. We expect auto sales will continue to gradually decline versus year-ago levels as consumers, who have plenty of purchasing power, shift toward other sectors.

[Crafty_Dog]

Monday Morning Outlook
________________________________________
The Long-Term Yield Conundrum To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/10/2018

Last Friday, the 10-year Treasury Note closed at a yield of 2.85%. That's up from 2.41% at the end of 2017, but down from the peak of 3.24% on November 8th, and well below where fundamentals suggest yields should be.

In the last two years, nominal GDP growth – real GDP growth plus inflation – has run at a 4.8% annual rate. Normally, we'd expect yields to be close to nominal GDP growth, but Treasury yields have remained stubbornly low.

Some analysts are spooked by the recent movement of 3-year yields above 5-year yields, thinking this "inversion" signals a recession. We think this is sorely mistaken. With a lag, recessions have often (but not always) followed periods when the federal funds rate exceeds the 10-year yield. If anything, that's the inversion to look out for; feel free to ignore the rest. But, at present, the 10-year is yielding about 70 basis points above the funds rate, well within the normal range.

One reason that the 10-year yield has remained below where economic fundamentals suggest it should trade is that the Federal Reserve set short-term interest rates near zero. Longer-term bonds, including the 10-year reflect the current level of short-term rates as well as the projected path of those rates in the future. So, back when yields were essentially zero, and the Fed was signaling they could stay there for a long time, this pulled down longer-term yields. The Fed has now lifted short-term interest rates by 200 basis points from where they were, but investors still don't believe they will go much higher.

Part of the issue is that many think low rates themselves are the only reason the economy came out of the Great Recession. So as the Fed lifts rates, many investors expect the next recession is a small tip of the scale from returning in force.

If you're buying 10-year Notes under the premise that a recession will happen sometime in the next ten years – and you also expect the next recession to tie (or beat) '08-'09 for the title of worst recession since the Great Depression – then the yield on the 10-year Treasury makes a lot more sense.

But we wholeheartedly disagree with your assessment. We think the bond market is anticipating a far weaker economy over the next ten years than the data justifies.

No matter how many believe it, the bond market is not all-knowing. In November 1971, the 10-year Treasury was yielding 5.81%. Over the next ten years, inflation alone increased at an 8.6% annual rate and nominal GDP grew at a 10.7% annual rate. In other words, 10-year note investors got hammered as yields soared. And notice that back in 1971 we had a Republican president (Richard Nixon) leaning heavily on the Fed to maintain a loose monetary policy. Sound familiar?

The next recession is unlikely to be like the last. Our calculations suggest national average home prices were 40% overvalued at the peak of the housing boom – pumped up by government rules and subsidies artificially favoring home buying. Meanwhile overly stringent mark-to-market accounting rules created a once in a 100-year panic. Mark-to-market rules have now changed to allow cash flow to be used to value assets, plus banks are much better capitalized. In other words, fundamentals suggest another panic is not in the cards.

What's more likely is that, when the next recession hits – and we don't see one happening until at least 2021 – it will be softer than usual, more like 1990-91 or 2001, than 1973-75, 1981-82 or 2007-09. As investors realize data trumps the rhetoric, we expect bond yields to rise. In the end, math wins.

[DougMacG]

It's a good article.  Agree or not he clarifies his thinking on interest rates in particular.

In explaining differences between the last recession and the possible next one he writes:
"Our calculations suggest national average home prices were 40% overvalued at the peak of the housing boom – pumped up by government rules and subsidies artificially favoring home buying."

I wonder what our PP (who was kind of tough on Wesbury previously) thinks of housing prices now.

Also this:  "The Fed has now lifted short-term interest rates by 200 basis points from where they were, but investors still don't believe they will go much higher." 

The interest rate banks pay went from 0.25% to 2.25%, an 8-fold increase just since the 2016 election. That doesn't effect the value of every house or every business, does it?   Nothing to see here, move along.

My sense is housing is nearly 40% overvalued now based on the continued skewing of government policies, with a reckoning coming from the impact of tax reform's SALT deduction limitation and the trend to limit mortgage interest deduction.

Mortgage interest for indebtedness over 1 million no longer deductible.  (Doesn't affect you unless different segments of the same market are connected!)

Home equity loans:  The new tax law also ended the deduction for interest on home equity indebtedness (until 2026), unless used to pay for home improvements.  It's December of the first year, does anyone know this yet?

Some people may want to pay less for their housing going forward and some may have to.  But it's not like housing is a major part of the US economy...  oops.

[Crafty_Dog]

Industrial Production Rose 0.6% in November To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/14/2018

Industrial production rose 0.6% in November (+0.3% including revisions to prior months), beating the consensus expected gain of 0.3%. Mining output rose 1.7% in November, while utilities increased 3.3%.

Manufacturing, which excludes mining/utilities, was unchanged in November (-0.5% including revisions to prior months). Auto production rose 0.3%, while non-auto manufacturing was unchanged. Auto production is up 3.5% versus a year ago, while non-auto manufacturing is up 1.9%.

The production of high-tech equipment rose 1.7% in November and is up 7.6% versus a year ago.

Overall capacity utilization rose to 78.5% in November from 78.1% in October. Manufacturing capacity utilization fell to 75.7% in November from 75.8% in October.

Implications: Industrial production continued to climb higher in November, hitting a new record high. However, the details of today's report were less impressive than the headline gain of 0.6%. All of November's growth was due to gains in mining and utilities, while overall manufacturing remained unchanged for the month. Further, downward revisions dragged the readings for both the headline index and manufacturing in October into negative territory. That said, a look at growth in the past year shows industrial production – which counts "units" of output and is therefore a proxy for "real" growth – is up a healthy 3.9%. Notably, the flat reading for manufacturing in November was due to a decline in the production of nondurable goods offsetting gains in motor vehicles, machinery, and high-tech equipment. In the past year, the various capital goods indices continue to show healthy growth with business equipment up 4.1%, machinery up 6.2%, and high-tech equipment up 7.6%. Comparing this with the more tepid year-over-year growth of 0.7% for nondurable goods, or 1.9% for manufacturing as a whole, demonstrates that capital goods production remains a valuable source of strength. 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. The biggest monthly gain in November came from utilities which rose 3.3%, as unseasonably cold weather supported demand for heating. Finally, after a brief dip in activity in October due to Hurricane Michael, mining rebounded 1.7% in November to return to a record high. The advance was due to gains in oil and gas extraction and coal mining. Mining is now up 13.2% in the past year, by far the fastest growing category in industrial production.

[DougMacG]

Yesterday down.  Today up.  Hard to time a comment...

Trump took credit for the stock market rise.  Opponents of course want to give him credit for the correction as well.
https://www.bloomberg.com/news/articles/2019-01-03/the-president-owned-the-trump-bump-are-we-in-the-trump-slump?srnd=premium

Funny that the downturn began when it became clear that Democrats led by Nancy Pelosi would take the House promising socialism if they can pass it and endless investigations.

On that theory, the downturn ends if and when it becomes clear that Leftists will not pass legislation by winning only one chamber, nor will they remove the President though they certainly can provide endless turmoil.

The downturn preceded the shutdown so that isn't the cause but it doesn't help.

Strange to me that Trump blames the Fed instead of investor distrust of the Democrats.  Maybe he feels he has more to gain by fighting the Fed but most think he would be more effective making that argument to them in private.

Chinese markets are down even more, maybe current fears here come out of trade jitters. cf Smoot Hawley. China is signaling it wants an agreement, whatever that means.  US negotiators are headed there next week.  Will they really give up technology theft??

If politics and uncertainty over future policies have anything to do with this volatility, the endless campaign of 2020 should provide plenty of drama.

[Crafty_Dog]

Data Watch
________________________________________
Nonfarm Payrolls Rose 312,000 in December To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/4/2019

Nonfarm payrolls rose 312,000 in December, destroying the consensus expected 184,000. Including revisions to October/November, nonfarm payrolls increased 370,000.

Private sector payrolls rose 301,000 in December and revisions to prior months added 42,000. The largest increases in December were for education & health services (+82,000), accommodations & food service (+49,000), professional & business services (+43,000, including temps), construction (+38,000), and manufacturing (+32,000). Government rose 11,000.

The unemployment rate rose to 3.9% in December from 3.7% in November.

Average hourly earnings – cash earnings, excluding irregular bonuses/commissions and fringe benefits – rose 0.4% in December and are up 3.2% versus a year ago.

Implications: Job growth surged in December, easily beating even the most optimistic forecast by any economics group and severely undermining the theory that the US is on the verge of a recession. Nonfarm payrolls rose 312,000 in the last month of the year and were revised up a substantial 58,000 for prior months. Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 142,000, but that series is very volatile from month to month. For 2018 as a whole, nonfarm payrolls rose 220,000 per month while civilian employment increased 217,000 per month. These are very robust figures given that we started the year eight and half years into an economic recovery. Although the unemployment rate rose to 3.9%, that was in large part due to a strong 419,000 increase in the labor force. For 2018 as a whole, the jobless rate fell only 0.2 percentage points (it ended 2017 at 4.1%), the smallest drop for any year so far in the recovery, even though we likely had the best economic growth for any calendar year so far in the recovery.

Faster growth with robust job gains and slower declines in the unemployment rate suggest something happened in 2018 to boost productivity and change the recovery for the better; we think that was a combination of the tax cut and deregulation, which should continue to support growth in 2019. Accelerating wages are another sign of improvement. Average hourly earnings rose 0.4% in December and are up 3.2% from a year ago. (Remember, that's in spite of that measure excluding extra earnings from irregular bonuses and commissions, like those paid out after the tax cut was passed.) Meanwhile, total hours rose 0.5% in December and are up 2.0% in the past year. As a result, total cash earnings are up 5.2% in the past year, easily surpassing inflation and more than enough to keep consumer spending growing.

What does this mean for the Fed?

If the economic data were the only issue, the Fed could raise rates as often as four times in 2019, the same as in 2018. However, we think the Fed wants to avoid the federal funds rate getting higher than the 10-year Treasury Note yield, which means the Fed would stand pat if Treasury yields stay where they are today. In the end, we think the 10-year yield rises due to solid economic data and the fed ends up hiking rates twice in 2019, maybe more if yields rise enough. Not every jobs report will be as strong as December's, but those fearing a recession or significant slowdown are too bearish on the US.

In other recent news, automakers reported selling cars and light trucks at a 17.6 million annual rate in December, up 0.3% from November, up 0.7% from a year ago, and easily beating the consensus expected 17.2 million pace. However, sales for all of 2018 were down 0.1% from 2017 and we expect a gradual decline in the next few years in spite of solid economic growth overall.

[G M]

manufacturing (+32,000)

Interesting. I believe the smartest president ever said that these jobs weren't coming back.

[DougMacG]

Interesting perspective from today's WSJ:

"It helps to think of stocks as having a focal length, like the lens of a camera, which is the point in the future investors are looking at. Stocks with long focal lengths have an area of high magnification, a smaller angle of view, and fewer things in focus. Amazon’s investors were willing to overlook low margins in the short term in exchange for a bountiful prize out there somewhere. A short focal length means investors don’t look too far and can see everything all in focus, warts and all, like General Electric . Stocks have a duration, but you can’t really measure it—you have to sense it, or feel how far out the market is willing to look."
https://www.wsj.com/articles/stock-picking-is-like-time-travel-11547412001

[Crafty_Dog]

Also, I saw Charles Payne this morning say that GDP projections have dropped from 2.7 to 2.4%?

Retail Sales Declined 1.2% in December To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 2/14/2019

Retail sales declined 1.2% in December (-1.5% including revisions to prior months), coming in well below the consensus expected gain of 0.1%. Retail sales are up 2.3% versus a year ago.

Sales excluding autos fell 1.8% in December (-2.3% including revisions to prior months) coming in well below the consensus expected no change. These sales are up 2.0% in the past year. Excluding gas, sales were down 0.9% in December but are up 2.5% from a year ago.

The drop in sales in December was led by non-store retailers (internet & mail order) and gas stations. The largest gain was for autos.

Sales excluding autos, building materials, and gas fell 1.6% in December and were down 1.8% including revisions to prior months. These sales were up at a 0.3% annual rate in Q4 versus the Q3 average.

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.

[DougMacG]

"Retail Sales Declined 1.2% in December"

Retail is a declining sector and I would guess that internet sales are poorly measured.  Maybe in the spirit of supply side economics we won't be only a consumer-driven economy anymore.

Wesbury:  "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."

That's an opinion but it's remarkable!  IF TRUE, that is a doubling of the growth rate.  If not true, what changed?  Dems won the House.  Same problem that killed off the last expansion he identifies.

"Tailwinds"  - Yes.  That is what we have left in the second half of Trump's first term, only what is already passed.  The Dem House is not going to pass any pro-economic-growth bill of any sort.  The exception to that should be to make the individual tax cuts already passed permanent.  I haven't heard that mentioned since the Ocasio-Omar election.

Also not mentioned relating to growth:  Interest rates are holding steady and a pretty good China deal is possible.

[Crafty_Dog]

Monday Morning Outlook
________________________________________
Spare Us the GDP Agony To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 3/4/2019

Real GDP grew at a 2.6% annual rate in the fourth quarter, and while some analysts are overly occupied with this "slowdown" from the second and third quarter, we think time will prove it statistical noise. Even at 2.6%, the pace is a step up from the Plow Horse 2.2% annual rate from mid-2009 (when the recovery started) through early 2017.

Fourth quarter real GDP growth happened in spite of a huge decline in retail sales for December (itself suspicious and likely to be revised higher, as job growth and retailer reports painted a very different picture). Moreover, business investment grew at a 6.2% rate in Q4 and was up 7.2% in 2018, the fastest calendar growth for any year since 2011.

In 2018 as a whole, real GDP grew at the fastest pace for any calendar year since 2005. And what's even more impressive is that year-over-year real GDP growth has accelerated in every quarter since the beginning of 2017. The first quarter of 2017 was up just 1.9% from a year earlier while subsequent quarters showed four-quarter growth of 2.1%, 2.3%, 2.5%, 2.6%, 2.9%, 3.0% and now 3.1%. We expect Q1-2019 GDP to slow like many other Q1s in recent years, meaning this impressive streak may come to an end. But this too is just statistical noise, and the YOY trend should remain around 3%+ over coming quarters.

"Potential growth," a measure of how fast the economy can grow when the unemployment rate is stable, has also improved. It's calculated using "Okun's Law," which says that for every 1% per year the economy grows faster than its potential rate, the jobless rate will drop by 0.5 points.

Working backward from the unemployment declines of recent years shows that potential GDP growth has picked up. From mid-2010 thru mid-2017, potential real GDP grew at just a 0.6% annual rate. But in 2018, with real GDP growth of 3.1% while the jobless rate dropped only 0.3 points, potential growth was 2.5%.

The worst part of the GDP story is the political gamesmanship of those who say real GDP only grew 2.9% in 2018. These data distorters are not looking at the size of the economy in the fourth quarter of 2018 compared to the fourth quarter of 2017; instead, they are comparing production through all of 2018 to production in all of 2017.

Here's why their method is misleading. Let's say that in the first quarter of Year 1 a company earns $100 per share then earnings slip to $99 in Q2, $98 in Q3 and $97 in Q4. Then, in Year 2, earnings start at $97 per share in Q1, go to $98 in Q2, $99 in Q3 and finally back to $100 in Q4. Overall, for two years earnings per share were flat. But that's because earnings growth was bad in Year 1 and good in Year 2. But the misleading method used by those saying the economy only grew 2.9% in 2018 would compare total earnings in Year 2 ($394) to total earnings in Year 1 ($394) and say the company had zero growth in Year 2! But that's nonsense. What matters in measuring Year 2 is how much earnings grew during the year, and in our example, that was 3.1% in Year 2.

As you can probably guess, this is a method favored only by academics, academic-style institutions like the IMF and World Bank, and political operatives trying to mislead. The truth is that tax cuts and deregulation have boosted growth, and will keep doing so as long as we stay on path.

[DougMacG]

"2018 ... real GDP growth ... 3.1%"
...
"[Year over year] trend should remain around 3%+ over coming quarters."
--------------------------------------------------------------------------------

He doubled the Obama growth rate in just two years using deregulation and tax reform.  Did anyone see this coming!  He needed a 0.4% increase in the growth rate to break even on the tax rate cuts.  Voila. 

Or as typical Leftist deniers of economic science predicted:
"Reasonable estimates of the current tax proposals will likely increase growth by no more than 0.1 percentage points per year on an ongoing basis.
Official government estimates of past tax reform proposals have never found a dynamic response as large as 0.4 percentage points per year."
http://www.crfb.org/papers/can-tax-reform-generate-04-additional-growth

Oops.  The increase was already four times what the entire Left said couldn't happen.

Can the loss of the House to the Democrats and the potential loss of Senate and Presidency in 2020 screw up optimism, risk taking and investment and kill off the new, faster, growth rate?  Yep. 

Wouldn't it be nice if both parties would promise to continue the policies that are working if they win.  Instead we have a 50/50 chance of Venezuelan socialism beginning in one and a half years.  No exaggeration.  Invest away.

[ccp]

"Wouldn't it be nice if both parties would promise to continue the policies that are working if they win.  Instead we have a 50/50 chance of Venezuelan socialism beginning in one and a half years.  No exaggeration.  Invest away."

Wall Street would be making a wise investment in paying all of Trump's medical bills.

If something happens to him or he loses. ......  back to Obamsternomics

[Crafty_Dog]

Data Watch
________________________________________
Real GDP Growth in Q4 was Revised to a 2.2% Annual Rate To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 3/28/2019

Real GDP growth in Q4 was revised to a 2.2% annual rate from a prior estimate of 2.6%, narrowly missing the consensus expected 2.3%.

The downward revision was due to personal consumption and government purchases. Net exports were revised up.

The largest positive contributions to the real GDP growth rate in Q4 came from consumer spending and business investment. The weakest component was home building.

The GDP price index was revised down to a 1.7% annualized rate of change from a prior estimate of 1.8%. Nominal GDP growth – real GDP plus inflation – was revised down to a 4.1% annual rate versus a prior estimate of 4.6%. Nominal GDP is up 5.2% versus a year ago and up at a 4.9% annual rate in the past two years.

Implications: Real GDP grew at a 2.2% annual rate in the fourth quarter, a downward revision from the prior estimate of 2.6%. There were no major changes to any particular component of GDP, but downward revisions to consumer spending and government purchases outweighed an upward revision to net exports. Still, real GDP grew 3.0% in 2018, the fastest growth for any calendar year since 2005, boosted by the shift to lower tax rates and less regulation. Meanwhile, nominal GDP – real GDP growth plus inflation – grew at a 4.1% annual rate in Q4. That's a downward revision from the prior estimate of 4.6%. However, nominal GDP was still up 5.2% in 2018 and is up at a 4.9% annual rate in the past two years, signaling that monetary policy is not tight. Today we also got our first look at economy-wide Q4 corporate profits, which were down 0.4% compared to the third quarter but are up 7.4% from a year ago. All the decline in Q4 was due to profits at domestic financial companies; profits increased at domestic nonfinancial firms, as well as from the rest of the world. Meanwhile, after-tax profits are up 14.3% from a year ago. Although some analysts are saying profits have peaked, we think the story of 2019-20 will be that profit growth may have peaked in 2018, but the level of profits will continue to trend higher. Our capitalized profits model suggests US equities remain cheap, not only at today's interest rates but even using a 10-year Treasury yield of 3.5%. In other news this morning, new claims for unemployment insurance declined 5,000 last week to 211,000. Continuing claims rose 13,000 to 1.756 million. These claims figures are both at very low levels, suggesting a rebound in payroll growth in March. On the housing front, pending home sales, which are contracts on existing homes, declined 1.0% in February after a 4.3% surge in January. These reports suggest March existing home sales, which are counted at closing will come in at around a 5.27 million annual rate, about the average of the past year.

[DougMacG]

What could have happened to the economic outlook in the 4th quarter? 

Rep. Omar elected.  Rep. Tlaib elected.  Rep. Ocasio-Chavez elected.  All moderate Republicans in suburban districts sent home.  Nancy Pelosi elevated to Speaker of the House.  Proposals abound to crush wealth, bring down the President and socialize the industries.  I guess voters wanted the economy to tick downward.