Silly Season

First Trust – MMO

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

With less than three months left before the 2022 midterm elections, it is officially silly season when it comes to interpreting economic reports. For many analysts it’s pretty much all politics all the time, with data seen through a political lens first, and with real unbiased economic analysis coming maybe second, if ever.

It started off with those saying we’re in a recession because, at least based on the most recent reports, real GDP declined in both of the first and second quarters of the year. Never mind that the unemployment rate has dropped 0.4 percentage points so far this year. Never mind that payrolls are up an average of 471,000 per month, while industrial production is up at a 5.2% annual rate over the first six months of the year. Never mind that “real” (inflationadjusted) gross domestic income was up in the first quarter (we’re still waiting for Q2 data) and has just as good of a track record as real GDP.

Ultimately, those claiming a recession started already wanted to score political points against the President and no other reports besides GDP would stand between them and that goal. Our view is that a recession is coming, that monetary policy will have to get unusually tight for the Federal Reserve to bring inflation back down to its 2.0% target. In turn, tighter money should induce a recession. But that takes time and the recession hasn’t started yet.

And now it’s the President and his side of the political aisle who are abusing economic reports for their own political ends. It is entirely true that the consumer price index was unchanged in July, the first month without an increase since May 2020. Fair enough. But to use that to suggest the inflation problem is going away is nonsense on stilts.

Energy prices surged 7.5% in June and then dropped 4.6% in July. That’s it. That’s really all you need to know about inflation in the past two months. As a result, overall consumer prices soared 1.3% in June and then were unchanged in July. But a new trend this doesn’t make. Looking at both June and July, combined, consumer prices rose at an annualized 8.1% rate. That is no different at all than the 8.1% annualized increase in April and May, before the extra surge in energy prices in June then the drop in July.

If you look at the unchanged CPI in July and think the Federal Reserve is nearly done, you’re in for a big surprise. The Fed isn’t close to done. Yes, if you follow consumer prices on a year-ago comparison basis, the inflation rate likely peaked at 9.1% in June. But getting from 9.1% down to the 5 – 6% range by sometime next year is the relatively easy part. Getting from there back down near the Fed’s 2.0% target is the hard part. Rents have been increasing rapidly around the country and we don’t see that ending anytime soon, which will make it very tough for the Fed to reach its stated goal.

You’re also deluding yourself if you think the officially-called “Inflation Reduction Act” is actually going to reduce inflation. Inflation is a monetary phenomenon; the bill isn’t going to have any noticeable impact at all.

The bottom line is that, for now, the economy continues to grow and inflation remains a very serious problem. In the meantime, investors need to set aside their personal political preferences and follow economic reports as they are, not as they want them to be because of the political spin their side gets to put on them.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Still No Recession

First Trust - Monday Morning Outlook

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

To many investors, this week’s GDP report is more important than usual. The reason is that real GDP declined in the first quarter and might have declined again in Q2. If so, this could mean two straight quarters of negative growth, which is the rule of thumb definition many use for a recession.

We think these investors are paying too much attention to the GDP numbers; the US is not in a recession, at least not yet. Industrial production rose at a 4.8% annual rate in the first quarter and at a 6.2% rate in Q2. Unemployment is lower now than at the end of 2021. Payrolls grew at a monthly rate of 539,000 in the first quarter and 375,000 in Q2. If we were already in a recession, none of this would have happened. That’s why the National Bureau of Economic Research, the “official” arbiter of recessions, uses a wide range of data when assessing whether the economy is shrinking.

In addition, it’s important to recognize that once a year the government goes back and revises all the GDP data for the past several years. That happens in July, including with the report arriving this Thursday. Given the strength in jobs and industrial production, it wouldn’t surprise us at all if Q1 is eventually revised positive.

In the meantime, we are forecasting growth at a +0.5% annual rate in Q2. Here’s how we get there.

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector grew at a 2.2% annual rate, and it looks like real services spending should be up at a solid pace, as well. However, car and light truck sales fell at a 19.7% rate. Putting it all together, we estimate real consumer spending on goods and services, combined, increased at a modest 1.2% rate, adding 0.8 points to the real GDP growth rate (1.2 times the consumption share of GDP, which is 68%, equals 0.8).

Business Investment: We estimate a 5.5% annual growth rate for business equipment investment, a 7.5% gain in intellectual property, but a 4.0% decline in commercial construction. Combined, business investment looks like it grew at a 4.4% rate, which would add 0.6 points to real GDP growth. (4.4 times the 14% business investment share of GDP equals 0.6).

Home Building: Residential construction looks like it contracted at a 4.0% annual rate. Mortgage rates should eventually become a headwind, but, for now, it looks like an increase in spending on construction was more than accounted for by inflation in construction costs. A decline at a 4.0% rate would subtract 0.2 points from real GDP growth. (-4.0 times the 5% residential construction share of GDP equals -0.2).

Government: Remember, only direct government purchases of goods and services (and not transfer payments like unemployment insurance) count when calculating GDP. We estimate these purchases – which represents a 17% share of GDP – were roughly unchanged, which means zero effect on real GDP.

Trade: Exports have surged through May while imports, after spiking late in the first quarter, have remained roughly flat so far in Q2. That means a smaller trade deficit. At present, we’re projecting net exports will add 1.0 point to real GDP growth, although a report on the trade deficit in June, which arrives on July 27, may alter that forecast.

Inventories: Inventories look like they grew at a slower pace in the second quarter than they did in Q1, suggesting a drag of about 1.7 points on the growth rate of real GDP. However, just like with trade, a report out July 27 may alter this forecast.

Add it all up, and we get 0.5% annual real GDP growth for the second quarter. Monetary policy will eventually tighten enough to cause a recession, but that recession hasn’t started yet.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Refocusing the Fed

First Trust Monday Morning Outlook

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

If you follow the financial press, the conventional wisdom has come to the simple conclusion that the way to fight inflation is raising interest rates. Unfortunately, this is just not true. Yes, raising rates may slow the economy, but that alone won’t fix inflation.

Starting in 2009, for seven years the Federal Reserve held the federal funds rate at zero and yet inflation never accelerated. So, if seven years of zero percent interest rates didn’t cause inflation, why would the last two years do it? Even though everyone talks about interest rates, it is really money supply growth that matters. We follow M2 because that is what Milton Friedman told us to follow. M2 is currency in circulation plus all deposits in all banks

(checking, saving, money markets, CDs).

If M2 rises by 10%, we would expect a 10% increase in overall spending. Some of that would be soaked up by real increases in output, but the rest would go to inflation.

From February 2020 – December of 2021, M2 grew at an 18% annual rate. No wonder inflation has climbed to 9%. Raising interest rates, by itself, will not stop this inflation. The way to stop it is by slowing growth in M2 to a low enough rate, for long enough, to allow the economy to absorb the excess money.

That is exactly what happened in the early 1980s when Paul Volcker altered the focus of the Federal Reserve toward money. Prior to Volcker, in the 1970s, the Fed would talk about what level of the federal funds rate it was aiming for, and people started to believe it was the level of rates that mattered. But this was never the case. The Fed consistently held rates lower than a free market (and the level of inflation) suggested it should, because that’s what politicians wanted. In order to do that, it would add more money to the system than real growth required, causing inflation.

In the late 1970’s, Paul Volcker turned this approach on its head. He understood (because of Friedman) that it was money supply growth that mattered. So, he targeted money growth and let interest rates go wherever they may. Some people believe he tightened money too much, and with interest rates spiking well above inflation, close to 20%, this may have been the case.

But it is also why inflation fell. He kept money tight until it was all absorbed and inflation was tamed. It was slower money supply growth, not higher rates that stopped inflation. At the same time, Ronald Reagan cut regulations, tax rates and slowed government spending. This let real economic output accelerate, also helping absorb some of the excess money of the 1970s.

So, if we learned that lesson once, why do we have to learn it again? Part of the answer is that the Fed shifted from a “scarce reserve” policy to an “abundant reserve” policy in 2008. This is what Quantitative Easing (QE) was all about. Under the old “scarce reserve” model the Fed bought bonds from the banking system to increase the money supply and this brought interest rates down. When it sold bonds to banks, the opposite happened. The reason this worked so well is that banks had few, if any, excess reserves. Banks used every dollar created.

Think of it this way. At the end of 2007, the Fed’s balance sheet (basically bank reserves) totaled roughly $850 billion. The M2 money supply (all deposits in all banks) equaled roughly $8 trillion. Banks held roughly $1 in reserves for every $9 in deposits. The “money multiplier” – how many dollars of M2 circulated relative to reserves held at the Fed – was about 9.

But this all changed in 2008. With QE 1, 2 & 3, and then more QE during 2020/21 the Fed increased its balance sheet ten-fold. The Fed’s balance sheet is now roughly $9 trillion, while M2 has grown to $22 trillion. In other words, banks only have about $2.5 of M2 per $1 of reserves, not $9. The Money Multiplier has collapsed, while excess reserves have soared. The Fed has grown tremendously relative to the economy and the banking system. Why? We could speculate on that…after all, some politicians want to nationalize the banking system. But the “how” is equally important.

Back in the 1970s, one of the Fed’s tools was to use reserve requirements to manage money. If the Fed raised reserve requirements it could slow down money creation. Today, with so many excess reserves in the system ($3.3 trillion at last count), the Fed and other banking regulators have layered regulations on banks, pushing required capital ratios from 4%, to 6%, to 10%, or higher. “Reserve requirements” have been replaced by direct regulation on how much capital a bank must hold.

This is why the 2008-2014 QE did not create inflation. The Fed grew its balance sheet, but it also increased capital requirements which kept the banks from multiplying those

new reserves.

The pandemic response was different. The Fed monetized Treasury debt (created new money to buy bonds). At the same time the Treasury and Congress used banks (through PPP loans and direct deposit stimulus checks) to distribute “stimulus” and the Fed eased liquidity rules to allow this to happen. M2 growth exploded. In fact, it has grown 41% since February 2020.

So, how does this get reversed? Once the Fed allows more M2 to be created, it can’t destroy it. All those deposits are owned by someone – you, me, your employer, or the Treasury. The Fed can’t take them away – they are private property.

There are only three ways to limit money supply growth under the “abundant reserve” model. First, by paying banks interest on their reserves at a high enough rate to keep them from lending. But this approach means that at a 3.5% rate, the Fed will be paying private banks roughly $120 billion per year. This may or may not stop them from lending, but it will certainly not make politicians, like Elizabeth Warren, very happy.

Second, the Fed can raise capital requirements, as it is already doing. Last week, JPMorgan was forced to raise its Tier 1 capital ratio to 12.5% from 11.2%. Jamie Dimon, the CEO of JPMorgan said these rules were “capricious” and “arbitrary.” He is correct. They have nothing to do with the banks themselves and have everything to do with slowing money supply growth. At some point, however, this becomes ridiculous. Banks are better capitalized and have more liquidity than they probably ever have.

The third way has little to do with the Fed. If the Treasury ran a surplus, like it did in April, it could reduce its debt and allow the Fed to let bonds mature. But this is unlikely to last. The US has what appears to be a permanent budget deficit and that is unlikely to change under current leadership.

We are not saying that raising interest rates won’t cause a recession. What we are saying is no country in the world has ever had massive inflation problems under the new “abundant reserve” policy model. We are in uncharted territory. Raising rates alone is an untested tool to slow or stop M2 growth.

Some people say that the velocity of money is falling and so we don’t need to worry about M2 as much. Slower velocity will help get inflation back down and keep it there. Slower velocity means every dollar boosts economic activity by less than it used to. But this is a feature of the abundant reserve model, not a bug. As the Fed grows its balance sheet, bank balance sheets grow as well, but this money is not allowed to circulate because of higher and higher capital requirements. That’s why velocity has fallen. Velocity itself has not changed, money has.

The thing that worries us the most is that the Fed will keep growing its balance sheet and government’s power by regulating banks to the point where capital requirements hit

ridiculously high levels.

And this brings us back to Paul Volcker and Ronald Reagan. By slowing the growth of money, Volcker took the Fed out of the business of juicing the economy. By cutting tax rates and reducing regulations, Reagan revived the private sector. This ended stagflation and led to a boom in the economy.

How do we end the current trajectory and fix our problems all over again? Our answer would be to shrink the size of the Fed’s balance sheet by massive amounts. It is way too big, and it is regulating banks in an extraordinary and unprecedented fashion. And while we sound like a broken record, shrink the size and scope of the federal government as well!

Putting these two policies together, just like the US did in the early 1980s, will end the stagflation we haven’t seen since the 1970s.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Mortgage Reset Alarmism Is Off the Mark

First Trust Monday Morning Outlook

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

Some investors think the US is already in a recession. As we wrote two weeks ago and as recent data have confirmed, we don’t think that’s the case.

Industrial production is up at a rapid pace so far this year, while payrolls have expanded at a monthly pace of 457,000 and the unemployment rate has dropped to 3.6% from 3.9%. Real gross domestic income (Real GDI), a companion to real GDP that is just as accurate, but which arrives a month later, rose at a 1.8% annualized rate in Q1.

Nonetheless, the recession story is out there and some claim adjustable-rate mortgage resets are going to knock the economic legs out from under consumers. The idea is that with the Fed raising rates rapidly, as the rate on adjustable mortgages reset, homeowners are going to have to make higher payments, which means less money to spend on other goods and services.

Let’s start off by noting the most basic problem with this theory, which is that even if mortgage resets increase some families’ payments, the holders of those mortgages will get the extra payments and their purchasing power will increase. On net, purchasing power should remain unchanged.

But, to be cautious, let’s indulge the reset theory by pretending the extra payments are money that just disappears, with no one on the other side of the transaction. Even then, our calculations show the theory doesn’t add up.

Households have about $12 trillion in mortgage debt, according to the Federal Reserve, so, yes, the top-line number sounds scary. But, according to the Federal Housing Finance Agency, only 3.7% of these loans are adjustable, or about $450 billion. Now let’s say that one-third of these mortgages reset every year. That’s $150 billion worth of mortgages resetting. Still a big number, still potentially scary.

But when we calculate how much a reset would change the payments on these loans the problem suddenly gets much smaller. An extra two percentage points in interest on $150 billion in debt is $3 billion.

Obviously, the people making these extra $3 billion in payments won’t like it. But the extra payments equal only 0.018% of annualized consumer spending. That’s not a typo. Not 1%, not 0.1%, but only 0.018%. Which means that even if all of the $450 billion in adjustable-rate mortgages reset upward by two percentage points at the same time, we’d be talking about 0.05% of annual consumer spending.

The bottom line is that we think a recession is eventually on the way because monetary policy will have to get tight enough to wrestle inflation back down and that should be tight enough to cause a recession starting in late 2023 or beyond. But those rate hikes won’t work like they did in 2006-07 when nearly half of all mortgages were adjustable in ‘05. The mortgage reset story makes superficial sense. But when you work through the actual numbers, it’s not something to worry about.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

How About More Freedom?

First Trust Monday Morning Outlook

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist 

As we celebrate 246 years of national independence, our country is now more than two years into an economic recovery from the two-month COVID Lockdown Depression.  Although the economy has improved dramatically from the complete lockdown bottom in April 2020, it’s still feeling lingering pain from policy mistakes made to address the pandemic.

First the good news.   The unemployment rate is down to 3.6%, very close to where it was before COVID started.  Manufacturing production is 3.8% above where it was pre-COVID.  The problem is that a smaller share of workers are participating in the labor force and the number of jobs still hasn’t fully recovered.  Meanwhile, inflation is running at the fastest pace in forty years.

In our view, we are still suffering from three major policy mistakes.  First, running an overly loose monetary policy.  Second, handing out too many government checks, which allowed American consumers to borrow from future production and spend more in the past two years than they would have if no pandemic had ever occurred.  And third, shutting down many parts of the economy through government mandates at multiple levels.

That last part, the shutdowns, is key because here we are about eighteen months after vaccines were introduced and supply chains are still a mess.  We think much of this represents lingering pain from shutdowns that broke relationships among firms and within firms.  This makes it much tougher for companies to keep up with demand that was temporary and artificially boosted by government stimulus checks.

Markets are extremely robust under normal circumstances.  War, hurricanes, drought, power failures are all disruptive, but markets absorb them and move on.  But, by taking the unprecedented path of shutting down large parts of the economy, government made the recovery process extremely hard.  Markets only work when information (the pricing system) is allowed to function.  It hasn’t functioned properly for over two years now.

The Atlanta Federal Reserve’s GDP Now model is now projecting that real GDP declined at a 2.1% annual rate in the second quarter.  We think that’s way too pessimistic and not consistent with continued increases in industrial production and job growth, both of which are signaling continued economic growth.

Nevertheless, the Atlanta Fed’s model is picking up the cost of the shutdowns and we think the lesson for future policymakers should be obvious: let’s not shutdown the US economy again.  People are much smarter than policymakers think; workers, customers, and private business, all by themselves, without mandates and extra rules, could figure out when to step back from certain high-risk activities and when they don’t have to.

Fortunately, some business leaders are starting to push back against political leaders who think they know how to run the US economy all by themselves.  For example, a recent comment from a consortium of oil companies urged that the author of a White House statement on energy take a basic course in economics.  Another example: Jeff Bezos openly disagreeing with the White House on inflation.

In a sense, the answers to our problems were all around us this past weekend, in all the celebrations of America and in all our connections with family and friends.  The answer is us.  What we need is more of all of us thinking things through on our own, figuring things out, with fewer Washington rules, mandates, and regulations getting in between.  Freedom works.        

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

We’re Not Already in a Recession

First Trust Monday Morning Outlook

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Andrew Opdyke, CFA – Senior Economist

Bryce Gill – Economist

Real GDP declined at a 1.5% annual rate in the first quarter and, as of Friday, the Atlanta Fed’s “GDP Now” model projects zero growth in Q2.

We still think real GDP will turn out to be positive in the second quarter, but if you take the Atlanta GDP Now model at face value, it superficially appears that the odds of having two consecutive quarters of negative growth are close to 50%. That’s important, because two consecutive quarters of negative growth is a rule of thumb that many people use for a recession.

We believe a recession is coming but the US is clearly not in one yet. In the first five months of the year, manufacturing production is up at a 6.6% annual rate, nonfarm payrolls are up at an average monthly pace of 488,000, and the unemployment rate has dropped to 3.6% from 3.9%. Meanwhile, in April, both “real” (inflation adjusted) consumer spending and real personal income (Excluding transfers) were at record highs. If this is a recession, we could use more recessions.

It’s also important to recognize that real gross domestic income (real GDI), an alternative measure of economic output, rose at a 2.1% annual rate in the first quarter. The public pays very little attention to GDI because the government usually takes an additional month to report that data, after GDP is initially released. But, over time, GDI is just as accurate as GDP in describing the performance of the economy.

We’re not saying everything is fine with the US economy. Obviously, inflation is taking a huge bite out of people’s earnings. But the debate about whether we’re in a recession should be about real economic pain, not academic-style semantics or whether we fit some technical definition. That’s the reason the official arbiter of recessions, the National Bureau of Economic Research, weighs jobs, manufacturing, and real incomes, when assessing whether we’re in a recession, not just real GDP.

We suspect that some of this debate is political, with some champing at the bit to claim there’s a recession because they know it hurts the party of the incumbent president in a mid-term election year.

 Again, we expect a recession, with a lag, after monetary policy gets tight. And tight it must get in order to wrestle inflation back down toward the Federal Reserve’s 2.0% target. But that means a recession starting in late 2023 or in 2024, not now.

Even more unlikely is the notion that the US is on the cutting edge of a recession like the one in 2008-09. Bank capital is well above regulatory requirements and we don’t have a mark-to-market accounting rule that will generate a “Fire sale” in bank assets. Nor are we about to have a government lockdown of the private sector, like in 2020.

When it comes, the recession will cause economic pain for many. Recessions always do. But we expect something like the recessions in 1990-91 or 2001, when the unemployment rate went up about 2.0 to 2.5 percentage points, not like the soaring unemployment of the Great Recession or the 2020 Lockdown.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Unprecedented

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

Strider Elass - Senior Economist

Andrew Opdyke, CFA - Senior Economist

Bryce Gill - Economist

At least a couple of major retailer stocks got clobbered last week as investors sold on reports that they missed earnings estimates.

What’s surprising to us is that the fate of these individual companies was such a surprise to so many investors. Inflation is obviously a problem – retailers often run on very thin margins – but a problem of which investors should have already been well aware.

What we really think is going on is both investors and corporate management are having a hard time understanding the real economic impact of “unprecedented” policies. As a result, normal macroeconomic analysis isn’t as helpful.

Yes, unemployment is very low. Yes, real GDP is up a solid 3.6% from a year ago. But the economy has been deeply influenced the past couple of years by a massive

increase in government spending, COVID-related shutdowns of normal business activity, and a huge increase in the money supply. In turn, the economy is deeply distorted versus where it was before COVID.

Retail sales are up 28.8% versus where they were in February 2020, an incredible surge over twenty-six months. For comparison, retail sales were only up 6.7% in the twenty-six months before COVID started. In other words, retail sales increased roughly 4x the normal pace because of pandemic spending and money printing. That can’t last.

But many firms apparently believed this COVID-era trend would continue, as if it were some sort of new normal. Part of the recent misses in earnings may reflect a generational shift, with a whole new cohort of managers who didn’t have jobs of any significance during the inflationary and Keynesian-dominated 1970s. They saw rising earnings earlier in the pandemic and thought they were brilliant when they were just lucky they were working in the sectors that were temporarily helped by money printing and redistribution. That goes for some retailers and some home exercise equipment and technology companies, as well.

While the government was throwing massive aid at the economy, both fiscal and monetary, government regulations were shutting down competition in certain sectors, particularly small businesses.

But the extra checks stopped in the spring of 2021 and now monetary policy has (finally!) gone into reverse. And so managers who figured they had the golden touch are now finding out their touch isn’t as golden as they thought, and investors are reassessing.

The good news is that while the tide is moving away from some businesses that were helped during COVID, the tide is moving toward some businesses that were substantially hindered by COVID. Goods are hurting while services are still getting back toward normal.

This is consistent with our view that the US is not heading for a recession in 2022. Goods slow down, but services pick up. In turn, it also means stocks should move substantially higher from current levels before the next recession begins, but with different sectors taking the lead versus the COVID era.

Since early 2020, the US has experienced the shortest and sharpest economic Depression/Lockdown in (at least) modern history, paired with an enormous expansion in government spending that is now receding. No one knows for sure how the whole process will play out, but the business winners and losers of the next couple of years are very likely to look a lot different than the last few.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

5-24 / 9:00 am New Home Sales – Apr 0.750 Mil 0.761 Mil 0.763 Mil

5-25 / 7:30 am Durable Goods – Apr +0.6% -0.1% +1.1%

7:30 am Durable Goods (Ex-Trans) – Apr +0.5% +0.1% +1.4%

5-26 / 7:30 am Initial Claims May 21 215K 209K 218K

7:30 am Q1 GDP Preliminary Report -1.3% -1.3% -1.4%

7:30 am Q1 GDP Chain Price Index 8.0% 8.0% 8.0%

5-27 / 7:30 am Personal Income – Apr +0.5% +0.5% +0.5%

7:30 am Personal Spending – Apr +0.7% +0.8% +1.1%

9:00 am U. Mich Consumer Sentiment- May 59.1 59.5 59.1

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Whipping Inflation

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

Strider Elass - Senior Economist

Andrew Opdyke, CFA - Senior Economist

Bryce Gill - Economist

Ultimately, inflation is always and everywhere a monetary phenomenon, as the late great economist Milton Friedman used to say. And so the key to reducing the inflation we’re experiencing today –the highest inflation in forty years – is the Federal Reserve raising short-term interest rates, like it will do on Wednesday, as well as pursuing an aggressive course of Quantitative Tightening.

But the central importance of monetary policy doesn’t mean other policies cant play any role at all wrestling inflation under control. Central banks don’t just exist on the blackboards of academic macroeconomists; they exist in the real world where other officials adopt policies that sometimes make central banks’ jobs easier and sometimes make them harder.

One key issue is the size of government, both spending and regulation. When the federal government spends money like a drunken sailor, as it did during COVID lockdowns, a central bank policy that sets short-term interest rates at essentially zero is going to generate a larger increase in the money supply and, in turn, a larger increase in inflation, than would otherwise be the case. Think of extra government spending as monetary kindling. It doesn’t create fire by itself, but it does make it easier to spread.

So, one way to help the Fed more easily achieve its goal of reducing inflation would be for Congress and the President to find ways to reduce spending. Entitlements, discretionary spending, you name it. No, we’re not being naïve; we know this isn’t happening in 2022. But if it did, inflation would be easier to fight.

In addition, regulations that stifle economic growth could be trimmed, particularly in the energy sector, where the government has directed resources toward politically-favored but relatively inefficient “renewables,” like wind and solar, while stifling development of nuclear power, for example. A world with cheaper, more abundant, energy supplies is one in which real economic growth is faster, which means less of the increase in the money supply winds up generating inflation.

Another area ripe for regulatory reform would be the Jones Act, which dates back to 1920 and requires ships carrying goods between US ports be built, owned, and manned, by American firms. No one is talking about letting North Korea, Russia, or Cuba run these ships. But there are plenty of US allies who could qualify and who could help reduce shipping costs.

Big picture: policymakers should commit to making sure the public knows another COVID-related lockdown is not in the cards, by admitting it was a massive mistake to lock things down in the first place.

Last, but never least, policymakers should consider cutting tax rates to boost work and investment, which, as always, help boost the economy and make inflation easier to control.

Yes, monetary policy is the key ingredient for reducing inflation, but getting other policy oars rowing the right direction can make the Fed’s job easier.

Date/Time (CST)        U.S. Economic Data                              Consensus          First Trust            Actual Previous

5-2 / 9:00 am             ISM Index -Apr                                         57.6                      58.0                       55.4       57.1

9:00 am                        Construction Spending - Mar              +0.8%                    +0.4%                    +0.1%    +0.5%

5-3 / 9:00 am             Factory Order -Mar                                +1.2%                   +1.4%                                    -0.5%

afternoon                    Total Car/Truck Sales -Apr                  14.1 Mil                14.5 Mil                                13.3Mil

afternoon                    Domestic Car/Truck Sales -Apr          10.8 Mil                11.3 Mil                                10.4Mil

5-4 / 7:30 am             Int’l Trade Balance –Mar                     -$107.1Bil            -$107.9Bil                         -$89.2Bil

9:00 am                        ISM Non Mfg Index-Apr                      58.5                       58.9                                       58.3

5-5 / 7:30 am             Initial Claims -April 30                            180K                      180K                                      180K

7:30 am                        Q1 Non-Farm Productivity                   -5.0%                     -7.4%                                     +6.6%

7:30 am                        Q1 Unit Labor Costs                               +10.0%                 +12.5%                                 +0.9%

5-6 / 7:30 am             Non-Farm Payrolls -Apr                         391K                      380K                                      431K

7:30 am                        Private Payrolls -Apr                               395K                      390K                                      426K

7:30 am                        Manufacturing Payrolls -Apr               34K                        20K                                        38K

7:30 am                        Unemployment Rate -Apr                    3.5%                      3.5%                                      3.6%

7:30 am                        Average Hourly Earnings -Apr             +0.4%                    +0.4%                                    +0.4%

7:30 am                        Average Weekly Hours -Apr                34.7                       34.6                                       34.6

9:00 am                        Consumer Credit -Mar                           $25.0Bil                $25.0Bil                              $41.8Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Slower Growth in Q1

First Trust Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/18/2022

Real GDP, in the US, grew 5.5% in 2021, the fastest growth for any calendar year since the Reagan Boom in the mid-1980s. In spite of this, for the two years ending Q4-2021, real GDP grew just 1.6% annually, which is below its pre-shutdown trend.

Because of the shutdown and government actions growth has been uneven. Goods consumption is up 7.5% at an annual rate in the past two years, while services consumption has declined 0.4%. Thanks to a boom in investment during the second half of 2021, investment (including inventories and home building) is up an annualized 5.9% during the past two years.

These uneven growth rates will start to balance out during 2022 and beyond. And in the first quarter of this year, we are tracking a real GDP growth rate of 1.5%, although our forecast may change based on reports to be released in the next week and a half. The bottom line is that this is a far cry from the stellar growth of 2021, but not a recession, either. We expect growth will be a little faster in the second quarter, but, again, not nearly as fast as in 2021.

Right now, the US economy is a battle between forces boosting growth and forces dragging it down. What's supporting growth? First, continued re-opening from COVID-19. Americans are still in the process of returning to normal, but we're not completely there yet.

Second, monetary policy is still very loose. Even if the Federal Reserve raises rates by 2.25 percentage points this year, real interest rates will still be negative and monetary policy will not be tight.

Third, tax rates remain relatively low and are likely to stay that way. Major transformational legislation seems unlikely.

Meanwhile, the economy also faces some headwinds. The Russia-Ukraine War and lockdowns in China are further disruptions to supply chains and the Biden Administration is ramping up regulation, adding to business costs.

Put it all together, positives and negatives, and we're forecasting about 2.5% real GDP growth this year (Q4/Q4), with slower growth in 2023-24 as monetary policy gets tight and the benefits of getting the economy back open eventually run out.

In the meantime, here's how we get to our 1.5% real GDP growth forecast for the first quarter.

Consumption: Car and light truck sales jumped at a 44.2% annual rate in Q1 while "real" (inflation-adjusted) retail sales outside the auto sector rose at a 5.3% rate, and it looks like real services spending should be up at a solid pace, as well. Putting it all together, we estimate real consumer spending on goods and services, combined, increased at a moderate 3.8% annual rate, adding 2.6 points to the real GDP growth rate (3.8 times the consumption share of GDP, which is 68%, equals 2.6).

Business Investment: We estimate an 11.0% growth rate for business equipment investment in the first quarter, with commercial construction unchanged, and investment in intellectual property rising at a typically strong rate. Combined, business investment looks like it grew at an 8.0% annual rate, which would add 1.0 points to real GDP growth. (8.0 times the 13% business investment share of GDP equals 1.0).

Home Building: Residential construction looks like it accelerated to a 6.0% annual rate in the first quarter, with demand for new housing and improvements remaining strong. A growth rate of 6.0% would add 0.3 points to real GDP growth. (6.0 times the 5% residential construction share of GDP equals 0.3).

Government: Remember, only direct government purchases of goods and services (and not transfer payments like unemployment insurance) count when calculating GDP. We estimate federal purchases shrank at a 0.6% annual rate in Q1, which would subtract 0.1 point from real GDP growth. (-0.6 times the 17% government purchase share of GDP equals -0.1).

Trade: Imports have continued to soar in the first quarter while exports have not grown as quickly. As a result, the trade deficit is likely to expand significantly, which will be a temporary drag on real GDP growth in the US. At present, we're projecting that the increase in imports relative to exports will subtract 2.3 points from real GDP growth in Q1, although a report on the trade deficit in March, which arrives on April 27, may alter that forecast.

Inventories: Inventories look like they grew at almost exactly the same pace in the first quarter that they did in the last quarter of 2021. If we're right, that would mean inventories have zero net impact on GDP in Q1.

Add it all up, and we get a 1.5% annualized real GDP growth for the first quarter. Look for continued growth in 2022 but not nearly as fast as in 2021.

Date/Time(CST)    U.S. Economic Data            Consensus            First Trust       Actual     Previous
4-19 / 7:30 am      Housing Starts – Mar          1.740 Mil               1.739 Mil                               1.769 Mil
4-20 / 9:00 am     Existing Home Sales – Mar 5.780 Mil              5.630 Mil                               6.020 Mil
4-21 / 7:30 am      Initial Claims – Apr              16 180K                 175K                                       185K
7:30 am                 Philly Fed Survey – Apr       21.4                         24.1                                        27.4

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Housing: Heartburn, Not a Heart Attack

First Trust Monday Morning Outlook

Brian S. Wesbury, Chief Economist

April 11, 2022

When interest rates go up, many analysts start to worry about recessions. That’s not wrong to do, after all Federal Reserve rate cycles are important. Lately, the market has settled on expectations for a total of about 2.25% or more of interest rate hikes this year. The result is a jump in many longer-term yields. The 10-year Treasury yield is 2.77%, while the typical 30-year mortgage has climbed from 3.2% in December, according to Bankrate.com, to 5.1% recently.

So, some analysts think that a housing bust is likely, which would drag down the entire economy. We certainly agree that higher mortgage rates will be a headwind for the housing market in the year ahead. But what we see is some heartburn, not a heart attack.

While 5% mortgage rates are high relative to where they were, home prices should still rise 5 - 10% this year, meaning home prices either keep up with or exceed borrowing costs. Real mortgage rates (the rate minus inflation) are still negative.

Negative real rates are also why we are not yet worried about an inverted yield curve from the 2-year Treasury to the 10- year. In the past, when inverted yield curves preceded recessions, real interest rates were positive, not negative.

Now, back to housing…It is true that national home prices have soared in the past couple of years. However, so have construction costs. The Census Bureau’s price-index for singlefamily homes under construction, which does not include the rising cost of land, is up around 25% from two years ago. For 2022, we expect mortgage rates to help slow national average home price increases versus 2020-21, but for prices to still go up in the 5 - 10% range.

By contrast, rents should accelerate for several reasons: (1) general price inflation, (2) the end of the eviction moratorium, (3) higher mortgage rates shifting demand toward renting, and (4) the fact that home prices are already high relative to rents.

Home sales are a different story. Higher mortgage rates make it likely that fewer existing homes should sell in 2022 than in 2021. But this is not the end of the world. Existing homes don’t reflect new construction and add only slightly to GDP (via brokers’ commissions, for example). Existing home sales slowed in 2018 and 2019 and the economy did fine. New home sales should be roughly flat to slightly down this year, but new home sales also fell in 2021 and real GDP grew 5.5%. Again, not the end of the world.

What really matters for the economy is how higher mortgage rates affect the pace of home construction. There, again, we see some heartburn, but no calamity and no collapse. Builders started 1.605 million homes last year and we expect total housing starts to exceed that in 2022. However, starts for the full year will probably lag the 1.713 million annual pace of January and February.

But starts are not the whole story when it comes to home construction. The total amount of construction can rise as builders move toward completing homes they began months ago. And remember: home building includes not only single-family homes but also multi-family units, which captures building designed for people who want to rent.

The US has underbuilt homes for the past decade. Higher mortgage rates don’t change that, although they may shift around the share of the population that rents versus owning. Monetary policy is now getting less loose; that’s going to lead to some indigestion. The real problems won’t start until policy actually gets tight. And for that we have longer to wait.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

4-12 / 7:30 am CPI – Mar +1.2% +1.1% +0.8%

7:30 am “Core” CPI – Mar +0.5% +0.5% +0.5%

4-13 / 7:30 am PPI – Mar +1.1% +1.1% +0.8%

7:30 am “Core” PPI – Mar +0.5% +0.7% +0.2%

4-14 / 7:30 am Initial Claims – Apr 9 171K 167K 166K

7:30 am Retail Sales – Mar +0.6% +1.0% +0.3%

7:30 am Retail Sales Ex-Auto – Mar +1.0% +0.9% +0.2%

7:30 am Import Prices – Mar +2.3% +1.5% +1.4%

7:30 am Export Prices – Mar +2.2% +1.5% +3.0%

9:00 am Business Inventories – Feb +1.3% +1.4% +1.1%

9:00 am U. Mich Consumer Sentiment- Apr 59.0 59.4 59.4

4-15 / 7:30 am Empire State Mfg Survey - Apr 1.0 12.2 -11.8

8:15 am Industrial Production – Mar +0.4% +0.3% +0.5%

8:15 am Capacity Utilization – Mar 77.8% 77.8% 77.6%

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Geopolitics Only One Factor in Rising Oil Prices

Markets and Investing

April 7, 2022

Underlying oil market fundamentals – good ol’ supply and demand – are as bullish as they have been over the past decade, says Pavel Molchanov, Managing Director and Energy Analyst for Raymond James Equity Research.

For our readers with investments in the oil value chain, the fact that oil prices reached fourteen-year highs in the early spring of 2022 helps explain the Energy sector’s outperformance year-to-date, building on its gains from 2021, when it had been the best sector in the S&P 500. On the other hand, the oil market rally is also contributing to the global economy’s inflationary spiral, with consumers as well as businesses feeling the pain of high prices at the fuel pump. Whether we like it or not, high oil prices are here to stay. We forecast that West Texas Intermediate (WTI) crude will average $100/barrel (Bbl.) in 2022, with only a modest cool-off to $90/Bbl. in 2023. For some perspective, as recently as December 2021, WTI was in the low $70s. Brent crude, the global benchmark, should remain a few dollars above WTI.

Geopolitics and the oil market

There is no disputing the fact that geopolitical factors played a major role in the oil market rally of recent months. The prime example is the crisis that culminated in Russia’s invasion of Ukraine. Why does this matter for the oil market? Because Russia produces approximately 11 million barrels per day, or 11% of the world’s oil supply – on par with the U.S. and Saudi Arabia – of which7.5 million barrels per day (bpd) is exported, including 4 million bpd that is sold into European countries.

Russia’s natural gas production – three-quarters of which goes to Europe – is even more of a geopolitical hot potato. Thus far during the war, oil and gas pipelines have continued to operate normally. Also thus far, sanctions have had only a peripheral effect on Russia’s energy sector. Germany has made it crystal clear that the Nord Stream 2 gas pipeline – an $11 billion project owned by the Russian gas giant Gazprom – will be blocked from operating for the foreseeable future. The U.S. has imposed an embargo on Russian oil, and the U.K. and Poland plan to do so by year-end 2022, but unless the rest of Europe follows suit, it won’t mean much in practical terms. Separate and distinct from Russia/Ukraine, other geopolitical hotspots that contribute to high oil prices include Libya (the plan to hold a presidential election has broken down); Yemen (the Houthi rebels continue to fire missiles into neighboring countries); and Iran (progress in negotiations toward a new nuclear agreement is uneven, at best).

Supply and demand fundamentals

It is equally true that the underlying oil market fundamentals —good ol’ supply and demand — are as bullish as they have been over the past decade. Our global oil market model points to inventories declining by approximately 2 million bpd in 2022.When inventories are declining, by definition it means that demand is outstripping supply. Demand in 2022 is back to the pre-COVID peak of 100 million bpd. Meanwhile, OPEC has remained very consistent with its roadmap of gradually bringing production back to pre-COVID levels by September 2022. Capital spending by the world’s oil and gas companies is finally recovering from the ultra-austere levels of 2020-2021, but the industry’s commitment to capital discipline is firmly in place. Management teams are accommodating long-standing shareholder demands for less production growth and instead more emphasis on dividends and share repurchases. Even for those companies that are willing to substantially increase capital spending, it will take time for drilling activity to provide a meaningful boost to supply. For North American shale, production uplift will remain muted until2023. For oil-producing regions with mostly long lead time projects, such as Brazil and West Africa, it will take even longer.

Energy transition

The oil industry may be tempted to celebrate that good times are back again, and indeed it is the case that profitability and free cash flow metrics are currently very strong. But high oil prices on a prolonged basis will carry an unavoidable side effect: accelerating the energy transition, away from fossil fuels. Government policies vis-à-vis climate change (such as carbon taxes and petroleum phase-outs) are already pointing consumers and businesses toward low- and zero-emission alternatives. Oil prices at fourteen-year highs are compounding the effect of climate policies, as the economics of electric vehicles look more attractive than they did just a few years ago. As it relates to Europe specifically, there is also the geopolitical urgency of shifting away from Russian oil. The war has dramatically raised the issue of energy security on the agenda across Europe. Germany, whose new coalition government includes the Green Party, is taking the lead: targeting 15 million electric vehicles (EVs) on the road by 2030, which is approximately equivalent to what the entire world currently has. EVs in Germany had a market share of 26% in 2021 (among light-duty auto sales) – the highest of any G20 economy. By comparison, the U.S. was at only5%. If Germany reaches its 2030 EV target, it would have the effect of erasing the need to buy Russian oil ever again.

Taking a global perspective, we forecast light-duty EV market share increasing from 8% in 2021 to 25% in 2025 and 50% in2030. Alongside the demand boost from high fuel prices, expansion of consumer appetite for EVs is being driven by the declining cost of lithium-ion batteries, longer range of those batteries, and a broader array of model choices across the price spectrum. Interestingly, though, the adoption curve is progressing more rapidly in buses as compared to the car market. China is the standout leader in electric buses, though Europe and the U.S. are moving in the same direction. Electrification of trucks is at a very early stage, but if it follows the trajectory of buses, this will imply rapid transformation of truck fleets into the second half of this decade. It is worth noting that sustaining rapid growth in EV sales will require an equally aggressive buildout of charging infrastructure, especially the DC ultra-fast chargers that can make it as convenient as filling up a conventional car at a fuel station, i.e., a mere five to ten minutes.

Read the full Investment Strategy Quarterly here.

All expressions of opinion reflect the judgment the author, the Investment Strategy Committee, or the Chief Investment Office and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. The performance mentioned does not include fees and charges which would reduce an investor’s return. Dividends are not guaranteed and will fluctuate. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The indexes mentioned are unmanaged and an investment cannot be made directly into them. The S&P 500 is an unmanaged index of 500 widely held securities.

We Are All Keynesians Now

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

April 4, 2022

Intellectuals and politicians often try to verbally summarize or justify conventional thinking in pithy ways. Milton Friedman (in 1965) and Richard Nixon (in 1971) both said different versions of the phrase “we are all Keynesians now.”

John Maynard Keynes, one of the most famous economists of all time, supported deficit spending and government manipulation of economic activity. Friedman and Nixon were describing the thoughts behind the implementation of Great Society redistribution programs and an inflationary monetary policy designed to offset the cost of those programs.

If economic policy was Keynesian in the 1960s and 1970s, as policymakers stopped believing in free markets, we are certainly all Keynesians now. COVID spending and monetary policy are a clear continuation of this economic thinking.

It all began in 2008, when the Bush and Obama Administration combined spent $1.5 trillion of taxpayer money to “rescue” the economy and the Federal Reserve started Quantitative Easing. That blueprint of policy response to the Panic of 2008 was used to respond to COVID shutdowns. This time the Federal Government borrowed at least $5 trillion to spend and the Fed increased its balance sheet by over $4.5 trillion.

As a result of the Keynesian policies of the 1970s, the U.S. experienced stagflation (slow growth and high inflation) – with both unemployment and inflation peaking in the double digits. Right now, inflation is 7.9% and the unemployment rate is 3.6%. So while inflation is clearly here, signs of stagflation are harder to find.

That doesn’t mean economic growth isn’t being impacted. There are multiple forces to analyze and untangle to understand everything that lockdowns and government largesse have done.

First, the US economy was artificially boosted by borrowing money and distributing it through PPP loans and pandemic benefits. Case in point, retail sales are up 25.2% between February 2020 and February 2022, while industrial production is up just 2.3%, and the US has 1.6 million fewer jobs than it did pre-lockdown. The good news is that unlike the Great Society programs, the spending done in response to the Financial Crisis and COVID-19 are not all permanent increases in entitlements. Some of our COVID response spending is likely to be permanent, but not all of it.

Second, the M2 money supply has increased more than 40% since February 2020, as the Fed renewed QE and monetized deficit spending. In other words, a great deal of that spending was paid for out of thin air.

The impact of these policies was like giving morphine to an accident victim. The economy was dramatically damaged by the lockdowns, but the morphine masked the pain. All that painkiller stimulus boosted sales and profits. This year, without new spending legislation and as the Fed starts to reverse course, the economy will lose its morphine drip.

On the surface, this suggests that the economy could be in trouble…and with the 2-year Treasury yield now above the 10- year Treasury yield (an inverted yield curve), many think the US faces a recession this year.

But this ignores the impact of the third factor in play – the reopening of the economy. It is clear, at least to us, that very generous pandemic unemployment benefits had a massive impact on employment. In fact, the “Great Resignation” (people just dropping out of the workforce) had a lot to do with these benefits. While it was never the case, many thought the Build Back Better spending bill would keep the checks coming. Now that BBB appears dead, those people are heading back to work. In the first three months of 2022, 1.69 million jobs have been filled. This year will likely total 4 million jobs, or more.

So, even though the Fed will be lifting rates and Keynesian deficits will be smaller, the economy will expand in 2022 and profits should continue to rise. Unfortunately, our forecast is that real GDP growth will remain under 3%, while inflation remains over 5%. This is reminiscent of the 1970s, and once the reopening from lockdowns is over, the full impact of these policies will be felt.

The inversion in the yield curve suggests the bond market thinks that if the Fed lifts short-term rates to 3% or so, it will be forced to cut rates again. This may be true, but we think inflation will prove a more persistent problem than the Fed or the bond market have priced in.

The US is now stuck in a Keynesian dilemma of its own making. The way out is to cut spending, cut tax rates, cut regulation, and tighten money enough to stop inflation. Because in the end, Keynesian policies don’t create wealth…free and open markets do.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

4-4 / 9:00 am Factory Orders – Feb -0.6% -0.2% -0.5% +1.4%

4-5 / 7:30 am Int’l Trade Balance – Feb -$88.5 Bil -$88.6 Bil -$89.7 Bil

9:00 am ISM Non Mfg Index – Mar 58.5 58.5 56.5

4-7 / 7:30 am Initial Claims – Apr 2 200K 198K 202K

2:00 pm Consumer Credit– Feb $18.2 Bil $20.0 Bil $6.8 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

March Market Review

April 1, 2022

Dear Clients and Friends,

Global equities experienced volatility throughout March, though a late rally softened some of the sharper losses from earlier in the month. The volatility of recent months continued, driven by geopolitical events that I believe are unlikely to dissipate soon, a more hawkish Federal Reserve (Fed) and higher prices. As expected, the Federal Open Market Committee raised the federal funds rate 25 basis points at its March meeting and indicated that further increases will be needed to return inflation to its 2% goal. Chair Jerome Powell reiterated the central bank’s commitment to curbing inflation, signaling that coming rate increases could be larger if warranted.

Despite headwinds, the general economic backdrop remains favorable, notes Raymond James Chief Investment Officer Larry Adam. U.S. consumers, flush with cash, continue to spend despite rising prices; manufacturing and business spending remain healthy; and the labor market remains robust.

The broad-market S&P 500 ended the month up 3.58% and the Dow Jones Industrial Average is up 2.32%, just 5.55% and 4.27% respectively off their record highs. Let’s look at the numbers for the first quarter:

Oil’s outsized impact

The Russian invasion of Ukraine has lifted oil prices globally, likely dampening the pace of growth in the near term, explains Chief Economist Scott Brown. As a result, inflation has remained elevated, reflecting higher energy prices, ongoing supply and demand imbalances related to the pandemic, and broader price pressures. The potential consumer impact drove Washington policymakers to focus on domestic economic policy, which may offer support for a reconciliation bill that invests in broad domestic energy production and enhances domestic manufacturing capability.

The war serves as a stark reminder of the importance of energy security, particularly in Europe, which imports one-third of its oil and gas from Russia. I believe that the need for a more viable long-term strategy should reinforce a shift toward wind, solar, energy efficiency and electric mobility.

Bottom line

Overall, I believe that volatility tied to geopolitical risk is likely to persist over the medium term and adds complexity to the global economic outlook. Despite uncertainty, the U.S. economy looks to have room to grow, and higher equity prices seem likely. Earnings trends remain solid and valuation multiples have become more compelling. In addition, I believe that higher Treasury rates coupled with wide spreads and increased municipal/Treasury ratios should bode well for income buyers in both the corporate and municipal markets. We are constructive on equities and believe investors should view temporary choppiness as a buying opportunity. 

As always, I’ll be sure to keep my eyes on the markets and relay anything relevant. If you have any questions, please feel free to reach out at your convenience. Thank you for your confidence in me.

Sincerely,

Matt Goodrich, Financial Advisor

President, Goodrich and Associates, LLC

Branch Manager, RJFS

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Small-cap securities generally involve greater risks. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation, and may not be suitable for all investors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

 Material prepared by Raymond James for use by its advisors.

The Real Cost of Free Apps and Services

Technology and Innovation

Learn how to protect your personal information when you are using free services.

You may use “free” apps for online shopping, email, cloud storage, and social media without really thinking about why those services are “free.” They are most likely free because they are harvesting and selling data about you, such as your preferences, age, race, marital status, interests, and location, among other things. These businesses sell user data to advertisers, who use that data to direct targeted advertisements to you based on your interests and online activity. For example, if you browse for shoes online, you may see ads for shoes on other sites you visit for a while after that.  If you use a free site or app that finds promotional codes for you to apply at checkout, it may be collecting and selling the data that you share.

What is the harm in this?

While some may feel uncomfortable with targeted advertisements, others may like when advertisers connect them to products and services that align with their interests. So, what is the harm? It is that information you wish to keep private may never actually be private. When you search the web on a free service, your activity may be broadly tracked—including, for example, searches related to a medical condition you don’t want others to know about—and shared with third parties.

In addition, many social media companies collect your data and then sell it, or even use it, for purposes you may not be entirely aware of. Think back to the Cambridge Analytica scandal in 2018, where millions of people were unaware of their Facebook data being harvested for political advertisements. Social media posts can also include photos or information about others who have not consented to the publication of their information (for example, children or friends who do not have social media profiles). Digital marketing companies will combine this information to build a robust digital profile—a centralized collection of everything they know about you, your friends, and your family—and sell it to a number of sources. Do you have the right to make those choices for your friends and family?

What can I do?

Determine whether you want to use a particular free app or software in exchange for your personal information. Here is what you can do to help come to a decision:

• Do not click on links for free apps. Independently search for the app in your device’s app store.

• Read the Privacy Notice and Terms of Use. These documents describe how the company uses your data, such as whether they share your information with third parties.

• Figure out where the company is located and where your data is stored because data rights vary among countries (and in some cases, states). Once you know the location of the company and where your data is stored, look into the data rights you may be afforded (such as the right to request deletion of your data).

• Manage your settings and preferences. If you do not want your data shared with third parties, check the privacy settings of the app or software to see if you can opt out of data sharing, activity tracking, or interest-based ads. Keep in mind that opting out of sharing does not mean you will not get ads, just that your information will not be shared for the purpose of personalized ads.

• Consider an alternative if you are not comfortable with using a particular app or software. For example, could you switch to an email provider that does not scan your emails for advertising? Do you want to pay for a service to avoid targeted third-party ads? How a company uses your data ultimately comes down to its privacy policy, but the company will have more incentive to protect their relationship with you if you are paying for its service.

• For online holiday shopping, stick with trusted websites and, if possible, work directly with the primary vendor. Before using a promo code site, consider whether that discount is worth the price of your data privacy.

As you may have heard time and again, if you are not paying for it, you are not the customer; you are the product. It’s always a responsible practice to be intentional with the types and amount of personal information you share, and to question a service that seems “too good to be true.”

Inflation Games

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 28, 2022

Inflation is a political lightning rod. As a result, there is a good deal of misconception around it. The Consumer Price Index (CPI) is up 7.9% from a year ago and will likely peak in the 8.5 - 9.0% range sometime in the next couple of months, the highest since 1981. Politicians blame war, or COVID, but the simple explanation is just too much money creation.

Others think inflation will be temporary and point to “core” inflation, which looks tamer. Core prices, which exclude the normally volatile food and energy sectors, are up 6.4% versus a year ago and will likely peak near 6.5%.

There is a reason to exclude some prices when there are very special factors at play…but food and energy prices have been going up for over a year. And just because more of the inflationary impact of the surging M2 measure of money (up more than 40% since the start of COVID) shows up in food and energy prices, or even used car prices, isn’t a reason not to count them.

Others argue that the government is grossly underestimating inflation and is hiding the scope of the problem. One on-line analyst says that if we used the pre-1980 methodology to measure inflation it’s already running north of 15%. But there are serious problems with this analysis, as well.

First, the same method suggests inflation has been running close to 10% per year on average since 2000. This is bonkers. If inflation really had been running close to 10% per year, a true measure of real GDP growth would show the US to have been in recession since 2000. Seriously?!?

Second, why would anyone use the basket of goods and services that Americans were buying in 1980 to measure inflation today? Energy used to be a much bigger share of our spending. Meanwhile, smartphones, by themselves, have replaced spending on a wide variety of products and services. Stereos, records, video recorders, radios, landline phones, clocks, watches, maps, cameras, calculators,…etc. The list goes on and on and keeps getting longer. Today, even poor Americans have access to products and services that the wealthy of prior generations never could have bought at any price.

Third, yes, the government has changed the way it measures home prices, but it’s for the better. When people buy a home they are buying an asset, just like when they buy stocks or land. The CPI is designed to measure the cost of consuming goods and services, not the cost of possessing an asset. When it comes to home inflation, the government changed the measure to look at rents, not the price at which homes are sold, because rents are the cost of consuming the value of homes.

The government figures on inflation are not perfect. The main ones are the CPI, the PPI, and the PCE Deflator (the Fed’s favorite!). All of them measure slightly different things and so the numbers are different, as well. But the inputs and methods to make these calculations are publicly available. There is not a conspiracy to dupe the American people. And every government measure of inflation is up. It’s pretty clear the Fed is going to have trouble wrestling inflation back down.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

3-30 / 7:30 am Q4 GDP Final Report 7.0% 7.1% 7.0%

7:30 am Q4 GDP Chain Price Index +7.1% +7.1% +7.1%

3-31 / 7:30 am Initial Claims – Mar 26 195K 195K 187K

7:30 am Personal Income – Feb +0.5% +0.5% 0.0%

7:30 am Personal Spending – Jan +0.5% +0.5% +2.1%

8:45 am Chicago PMI – Mar 57.0 59.2 56.3

4-1 / 7:30 am Non-Farm Payrolls - Mar 490K 435K 678K

7:30 am Private Payrolls – Mar 496K 445K 654K

7:30 am Manufacturing Payrolls – Mar 30K 25K 36K

7:30 am Unemployment Rate – Mar 3.7% 3.7% 3.8%

7:30 am Average Hourly Earnings – Mar +0.4% +0.4% 0.0%

7:30 am Average Weekly Hours – Mar 34.7 34.7 34.7

9:00 am ISM Index – Mar 59.0 58.7 58.6

9:00 am Construction Spending – Feb +1.0% +0.9% +1.3%

afternoon Total Car/Truck Sales – Mar 13.9 Mil 12.7 Mil 14.1 Mil

afternoon Domestic Car/Truck Sales - Mar 10.8 Mil 9.5 Mil 10.9 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

What the Fed "Should" Do

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 21, 2022

Normally when we write about public policy – monetary policy, taxes, spending, trade, and regulations – we mainly focus on what we think policymakers will do and the likely effects on the economy or the financial markets. For example, we now think the Fed is on a path to raise rates gradually and persistently throughout 2022, with some possibility of a rate hike of a half a percentage point along the way, as well.

But this is a far cry from what we think the Federal Reserve should do.

The Fed is well behind the curve and – in spite of raising rates by 25 basis points last week – is only getting further behind in its fight against inflation. Yes, a higher target shortterm rate is an improvement in policy. But that’s because it is falling behind the inflation curve at a slower rate, not because it’s actually catching up.

At present, the futures market in federal funds appears split roughly 50/50 on whether the Fed will raise rates by 25 or 50 bp in May. Instead, we think the Fed should raise shortterm rates to 2.0% and do it immediately. Like today.

In addition, the Fed should announce that the hurdle for an additional change to rates in the next six months is high and it will reduce its balance sheet by $100 billion per month starting as soon as possible, not only by not rolling over maturing securities but also by outright selling longer-dated securities. That pace would double the peak pace of Quantitative Tightening from the prior cycle back in 2017-19.

No, we are not being cavalier about these suggestions, nor are we making them to get attention. Instead, it’s the Fed that’s been cavalier about inflation risk and now has the financial markets and economy in a position where we have to obsess over its every move. Consumer prices are up 7.9% in the past year and the year-ago comparison will likely peak somewhere around 9.0% in the next couple of months. The M2 measure of the money supply has grown more than 40% since COVID started and signals persistently high inflation for years to come.

Yes, we are well aware that, the Fed not having prepared the financial markets for a sudden move to 2.0%, there may be some temporary significant losses for some investors, particularly in equities. But, once digested, we think this dramatic move in monetary policy should be good news whether you are a hawk or dove on monetary policy.

If you’re a hawk, the attraction is obvious: the Fed is finally on the ball and more likely to get inflation under control. But we also think a dramatic move in policy should appeal to doves. Even the most dovish policymaker at the Fed is forecasting a short-term interest rate of around 2.0% in late 2023 and late 2024 (according to the “dot plot” released last week). Getting to 2.0% more quickly might open the door to staying there (or above) for a shorter amount of time.

It’s also important to note that the median policymaker at the Fed expects the short-term interest rate target to average about 2.0% for the next three years. In other words, the Fed would just be placing the short-term rate right about where it’ll be anyhow and then taking the next several months to assess where it needs to go next.

We think that after pausing for several months, the Fed would eventually realize it needs to do more. But, if we’re right, that means by having swiftly proceeded to 2.0%, the Fed would have less work to do than if it were to gradually meander rates upward over the next several months.

A target rate of 2.0% would not be high by historical standards. It would still be very low relative to current inflation and even low versus the future inflation expectations embedded in the prices of Treasury securities. Raising the short-term rate to 2.0% would not invert the long end of the yield curve; the 10-year Treasury is yielding 2.2% (as of Monday morning).

There is a time and place for gradualism in monetary policy, particularly when the unemployment rate is still above normal or when inflation is only a little above the Fed’s longterm target. This is not that time and place. The Fed’s monetary policy mistakes of the past two years have accumulated to a point where they equal those of the 1970s. Small policy shocks today will save us from even bigger ones down the road. But it takes intestinal fortitude.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

3-23 / 9:00 am New Home Sales – Feb 0.810 Mil 0.815 Mil 0.801 Mil

3-24 / 7:30 am Initial Claims – Mar 21 211K 211K 214K

7:30 am Durable Goods – Feb -0.6% -1.5% +1.6%

7:30 am Durable Goods (Ex-Trans) – Feb +0.6% +0.8% +0.7%

3-25 / 9:00 am U. Mich Consumer Sentiment- Mar 59.7 59.7 59.7

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Powell Channels Volcker

First Trust Economic Research Report

Brian S. Wesbury - Chief Economist

March 16, 2022

As expected, the Federal Reserve raised short-term rates by one quarter of a percentage point (25 basis points) earlier today, the first rate hike since the end of 2018. Even more important, the Fed signaled a new level of hawkishness in terms of future rate hikes as well as Quantitative Tightening.

The ”dot plot,” which show the pace of rate hikes anticipated by policymakers, suggests the median Fed official thinks short-term rates will go up 1.75 percentage points this year, which would be consistent with one 25 bp rate hikes at each and every meeting for the remainder of the year. This would also be consistent with the new language in the Fed’s statement that it anticipates rate hikes will be “ongoing.” Notably, this would also mean the Fed is prepared to keep raising rates through the mid-term election season, without pausing.

In addition, the median “dot” suggests another 75 - 100 bp in rate hikes in 2023, which would take short-term rates to a peak of about 2.75%. That, in turn, is slightly above the median estimate for the average short-term rate over the long run. In other words, the Fed now thinks it’ll overshoot on rates, although not by much.

But the Fed didn’t only change policy on rate hikes, it also shifted earlier the timing on Quantitative Tightening by saying it “expects to begin reducing [its balance sheet] at a coming meeting.” It looks like the Fed will start QT in May unless the economy runs into some unexpected headwinds. Notably, Powell said at the press conference that QT will be faster than it was back in 2018-2019. The fastest pace in that cycle was $50 billion per month. Look for a pace of around $75 – 100 billion per month in this cycle.

The dramatic turn in the projected pace of rate hikes and the earlier schedule for QT was accompanied by some big changes to the forecast for the economy this year. Expected real GDP growth was downgraded to 2.8% from 4.0%, while expected PCE inflation was lifted to 4.3% from a prior estimate of 2.6%. However, the real GDP growth forecast for 2023 and beyond wasn’t changed and the upward revisions to the inflation forecast for 2023-24 were modest.

Is the Fed worried that removing accommodation will cause a recession? Not yet. At the post-meeting press conference, Powell said that the odds of a recession are not “elevated” over the next year and the economy can “flourish” even as the Fed becomes less accommodative. Powell thinks he can engineer a “soft landing.” We will see. He is likely right about 2022, itself. A federal funds rate below 2.0% is not tight. But wrestling inflation down to 2.0% is going to be tough to do without the Fed eventually getting tight enough to cause a recession.

This does not mean it’s time to get bearish on equities. Economic growth continues, corporate profits are very high, and long-term interest rates, although they’ve moved up recently, are still low enough to make equities relatively attractive. In a better world, the Fed would operate in the background and investors could ignore it. Unfortunately, for the time being, investors are going to have to pay attention to the direction and pace of changes to monetary policy.

We believe today’s policy shifts are long overdue. Consumer prices rose 7.0% last year and the year-ago comparison should peak near 9.0% sometime in the next month or so. The Fed is well behind the curve and has its work cut out for it.

Brian S. Wesbury, Chief Economist

Robert Stein, Deputy Chief Economist

Text of the Federal Reserve's Statement:

Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments. Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Voting against this action was James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1/2 to 3/4 percent. Patrick Harker voted as an alternate member at this meeting.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Fed Raises Interest Rates for First Time Since 2018

Markets and Investing

March 16, 2022

Scott Brown - Chief Economist

The Fed raised interest rates for the first time since December 2018 and a majority of Fed officials expect at least another 150 basis points in rate hikes for 2022.

Click here to view the video commentary

As widely anticipated, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate (the overnight lending rate) by 25 basis points (bps) to 0.25-0.50% at its March meeting. The FOMC cited elevated inflation and strengthening employment. The conflict in Ukraine will have a “highly uncertain” impact on the U.S. economy, according to the FOMC, but will likely dampen growth and add inflation pressures.

“While this rate increase was anticipated,” said Raymond James Chief Economist Scott Brown, “the Fed signaled a higher path for interest rates than the market expected.”

Twelve of 16 senior officials anticipate seven or more rate hikes this year.

“The Fed expects inflation to moderate in the months ahead,” Brown said, “but if not, it is prepared to raise rates more aggressively down the line.”

The median forecast of senior Federal Reserve officials for 2022 for GDP growth fell from 4% (in December) to 2.8%.  The median forecast of inflation rose from 2.6% to 4.3%. Headline consumer inflation was 7.9% in the 12 months ending in February.

Raymond James Chief Investment Officer Larry Adam accurately predicted Powell would instead raise rates 25 bps at this meeting, although sentiment at the time leaned toward 50. Adam believes 25-bps increases will allow the Fed the flexibility to monitor the effect of increased rates on the economy.

“On average, after the first Fed tightening [cycle], the economy tends to expand for an additional five years,” said Adam on February 22. “With this economic expansion only two years old, we believe the Fed has every incentive to make sure it steers us clear of a recession.”

Adam did note that high energy prices may cramp consumer spending and push the Fed to act more aggressively. Brown believes the conflict in Ukraine could dampen growth and lead to higher inflation, which would also push the Fed to take action.

Officials continued to work on a plan to start reducing the Fed’s $9 trillion balance sheet, expected to begin in the months ahead.  Details of that discussion will be included in the policy meeting minutes, to be released on April 6. The next FOMC meeting is scheduled for May 3-4.

 All expressions of opinion reflect the judgment of the Chief Investment’s and Chief Economist’s Offices, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

© 2022 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2022 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

It's the Money

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 14, 2022

With every passing month, politicians and economists try to blame inflation on anything but excess money growth. As inflation gets worse, just like the 1970s, the list of excuses for inflation grows longer. At the start of the year, politicians on the left were blaming higher inflation on greedy companies; now they’re blaming Putin. Meanwhile, politicians on the right started out blaming higher government spending and bigger budget deficits; now others are blaming unfavorable demographics and de-globalization.

Among all these excuses we think the silliest is that inflation is caused by greedy companies. Businesses are no greedier today than they were before COVID.

As to Putin, the Russia-Ukraine War has caused a temporary spike in prices for oil and other commodities. Consumer prices rose 7.0% in 2021. But, in the next couple of months, we could see consumer prices up about 9.0% from a year ago. So, let’s say we can temporarily blame Putin for up to an extra two points of inflation, which should hopefully unwind later this year. That still leaves a big inflation problem that existed before Putin ordered the invasion of Ukraine and, we think, will continue even if the invasion (hopefully) ends.

Some voices on the political right are saying inflation will continue in advanced countries because of the aging of the Baby Boom generation mixed with low fertility as well as de-globalization. The idea is that fewer workers in the advanced world plus less willingness to extend supply chains to countries with lower-paid workers mean higher costs for businesses, which will have to be passed along to consumers.

We have no doubt that an economic environment in which labor is becoming (relatively) scarcer is prone to higher inflation if central banks ignore this issue when setting monetary policy. But these phenomenon – retiring Boomers, low fertility, de-globalization – are not hidden or some sort of secret. If they’re obvious enough for some economists to develop theories about how they’ll affect inflation, then they’re also obvious enough for central bankers to adjust monetary policy so that higher inflation doesn’t result.

But what that would require is for central bankers to dust off the writings of Milton Freidman, the same writings they’ve been casually dismissing the past two years as the M2 measure of the money supply has soared.

It is ultimately the increase in the money supply that’s responsible for inflation. It doesn’t matter whether government spending or the budget deficit is high or low, whether the labor supply is growing or shrinking, whether free trade is waxing or waning; inflation is based on decisions made by central banks. If the money supply grows too fast, you get more inflation; if the money supply grows too slowly or shrinks, you get deflation. If the central bank does its job right, you get stable prices.

Which is why we suspect inflation is going to keep exceeding the Federal Reserve’s supposed 2.0% long-term target for a long time to come. The money supply is still growing rapidly and the Fed is just getting around to its first modest rate hike (most likely 25 basis points) later this week. It is nowhere close to being tight and tight it will have to get in order to tame the inflation it’s unleashed.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

3-15 / 7:30 am Empire State Mfg Survey - Mar 6.5 19.9 3.1

7:30 am PPI – Feb +0.9% +0.9% +1.0%

7:30 am “Core” PPI – Feb +0.6% +0.6% +0.8%

3-16 / 7:30 am Retail Sales – Feb +0.4% +0.3% +3.8%

7:30 am Retail Sales Ex-Auto – Feb +0.9% +1.9% +3.3%

7:30 am Import Prices – Feb +1.6% +1.3% +2.0%

7:30 am Export Prices – Feb +1.2% +1.1% +2.9%

9:00 am Business Inventories – Jan +1.1% +1.1% +2.1%

3-17 / 7:30 am Initial Claims – Mar 12 220K 221K 227K

7:30 am Housing Starts – Feb 1.700 Mil 1.699 Mil 1.638 Mil

7:30 am Philly Fed Survey – Mar 15.0 24.7 16.0

8:15 am Industrial Production – Feb +0.5% +0.6% +1.4%

8:15 am Capacity Utilization – Feb +77.9% 78.0% 77.6%

3-18 / 9:00 am Existing Home Sales – Feb 6.100 Mil 5.970 Mil 6.500 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

COVID-19 Tracker

First Trust Economics

Brian S. Wesbury - Chief Economist

March 4, 2022

COVID-19 was not a hoax, but it was the world’s first Social Media pandemic, where fear was spread in a way we have never seen before. Our goal with the COVID-19 Tracker was to provide a data driven piece to put the pandemic in perspective.

The information we presented was used by the White House, Congress, the press, educational institutions from universities to high schools, and of course, the Financial Advisor community. The reason we think it was so widely used was that we presented factual data in a way that helped minimize fear.

What this data has consistently shown since the beginning of the pandemic was that those most at risk were a small subset of the population. Those 65 years and older make up only 16.3% of the population, but have accounted for nearly 75% of all COVID-19 deaths as of 3/2/2022.* In our opinion, focusing resources on the most vulnerable individuals, instead of locking down the entire country, would have resulted in better outcomes from both a public health and economic perspective. As history looks back, we believe locking down the economy will be viewed as one of the most damaging public policy mistakes in world history.

The shutdowns destroyed supply chains, put millions out of work, hurt the young by eliminating in-person learning, damaged mental health, caused the delay of important screenings for other health problems, and led to a government spending spree of over $5 trillion. We are now dealing with the costs of those shutdowns and while we can’t assess the long-term sociological problems, we do know that the economic data continues to improve. You can follow our weekly Recovery Tracker here.

The U.S. and other western countries have seen case counts from the Omicron wave of COVID-19 collapse over the past several weeks, and it now looks clear that the worst of this wave of the virus is behind us. As a result, and in conjunction with widespread population immunity due to vaccination and prior infection, restrictions are starting to be removed at a rapid rate around the world. It’s important to remember that seasonality plays a big part in the spread of this virus, and cases could always rise once again, but for now it looks like the status quo of lockdowns, mask mandates, vaccine passports, etc. over the past two years may be coming to an end.

The lagging effects of the draconian response to this pandemic will continue to be felt for years to come as will the long-term economic consequences from government spending and money printing. But it seems clear that confidence is returning, the pandemic is waning and the economy continues to recover. As a result, we have decided it’s time to end the First Trust COVID-19 Tracker. This final Tracker is two pages. We hope you found our Tracker a port in the COVID-19 storm.

Click here to view the final report.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.