Profits and Stocks

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

September 30, 2024

Like it does once every year, last week the Commerce Department went back and revised its GDP figures for the past several years. And while the top line revisions to Real GDP were pretty small, there was a larger revision to corporate profits.

Real GDP was revised up 1.3% for the second quarter of 2024, which means the annualized growth rate since the start of 2020 was about 0.3 percentage points faster than previously estimated: 2.3% per year rather than 2.0%.

And the statisticians also said profits were underestimated. The government now thinks its comprehensive national measure of pre-tax corporate profits is 11.5% higher than previously thought, mostly due to profits at domestic non-financial companies (such as manufacturers, retailers, transportation & warehousing, etc.). Meanwhile, after-tax profits were revised up 13.3%.

As our readers know, we judge the value of the overall stock market by using a Capitalized Profits Model. Using these revised economy-wide profits from the GDP accounts and a 10-year yield of 3.75% (Friday’s close) suggests the S&P 500 would be fairly valued at about 4,725, 18% below Friday’s S&P 500 close.

Our readers know that this measure is a view from 30,000 feet. The Capitalized Profits Model is not a trading model and there are many other tools to judge the value of stocks. In addition, in an election year, another factor is in play as well and that is the tax rate on corporate profits.

In 2018 the top tax rate on corporate profits was cut from 35% to 21%. This 21% tax rate is the lowest tax rate on corporate profits since the Great Depression.

We have always used pre-tax profits to judge stock values because the corporate tax rate moves up and down with the political cycle and pre-tax profits are a true reflection of economic activity, not just tax rate changes.

Clearly, the stock market has continued to rise in spite of the fact that our 30,000-foot view suggests it is overvalued. This could be a repeat of what happened in the late 1990s, when stocks rose in spite of the fact that they were overvalued, or it could be explained by an expectation that tax rates will stay low, and possibly be cut again.

Using newly revised after-tax profits in our model, instead of pre-tax profits, suggests that stocks are fairly valued today. And if President Trump were to win the election, and cut the corporate tax rate further as he has suggested (to 15%, from 21%) then there’s a case for stocks being mildly undervalued. (In theory, cutting the tax rate to 15%, which means companies would get to keep 85 cents on the dollar rather than 79 cents, translates into an 8% increase in after-tax profits).

However, there is also a risk of corporate tax increases, both in the near future as well as beyond. Vice President Harris’s campaign has mentioned lifting the rate to 28%, which would translate into a 9% reduction in after-tax profits.

It is hard to look at the federal budget situation and think the US government won’t be raising tax rates in the future. We’d prefer spending cuts, but we don’t live in a world where policymakers do what we want. In a worst-case scenario, tax rates could go up on both corporate profits as well as investors’ capital gains.

Net, net, what does this all mean? At the very best, upward revisions to profits mean stocks aren’t as overvalued as our models showed before. Nonetheless, with the M2 measure of the money supply down from its 2022 peak, and the risk of recession higher than it has been in a long time, we still believe stocks are overvalued.

The Federal Reserve is reducing interest rates, but even with a 10-year yield of 3% the stock market is not cheap. From 2008 to 2022, the market was significantly undervalued, and we were bullish for almost that entire time. Today, this is just not the case. There are sectors of the market that remain less expensive than the market as a whole, but caution is still warranted.

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.

The Budget Blowout

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

September 23, 2024

With only one week left in the fiscal year, it looks like the budget deficit for the federal government for Fiscal Year 2024 is going to come in at about $1.9 trillion, which is 6.7% of GDP.

To put this in historical perspective, we know of no other year in US history where in the absence of a major full-mobilization war (like World War I or II) or a major recession and its immediate aftermath when the budget deficit was so large. Some may point out that the budget gap was this large in FY 2012, a few years after the Financial Panic and Great Recession of 2008-09. However, the unemployment rate averaged 8.3% that year, more than double the average jobless rate of 4.0% this year. In other words, the economy in 2012 was still far from a full GDP and job-market recovery.

You may not remember, but Democrats hammered Ronald Reagan for deficits in the 1980s. Well, looking back the largest deficit we ever had under Reagan was in 1982, when the unemployment rate was 10% and we were fully funding the Pentagon at the height of the Cold War. In other words, there is simply no excuse for running a deficit this large given the lack of a major war and the absence of a recession.

And yet here we are. What’s amazing is how much the budget situation has changed in only the past five years. When looking at the budget it’s important to compare apples-to-apples, so we like to use the budget at the same point in the business cycle. In 2019 the economy was at a pre-COVID peak and 2024 is, so far, a peak business-cycle year as well. (It remains to be seen if 2025 is an even higher peak, in which case we will be happy to make a 2019 versus 2025 comparison a year from now).

Five years ago, in FY 2019, the deficit was 4.6% of GDP, so with this year at 6.7% it is 2.1 percentage points higher. Is it higher because of less revenue? Not at all. In the past five years revenue as a share of GDP has risen to 17.2% from 16.3%. They were $3.5 trillion in 2019, this year they are $4.9 trillion, $1.4 trillion higher.

Instead, the problem with the growing deficit is on the spending side. And while many just chalk it up to Social Security and Medicare because of our aging population, this just isn’t true. There are three major factors: (1) net interest on the federal debt, (2) “other” mandatory spending, and (3) major health care programs, such as Medicare (for senior citizens) and Medicaid (for those with lower incomes).

The growth in the net interest on the federal debt has been astounding and we plan to write more about the major political and policy implications of that change in the months ahead. Back in 2019, net interest was 1.8% of GDP; this year it will clock in at 3.1% of GDP, the highest share since 1995.

Meanwhile, “other” spending is up because the Biden Administration has been busy finding ways to forgive as many student loans as it can legally get away with (as well as ways that may end up being illegal, like with policy changes announced in 2022 and later overturned by the Supreme Court). When loans are forgiven, the Department of Education calculates present value of less future repayments, and factors that into the current budget year. As a result, “other” spending, which was 2.7% of GDP in 2019 is 3.8% this year.

Then there are the health care programs, which cost 5.3% of GDP five years ago, but 5.8% this year, with Medicaid growing much faster than Medicare. With population aging and barring major reforms to these programs, this share should only grow in the decade ahead.

The bottom line is that the US faces big structural budget challenges in the years ahead, particularly on the spending side. With low interest rates in the past fifteen years, we had the chance to avert our eyes from the problem, but we are soon to run out of time. No matter who we elect in November, we expect getting our fiscal house in order to eventually become a major policy theme of the next Administration as well as those beyond.

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.

It’s Money, Not Spending, that Causes Inflation

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

September 16, 2024

You don’t have to read or listen for long these days before you hear a politician, pundit, or politically-inclined person say: “Government spending causes inflation.”

Don’t get us wrong…anyone who wants to cut the size and scope of government is a friend of ours. Government is WAY too big. It slowed the growth rate of the economy, hurt living standards, and made people fight over fixed slices of the pie rather than working to grow the pie. But, government spending, itself, doesn’t cause inflation.

Just think about it. If government taxes (or borrows) $1,000 from Peter and gives that $1,000 to Pauline…Peter doesn’t have it, but Pauline does. Is there any more money in the economy? Absolutely not.

The only thing that can increase inflation – in fact, the definition of inflation – is excess money creation. Inflation is a decline in the purchasing power of a currency caused by central banks that inject more money into an economy than an economy really needs. Inflation isn’t an increase in the prices of goods and services, it’s a decline in the value of money. And government spending, all by itself, does not increase the money supply.

And if you don’t believe us, how about Milton Friedman? He wrote “Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation.”

Some people wrongly assume that government borrowing creates money. But think about it. Who does the government borrow from? China, Japan, retirees, and banks all buy Treasury bonds. They buy them with dollars that they earned exporting to the US, working for incomes, or taking in deposits.

If any entity buys the debt of the US they no longer have the cash, the government does. Like Peter and Pauline, it is just a transfer of cash from one account to another. It doesn’t increase spending. If China buys debt, then they can’t buy imports with those same dollars. If banks buy debt, then they can’t make loans with that same money.

What is true is that if the Fed (or any central bank) creates new money (say with QE) and buys government debt, this injects new money into the economy. That IS inflationary. But it’s the money creation that caused the inflation, not the spending itself.

We think government spending needs to be cut. In fact, it may be the most important policy proposal on the table today. But we should cut spending for the right reasons. Making mush of economics doesn’t help anyone in the long run.

In that vein, many people correctly point out that the more the government borrows and taxes, the less the private sector has. This slows the growth of the economic pie and holds back the production of goods and services. Fewer goods and services, with the same monetary policy, means higher prices than we would have if government were smaller.

But this is not inflation, it is a (negative) supply-side boost in prices. The Fed could pull money growth back in such a situation and keep prices from rising as much, but the Fed actually does the opposite. The slower the economy grows, the more likely the Fed is to print excess money to boost it.

Again, this excess money is what causes the inflation, not the government spending. Even though a bigger government holds back output, it is not the ultimate cause of inflation.

The US was able to fix the inflation of the 1970s by slowing down the growth rate of the money supply. And, contrary to popular belief, the US does not need easy money and low interest rates to grow. In fact, the high-tech sector has thrived with declining prices.

Let’s cut spending for the right reasons. We get it: if saying spending creates inflation and that bumper sticker argument gets voters on board it would be easy. But the real reason to cut the size of government is to create more of a free market, reduce corruption, and allow workers to keep more of what they earn.

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 Faster

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

September 9, 2024

Friday’s employment report suggests the US economy may be slowing down faster than most investors think.

Nonfarm payrolls increased 142,000 in August, but revisions to June and July brought the net gain down to a modest 56,000. And the details were worse. We like to follow payrolls excluding three sectors: government, education & health services, and leisure & hospitality, all of which are heavily influenced by government spending and regulation (that includes COVID lockdowns and re-openings for leisure & hospitality). That “core” measure of payrolls rose only 25,000 in August and is up only 31,000 total in the past three months.

In particular, government plus education & health care jobs have made up 37% of all the net payroll increases since the pre-COVID peak in February 2020, an unusually large share.

For August itself, things looked better if you focus on civilian employment, an alternative measure of jobs that includes small-business start-ups, which rose 168,000 for the month. However, it’s hard to make a strong case for the US economy if you stick with that civilian employment measure. The August gain was the largest in five months but civilian employment is down compared to a year ago, with a loss of 66,000 jobs. Even worse, full-time employment is down one million from a year ago while part-time employment is up 1.1 million over the same timeframe.

Another recent report from the Labor Department revised down the payroll increase in the year ending in March 2024 by 818,000. That makes sense given that payrolls had been previously estimated to have grown 2.9 million during this period while civilian employment was estimated to have grown 642,000. But even after reducing payroll growth by 818,000 that still leaves a large gap. One way to close that remaining gap is an upward revision to population numbers due to high immigration, which would lift civilian employment, as well. But another way would be an even larger downward revision to payrolls.

This week the Labor Department will report on inflation and we – and the consensus – expect a moderate 0.2% increase in consumer prices for the month of August. In turn, that would mean that CPI prices were up around 2.5% from a year ago, which should translate into PCE inflation (the Federal Reserve’s preferred measure) of 2.3%. That’s a big drop from the 3.3% gain in PCE prices in the year ending in August 2023 and suggests that by the early part of next year inflation may temporarily hit or go under the Fed’s 2.0% target.

Why is this happening? Why is the economy slowing and inflation decelerating? Because monetary policy has been tight. After surging in 2020-21, the M2 measure of the money supply peaked in early 2022. Although it’s been rising gradually since October, it’s still down 3.1% from the peak in April 2022.

The Fed obviously realizes this, hence all the talk about cutting short-term interest rates. For now, our base case is that the Fed will cut rates by a quarter percentage point at each of the three remaining meetings this year (starting next week) and continue that pattern well into 2025.

The problem is that the Fed still thinks its focus should be on rates, not the money supply. If growth in M2 picks back up quickly, we risk a return to higher inflation, like we did multiple times in the 1970s. If growth in M2 remains lackluster in spite of rate cuts, the landing could get harder than anyone thinks.

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.

Rate Cuts on the Way

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 26, 2024

We all knew it was coming…and in Jackson Hole, Federal Reserve Chairman Jerome Powell said it will come next month. He said, “the time has come,” and the futures markets have priced in either a 25 or 50 basis point rate cut at the meeting on September 18.

While the world seems to think the setting of the federal funds rate is the most important decision in monetary policy, we don’t think that’s true. With the advent of the abundant reserve policy in 2008, the Fed separated the link between the money supply and interest rates.

In reality there are multiple things we watch to determine the stance of monetary policy. Interest rates are one, but the rate of growth in M2 is more important…and that growth rate can now be influenced by what the Treasury Department does with the $730 billion it holds at the Fed in something called the Treasury General Account (TGA).

We think the real reason inflation has slowed is because the Fed actually allowed M2 to decline after the massive increase during COVID. Yes, short term interest rates were very low. But it wasn’t those low rates that caused the inflation, otherwise short-term rates that were just as low in the aftermath of the 2008-09 Financial Crisis would have caused a similar surge in inflation.

Similarly, it wasn’t the hikes in short-term interest rates that brought inflation back down. It was the slowdown in M2, in part caused by the growth of the TGA, which the government has used to take roughly $700 billion out of circulation.

This new system of abundant reserves and a large TGA has pushed the US very close to Modern Monetary Theory, where the Treasury can take money out of circulation by borrowing or taxing from the public and then hiding it in the TGA. And the Treasury could always drain the TGA and push $700 billion back into circulation by spending.

We don’t know exactly what the Treasury or Fed will do with Quantitative Easing/Tightening and the TGA, but many seem to believe cutting rates will allow the US to avoid a hard landing. With M2 barely growing, this may not work.

Since 2008, the Fed has held short-term interest rates below inflation 80% of the time, and for nine years, interest rates were basically held at zero. With inflation running 2.5% to 3.0%, the Fed could take the federal funds rate down a full percentage point to roughly 4.5% and rates would be “normal,” unless and until inflation falls further.

Meanwhile, the housing market is probably not poised to surge as short-term interest rates start to decline. Mortgage rates are not going to fall back to 3%. In addition, when the Fed starts cutting rates and people think they will cut them more, they could hold back on purchases waiting for the even lower rates. So sometimes, rate cuts can lead to slower growth in the near term. Also, we have a presidential candidate suggesting a large tax credit for some buyers, which could also postpone purchases into next year.

The Fed has been running an experiment in new monetary policy…in other words, don’t start believing that this change in direction from higher for longer, to lower is the way to stick the landing. We still haven’t felt the full pain from policies undertaken during COVID lockdowns…it takes a lot of imagination to believe all this can happen with no real negative impact.

We are worried that we have come very close to state-run capitalism. In the past year, 82% of all net new jobs have been in government, healthcare and education. Growing budget deficits have been holding up the economy even though the money supply has gone negative. Now, with deficits no longer rising as rapidly, the Fed will try to become the engine behind growth.

But pushing growth with government spending and Fed policy is a dangerous mix that could ignite the embers of inflation before the fire is completely put out. Gold rose to a record high last week, Bitcoin rallied too. The markets are not convinced that inflation has been tamed.

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.

Remember When (Almost) Everyone Was Saying That US Businesses Were Hoarding Workers?

Thoughts of the Week

Eugenio J. Aleman, PhD, Chief Economist

Giampiero Fuentes, CFP, Economist

August 23, 2024

As a businessman and ex-business owner, the idea of firms ‘hoarding’ workers never made sense. As an economist, the idea of firms hoarding workers never made sense either. And since I am a business economist, the idea of firms hoarding workers is ludicrous. So why was it that so many pundits, economists, analysts, and everybody else looking at employment data during 2022 and 2023 argued that the reason for employment to be so strong during those years was because firms were hoarding workers?

Some argued that workers were so scarce that firms were reluctant to get rid of workers. Not only firms were not willing to get rid of workers, but the argument was that they wanted to continue to hire at very high rates because they didn’t know if they were going to be able to hire workers in the future.

We started writing about this issue back in October of 2022 when everybody was talking about firms ‘hoarding workers’ (See our Weekly Economics Thoughts of the Week for October 14, 2022, titled ‘Businesses Hoarding Workers? Say What?’). At that time, we argued that what firms were doing was just trying to go back to pre-pandemic levels of employment and that they were struggling to find workers, not hoarding workers. And because they were struggling to get workers, wages and salaries were going up.

But even after firms were able to catch up to pre-pandemic levels of employment in early 2023 and employment growth continued to remain strong, we argued that we needed to see an important slowdown in employment growth during the second half of 2023 because growth in employment was outpacing growth in economic activity. In our ‘Weekly Economics Thoughts of the Week’ for June 9, June 30, and July 07, 2023, we beat the drum that employment growth numbers were making no sense.

However, almost everybody else was trying to adjust their narratives to the numbers being reported rather than analyzing what was happening in the economy and concluding that job numbers coming out from the establishment survey were too good to be true. Of course, we never joined the bandwagon of conspiracy theories regarding the reason why we believed the numbers were wrong. The reason is because we have previous experience with the damage severe crises have on statistical calculations and we knew that nobody was trying to use these numbers for political purposes.

On Wednesday of this week, the Bureau of Labor Statistics (BLS) provided a preliminary estimate of the establishment benchmark revision, which indicated, preliminarily, that from April 2022 until March of 2023, the number of jobs created in the US economy was revised down from an original 2.9 million to 2.1 million. That is, the BLS indicated that their preliminary revision was lower by 818 thousand than originally estimated, or about 68 thousand less per month during those 12 months.

Again, we want to put an emphasis on the preliminary nature of this number because this is not going to be the last number. The final numbers will be released when the January 2025 establishment numbers are reported, which is going to be on February 6, 2025.

If we take a look at the chart below, we see that Wednesday’s revision was second in absolute numbers to 2009’s revision, which was -902 thousand. Thus, it is clear that after a severe recession, which was the case for the Great Recession as well as the pandemic recession, these estimates tend to produce very large negative errors in nonfarm payrolls estimates.

Again, this number may come down or move higher once we get the final numbers in February of 2025, but there is nothing mysterious or nebulous about it. It is just the nature of the beast. And as our RJ CIO Larry Adam argued during the Summer Development Conference in Orlando in July of this year, this is the reason why we use a combination of sources and our experience analyzing the economy to guide our research and our view on the economy and the markets. And that is why we wrote so many reports over the last two years providing our interpretation of what was happening to the US labor market.

Having said this, the large revision by the BLS still puts US employment growing at a strong clip during those 12 months, with growth in nonfarm payrolls ‘slowing down’ to an average of 173 thousand from an original pace of 242 thousand, which is still extremely strong compared to a historical average of 124 thousand per month before April of 2023 and going back to 1939. Therefore, the labor market remains in good condition despite recent increases in the unemployment rate as well as our belief that it has continued to weaken. Being that ‘to maintain full employment’ is one of the Fed’s two mandates, the slowdown in employment growth is an additional reason to support our view that the Fed will ease rates starting in September.

Economic Releases:

Existing Home Sales: The increase in existing homes during July brought down the months’ supply of homes for the first time in five months. The year-over-year increase in home prices will continue to be the most important risk for the Federal Reserve because lower interest rates will add to the current pressure on home prices due to the still limited availability of homes for sale despite the improvements we have seen over the last several months. Existing-home sales increased by 1.3% during July on a seasonally adjusted basis and compared to June, according to the National Association of Realtors (NAR). According to the release, existing-home sales were down by 2.5% on a year-earlier basis. By region, the Northeast saw a month-over-month increase of 4.3% in existing-home sales (also up 2.1% compared to July of last year) while existing-home sales remained flat in the Midwest, month-over-month, while declining by 5.2% compared to a year earlier. The largest region of the country, the South, saw existing-home sales increasing 1.1% compared to June while declining by 3.8% compared to the same month a year earlier. Finally, the West saw existing-home sales up by 1.4% both on a month-over-month as well as year-earlier basis. The sales price of existing homes increased by 4.2% on a year-earlier basis. The inventory of existing homes for sale increased to 1.333 million in July while months’ supply dropped slightly, from 4.1 months in June to 4.0 months in July. This was the first increase in existing home sales in five months while it was the first time months’ supply declined this year. Months’ supply was down 2.4% in July compared to the previous month but up 21.2% compared to July of last year.

Leading Economic Indicators: The worse than expected Leading Economic Index (LEI) continued to point to a weakening US economy during the third and fourth quarters of the year, which is consistent with our view on the US economy. The Conference Board’s Leading Economic Index (LEI) declined by 0.6% in July, the institution reported today. This decline was twice as large as FactSet expectations for a 0.3% decline. The Conference Board also indicated that while the LEI indicates weakness in real GDP, it still doesn’t expect a recession, just a weakening in economic activity during Q3 and Q4 2024. The Conference Board’s Coincident Economic Index (CEI) stayed unchanged in July of this year after a 0.2% increase in June. The Conference Board’s Lagging Economic Index (LAG) declined 0.1% during July after increasing 0.2% in the previous month. According to The Conference Board’s Senior Manager, Justyna Zabinska-La Monica, “In July, weakness was widespread among non-financial components. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, and softer building permits and hours worked in manufacturing drove the decline, together with the still-negative yield spread.”

New Home Sales: The strong increase in new home sales has pushed down the median price of new homes in July by 1.4% compared to a year earlier. Furthermore, the strong increase in new home sales brought down the months’ supply of homes to 7.5 months from 8.4 months at the end of June of this year. The decline in prices of new home sales will help put downward pressure on the price of existing homes. However, the decline in months’ supply of new homes has the potential to make the year-over-year decline in new home prices short lived. New home sales of single-family homes surged by 10.6% in July to a seasonally adjusted annual rate of 739,000 compared to an upwardly revised June rate of 668,000, according to the US Census Bureau and the US Department of Housing and Urban Development. Compared to last year, new home sales were up by 5.6%. By region, new home sales in the Northeast were up 6.9% while the Midwest saw a 9.9% increase. The South experienced an increase of 2.9% while in the West, sales surged by 33.8%. All of the regions experienced an increase in new home sales on a year-over-year basis according to the release. The median sales price of new home sales in July of this year was $429,800 compared to a median price of $435,800 in July of last year. The average price was $514,800 in July of this year compared to an average price of $507,600 in July of last year. The months’ supply of homes in July was down to 7.5 months compared to 8.4 months in June of this year and 7.3 months’ supply in July of last year. Clearly, the recent surge in new home construction completions has put a lot of pressure on sales of new homes, so much that the effort has meant that home sellers have had to reduce the price of new homes.

DISCLOSURES

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. Current Situation Index (CSI) and Future Expectations Index (FEI) are the end-results of CCI, covering economic conditions, employment, price, income, and expense. The reading is 100 plus the average of said five factors.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

The Pending Home Sales Index (PHSI) tracks home sales in which a contract has been signed but the sale has not yet closed.

Supplier Deliveries Index: The suppliers' delivery times index from IHS Markit's PMI business surveys captures the extent of supply chain delays in an economy, which in turn acts as a useful barometer of capacity constraints.

Backlog of Orders Index: The Backlog of Orders Index represents the share of orders that businesses have received but have yet to start or finish. An increasing index value usually indicates growth in business but shows that output is below its maximum potential.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output. Industrial production:

Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interestrates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.

Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

New Export Index: The PMI new export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.

Durable Goods: Durable goods orders reflect new orders placed with domestic manufacturers for delivery of long-lasting manufactured goods (durable goods) in the near term or future.

Source: FactSet, data as of 8/23/2024

The Current State of Household Debt

First Trust Economics

Three on Thursday

Brian S. Wesbury - Chief Economics

August 22, 2024

In this week’s Three on Thursday, we explore the current state of indebtedness and financial health of U.S. households. Each quarter, the Federal Reserve Bank of New York provides a comprehensive overview of consumer borrowing and repayment trends, drawing from a nationally representative sample of Equifax credit reports. This data is thoroughly analyzed to estimate the total debt balances and delinquency rates across the country, offering valuable insights into how American households are managing their financial obligations. Curious about the latest trends? Dive into the three charts below to get a clearer picture of where things stand today.

Household debt balances grew by $109 billion in the second quarter of 2024, marking a 0.6% increase from the previous quarter, bringing the total to $17.80 trillion. Mortgage balances increased by $77 billion, reaching $12.52 trillion, accounting for 70% of overall household debt. This has provided stability for households despite a higher interest rate environment, as 94.3% of these mortgage loans are fixed-rate, with an average rate of 4%. Additionally, non-housing debt balances increased by $28 billion.

Aggregate delinquency rates were unchanged from the previous quarter, with 3.2% of outstanding debt in some stage of delinquency. Besides last quarter, Delinquency rates sit at the highest rate since the fourth quarter of 2020. Over the past year, about 9.1% of credit card balances and 8.0% of auto loan balances have transitioned into delinquency, indicating rising financial strain in these areas. Mortgage delinquency rates edged up by 0.1 percentage point in early-stage delinquencies but remain low by historical standards. The overall 3.2% delinquency rate is still relatively low, but is largely due to the ongoing impact of student loan forbearance.

The share of credit card balances 90+ days delinquent has risen to 10.9%, the highest since Q1 2012. Meanwhile, student loan delinquencies have dropped from around 11% in 2012 to just 0.65%, thanks to the CARES Act, which paused payments and set interest rates to zero. Although payments resumed in October 2023, delinquencies have remained low due to an “onramp” period that allows borrowers to delay payments without penalties until September 2024. However, as interest accrues, delinquencies are expected to rise once this temporary relief ends.

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.

Price Controls Redux?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 19, 2024

Unfortunately, when it comes to the government, what’s old is sometimes new again.

Back in the late 1960s and 1970s the Federal Reserve printed too much money relative to Real GDP, resulting in repeated bouts of high inflation. President Nixon, having been burned by a mild recession in 1960 the first time he pursued the presidency, wanted to make sure there was no hint of recession in 1972, the year he’d be seeking re-election.

As a result, in 1971, when Nixon closed the “gold window” at the Fed – to give the Fed the chance to print money more freely – he also imposed wage and price controls to try to temporarily hide the inflation that would inevitably result. After the election the controls went away and inflation surged, averaging more than 9% per year from 1973 through 1975. No wonder Nixon got so unpopular after the election!

But price controls have a long and sordid history all over the world, including in ancient Egypt, Babylon, as well as ancient Rome and even modern-day Zimbabwe and Venezuela. During the French Revolution, in 1793, the rapid inflation caused by the paper money issued under the revolution led to price controls enforced by the death penalty, then implemented by the guillotine. But even lopping off heads didn’t fix the problem and shortages were one of the damaging results.

Why do governments periodically do this? Because inflation is political kryptonite. Prior to COVID the US had inflation under control for almost forty years. Now, with inflation having remained stubbornly high the past few years – even though it’s decelerated the last two years – some politicians feel compelled to act, especially because while the rate of inflation is down, the price increases of recent years are still in place.

Politicians say it couldn’t possibly be their fault prices went up too fast, it must be someone else’s, like those wicked “price gougers’ in the private sector, lining their pockets with workers’ hard-earned dollars. But if price gouging is the reason for recent inflation, why weren’t these gougers doing it the past forty years? What changed?

And why has the inflation been such a global phenomenon? Inflation surged around the world, not only in the US. Is every single company in the world price gouging, and if so, doesn’t that present a once in a lifetime opportunity for someone to take market share by reducing prices?

Meanwhile, the cost of government has soared but those who accuse the private sector of price gouging are ignoring that. Since 2012, Chicago school spending per student is up 97% even as test scores have gone down.

But we shouldn’t just pick on Chicago schools. A recent study that used AI looked at SAT scores since 2008. Including the effect of the test getting easier, average math scores are down more than 100 points in the past fifteen years with most of the drop since 2019, right before COVID. Those who want to impose price controls on the private sector want to punish shrinkflationists. But schools have been charging more and shrinking the education they’re giving our kids. Where is the plan to fix that?

Ultimately, the best way to fight inflation is to have the Fed focus on price stability while the government minimizes taxes and regulation to encourage competition and risk-taking. Competition, not new regulations, is the way to keep prices down. School vouchers would certainly accomplish this for education.

The key assumption behind price controls is the rationalist delusion that some group of policymakers can figure out what a “fair” price is for each and every good and service across the vast US economy. It’s the pretense of the kind of central planners who ran the Soviet Union’s economy for decades.

The good news is that we think price controls are a very long shot to take effect. Even already, a candidate suggesting price controls is backpedaling, probably realizing that many political allies think it’s a very bad idea. Meanwhile, it’s unlikely that, outside wartime, such a plan could be imposed without new legislation and that legislation would probably not have the votes to pass.

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.

The Week Ahead

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 12, 2024

Pretty much every month there’s one week that has the most important economic reports. For the month of August that’s this week. The reports this week include consumer price inflation, producer prices, retail sales, industrial production, housing starts, and unemployment claims.

As it stands, it looks like the broader economy is decelerating as the tighter monetary policy of the past two years finally gains traction. The deceleration has taken longer than it normally does, probably due to the unusual nature of COVID lockdowns and reopening, the massive amount of monetary stimulus that preceded the tightening, plus the unusual expansion of the federal budget deficit last year, in spite of low unemployment and a Supreme Court decision on student loans that artificially reduced the official deficit last year.

In the past two weeks economic reports have included a decline in construction, slower job growth, and mixed ISM indexes, with manufacturing signaling contraction while the service sector remains slightly positive.

What’s likely for this week? It looks like both consumer and producer prices rose 0.2% in July, which would be welcome news compared to the higher average inflation rates of the past few years. If tighter money is gaining traction, these inflation rates should slow even further later this year. It doesn’t mean this trend will be permanent, though. Eventually the Federal Reserve will loosen once again, probably too much, and send inflation higher.

Meanwhile, retail sales and industrial production should bring mixed news. Due to a bounce back in auto sales in July, after the technology-related snafus at auto-dealers in June, total retail sales should be up for the month. However, even if they grow the 0.5% we expect, that would leave them up only 2.5% from a year ago, barely treading water versus inflation.

Worse, we anticipate a decline in industrial production for July, led by the manufacturing sector. Production should still be up slightly versus a year ago, but not by much.

Does this mean the US is already in recession? Not yet. But dark clouds are gathering. Monetary policy is tight right now and has been for some time. Meanwhile, capital standards for banks are likely tightening up even as cuts in short-term rates are nearing. Investors should be wary about slower economic growth than the financial markets now assume.

In the meantime, taking all these data in, it looks more like stagflation than at any time since the 1970s. In spite of AI, space travel, and 3D printing, the economy is growing slowly with inflation still above the 2% level most people have wrongly considered “price stability.” COVID lockdowns and then reopening have seriously impaired seasonal adjustments. Massive federal deficits have allowed spending to continue, but created a bill that is coming due.

The US has backed itself into an economic corner where many are demanding more government interference. We wish we knew exactly how this will end, but experimental policies of the Fed and Treasury are making it very hard to predict.

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.

The Lags are Over for Tighter Money

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 5, 2024

As Milton Friedman taught us many decades ago, monetary policy works with long and variable lags. Recent economic reports suggest that the long and variable lags on the tightening of monetary policy in 2022-23 are starting to come to an end.

Both inflation and economic growth are decelerating. Consumer prices declined 0.1% in June, the largest drop for any month since the early days of COVID. Much of this was due to a decline in energy prices, but even “core” consumer prices were soft, up only 0.1% for the month, the smallest increase for any month in more than three years. The CPI was still up 3.0% in June versus the year prior, but this year-ago comparison looks like it decelerated in July and will probably do so again in August, given that oil prices are down.

Meanwhile, we are seeing more and more softness in the economy. The housing sector remains mired in slow construction and slow sales. The dollar value of new private housing construction is down in each of the past three months. Recent existing home sales are near the lowest level since the housing bust in 2010; new home sales are lower than they were prior to COVID.

The national ISM Manufacturing index came in at 46.8 for July, below the forecast from every economics group that submits a forecast to Bloomberg and, more important, below 50, which signals contraction. The production component of the index declined to 45.9, the lowest since the COVID Lockdown.

And then the July employment report showed a marked deceleration in job creation, with payroll gains (net of downward revisions for prior months) a tepid 85,000. We like to follow payrolls excluding government (because it's not the private sector), education & health services (dominated by government) and leisure & hospitality (which is still recovering from COVID Lockdowns). That “core” measure of payrolls rose just 17,000 in July, the smallest gain so far this year. At the same time, the unemployment rate rose to 4.3%, 0.4 percentage points higher than it was three months ago, an increase that in the past has often (but not always) been associated with a recession.

It is true that the M2 measure of money bottomed in October and has since been trending upward, but the gain since then has only been 2.4% annualized, much slower than the 6.1% annualized average during the twenty years leading up to COVID, a time when the CPI gained a moderate 2.1% per year.

Put it all together – decelerating inflation and decelerating growth, along with an abnormally slow rebound in M2 – and we have a strong case that the Federal Reserve has implemented tight money. In turn, given the lags between shifts in policy and its economic effects, the Fed now has room to shift to a monetary policy that is less tight.

To most analysts and investors, that means cutting the short-term target rate. As of late Sunday, the futures market in federal funds showed almost 125 basis points in rate cuts later this year. But lower rates, by themselves, are not easier monetary policy.

Instead, the Fed needs to start focusing on the money supply, particularly on M2. If the Fed cuts short-term rates but growth in the money supply remains weak because of tighter capital requirements on banks or because businesses and consumers expect even lower rates further ahead (which might lead them to temporary postpone economic activity) then it isn’t really making monetary policy less tight.

There is a widespread myth that 1980s Fed Chairman Paul Volcker beat inflation by sharply raising short-term interest rates. In truth, he did no such thing. What Volcker did was focus on the money supply and getting its growth under control. That meant using the Fed’s open-market operations to soak up excess liquidity. And it was those operations which resulted in higher short-term rates and lower inflation. The causation is important: less money meant higher rates, but Volcker’s focus was on the money. If he could have withdrawn the excess liquidity without higher rates, he would have been happy to do so.

The problem today is that the current Fed has abandoned a focus on the money supply and has swapped a system of scarce reserves for one in which reserves are excessively abundant, which means short-term interest rates are directly controlled by the government, rather than the market. Investors have a great deal riding on whether the Fed gets it right. Focusing on the money supply will help show how successful the Fed will be.

And, finally, there is a real potential here for the Fed to overreact. The world has gotten used to extremely low interest rates and very easy money. The stock market was overvalued and unemployment was artificially low. If the Fed thinks that was normal it will try to add more money than needed and risks creating stagflation. Just like it did in 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.

Want Affordable Housing? Build Homes, Cut Government

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 29, 2024

Listen to enough politicians and it won’t take long to hear about the lack of “affordable” healthcare, drugs, daycare, and housing. This was going on long before inflation returned after COVID. Everyone wants affordable things.

But the concept of affordability is made up of two components – the price of something and the income of the person who wants to possess it.

There are complicating factors in every market, so let’s focus on one – housing. Almost everyone thinks home prices and rents are just too damn high.

Many blame this on greedy landlords and investment firms buying up apartments and homes. President Biden (prior to his withdrawal from the presidential race) said he wants to impose a form of national rent control on “corporate” landlords.

There should be no doubt that a typical home today costs much more relative to income than it used to. The median price of an existing single-family home that sold in 2022 was about $390,000, which was 5.2 times higher than median household income of $74,580 that year (the most recent year for which median income is available).

By contrast, back in 1968, the median price of an existing single-family home was only 2.6 times median household income. As recently as 2011, the bottom of the housing bust, the ratio was only 3.3 and even at the peak of the housing boom in 2005, the ratio was 4.7. No wonder so many people are finding housing hard to afford.

This is not due to greedy landlords and homebuilders. Government entities of all kinds restrict building and add massive costs through regulation, which all limit housing supply. And don’t forget the inflation caused by excess money printing. Many workers in the US have not seen their wages keep up.

On top of this the US has allowed massive immigration, which increases the demand for housing, while homebuilders have not built enough new homes for basically the last 15 years – since the housing bust of 2007-2009.

But the least talked about issue with affordable housing is the income side. Today, federal, state and local government expenditures, plus the cost of complying with government regulations take at least 50% out of the entire Gross Domestic Product of the United States.

In other words, working Americans, on average, are left with only 50% of what they earned. If government used that money to do things that were more productive than the private sector, we would all be better off. But government programs are less efficient. Elon Musk’s SpaceX is massively more efficient than NASA ever was.

The more the government spends based on political priorities the less taxpayers can spend. And taxing Peter to give money to Paul makes it harder for Peter to buy a house, while Paul probably can’t afford one either. Redistribution limits opportunity. The more the government grows, the less affordable housing becomes. And, yet, no one talks about it.

Ultimately, if populists want to address the problem of housing affordability, they need to give power to the people by letting them keep their earnings, while government stops giving money to people, while grabbing power for itself.

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.

Moderate Growth in Q2

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 22, 2024

There are signs US economic growth is slowing down. In particular, jobless claims, perhaps the best high-frequency economic indicator, have averaged 235,000 per week in the last four weeks versus 211,000 in the first quarter. Meanwhile, continuing jobless claims are creeping up while overall retail sales are up a meager 0.2% in the past six months, slower than the pace of inflation.

The US is not in a recession at this point but higher claims and soft sales, along with a renewed deceleration in inflation (consumer prices ticked down 0.1% in June), suggest that the drop in the M2 measure of the money supply from early 2022 through late 2023 is finally gaining traction.

We may also be witnessing the end of the temporary and artificial impact of last year’s surge in the budget deficit. In the absence of the Supreme Court’s decision to overturn much of President’s Biden’s plan to forgive student loans, the budget deficit would have been 7.5% of GDP last year. That’s well larger than any year on record when the US was not engaged in a World War and the unemployment rate was below 4.0%.

We estimate that Real GDP expanded at a 2.1% annual rate in the second quarter, mostly accounted for by an increase in consumer spending. (This estimate is not yet set in stone; reports Wednesday about international trade and inventories might lead to an adjustment.)

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector grew at only a 0.3% annual rate in Q2 but auto sales rebounded at a 9.8% rate. Meanwhile, it looks like real services, which makes up most of consumer spending, grew at a 2.1% pace. Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a 2.1% rate, adding 1.4 points to the real GDP growth rate (2.1 times the consumption share of GDP, which is 68%, equals 1.4).

Business Investment: We estimate a 1.7% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined slightly. A 1.7% growth rate would add 0.2 points to real GDP growth. (1.7 times the 14% business investment share of GDP equals 0.2).

Home Building: Residential construction grew in the second quarter in spite of some lingering pain from higher mortgage rates. Home building looks like it grew at a 4.9% rate, which would add 0.2 points to real GDP growth. (4.9 times the 4% residential construction share of GDP equals 0.2).

Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases were up at a 1.7% rate in Q2, which would add 0.3 points to the GDP growth rate (1.7 times the 17% government purchase share of GDP equals 0.3).

Trade: Looks like the trade deficit expanded in Q2, as exports grew but imports grew much faster. In government accounting, a larger trade deficit means slower growth, even if exports and imports both grew. We’re projecting net exports will subtract 0.8 points from real GDP growth.

Inventories: Inventory accumulation looks like it picked up in Q2 relative to Q1, translating into what we estimate will be a 0.8 point addition to the growth rate of real GDP.

Add it all up, and we get a 2.1% annual real GDP growth rate for the second quarter. Good news compared to a recession but not a great starting point if a tighter monetary policy starts to bite harder.

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.