Monday, 24 of June of 2019

Economics. Explained.  

Two Pieces to Read this Week

June 21, 2019

We wrote two pieces this week.  One was right after the FOMC’s decision on Wednesday which focused on the widely diverging views amongst FOMC participants.  The other written today focuses on what indicators and/or events might cause the Fed to actually pull the trigger at the next FOMC meeting.

Stephen Slifer


Charleston, S.C.


Follow the Data

June 21, 2019

The Fed did not change rates at the latest FOMC meeting.  And while it is clearly leaning towards lower rates it has not yet reached that decision.  Fed Chair Powell repeatedly noted that the incoming data will determine whether the Fed pulls the trigger.

It turns out there is a surprisingly wide gap in the views of FOMC members.  At the moment, eight members believe that rates will be unchanged between now and yearend, but seven other members are looking for two rate cuts between July and December.  So, sit tight and do nothing or cut rates twice.  Those two views are diametrically opposed to each other.

Powell noted that at the time of the May FOMC meeting the U.S. and China were on the cusp of a trade agreement but that agreement fell apart.  From the Fed’s perspective that heightened uncertainty about the trade outlook.  So, what’s next?

So, as we see it the Fed has outlined two scenarios.  First, Trump further raises tariffs on Chinese goods which weakens global growth (mostly outside of U.S. borders) and could imply a further drop off in the inflation rate from its 2.0% target path. In that event, the Fed might cut rates a couple of times between now and yearend.  Or, at the upcoming G-20 summit meeting Trump and Xi choose not to further escalate the tariff war, agree to resume their discussion and, hopefully, find a way to resolve their differences.  In that case, the Fed would most likely leave rates unchanged between now and December.

In the past the FOMC’s decisions were based on their assessment of economic conditions.  How are GDP and inflation evolving relative to what it expected, and are any rate adjustments required to return to the desired path?  The operating assumption was that fiscal and trade policy would be unchanged.  They would incorporate changes in either type of policy after the fact.  Once those changes occurred, the Fed would determine their impact on the economy and adjust accordingly.  Now the path going forward seems to depend largely on policy decisions made by the current president which may, or may not actually occur.  That is an exceedingly difficult task because one can envision any number of relatively plausible scenarios.  Whether the Fed should base monetary policy on potential changes in the president’s fiscal or trade decisions, it has clearly chosen to go down that path.

So, where does that leave us?  Everybody will be scouring the economic tea leaves between now and the July 30-31 FOMC meeting.  These events/economic indicators will be crucial.

  1. The outcome of the June 28-29 summit meeting.  If China and the U.S. agree to restart trade discussions, the no-change group at the Fed will gain support.
  2. The personal consumption expenditures deflator for May on Friday, June 28. This is the Fed’s preferred inflation target so whatever happens will be important.  We are looking for an increase in the core rate of 0.2%.  This outcome would cause the year-over-year increase to slip from 1.6% to 1.5%, but for the most recent 3-month period the run-up would climb to 1.9%.  Perhaps a bit of ammo for both sides.
  3. The purchasing managers’ index for June on Monday, July 1. After reaching a high of 60.8 in August of last year it has been trending downward and now stands at 52.1 which is, presumably, consistent with GDP growth of 2.4%.  We expect a modest increase to 52.5 which would suggest that the beleaguered manufacturing sector of the economy is not deteriorating further.  A decline would give the rate-cutters at the Fed more ammo.
  4. The June employment data released on Friday, July 5. The weaker-than-expected increase in payroll employment for May of 75 thousand was disquieting.  Will the June data be equally subdued?  For what it is worth, we anticipate an increase of 170 thousand which would provide support for the no-change camp.
  5. CPI data for June on Thursday, July 11. While the Fed’s specific inflation target is the core PCE deflator, the concern about the continuing inflation shortfall will focus attention at the CPI as well.  We expect to see a June increase in the core CPI of 0.2% which would leave the year-over-year rate at 2.0%.  That outcome would leave the inflation outlook uncertain.  No hint of a pickup but, no further shortfall either.
  6. Second quarter GDP growth on Friday, July 26. Following 3.1% growth in the first quarter we anticipate second quarter growth of 1.5%.  That probably provides some support for both groups.  Growth in the first half of the year would be 2.3% which would exceed the Fed’s estimate of potential GDP growth which is currently 1.9% and suggest no further rate cuts are necessary.  But 1.5% growth in the second quarter could encourage the rate-cut camp.

Our sense is that if the data unfold as described above, the FOMC will – once again – chose to leave rates unchanged on July 31 and await further data.  The market’s two expected rate cuts between now and December are expected at the meetings in September and December.  As always, the data will determine the outcome.

Stephen Slifer


Charleston, S.C.

What the Fed’s Rate Decision Really Means

June 19, 2019

At its June 18-19 meeting The Fed chose to leave the federal funds rate unchanged at 2.25-2.5%.  Its assessment of GDP growth for the next three years is essentially unchanged from what it was back in March.  However, the outlook for its preferred inflation measure, the personal consumption expenditures deflator excluding the volatile food and energy components, slipped to 1.8% this year from 2.0% three months ago.  The median forecast for the federal funds rate at yearend remained at 2.4%.  However, seven FOMC participants thought the rate might fall to 1.9% by yearend which means that group envisions two rate cuts in the second half of the year.  That is one of the widest divergences of opinion amongst Fed officials ever regarding the outlook for inflation just six months hence.  It also represents one of the biggest shifts in the anticipated outlook for the funds rate in a 3-month period of time.  Remember, back in March not a single Fed official envisioned lower rates by yearend and now seven of them are in that camp.

The outlook for economic growth is not the issue.  The Fed expects GDP growth this year of 2.1%, 2.0% next year, and 1.8% in 2021.  Those forecasts are virtually identical to what it reported back in March.  The Fed continues to believe that the economy’s potential growth rate is 1.9%.  Thus, all FOMC officials seem to concur that the economy will be steady for the foreseeable future.

What seems to be bothering them is the persistent shortfall in the inflation rate from its target.  For example, back in March the group thought that the core PCE would rise 2.0% this year.  By June that forecast was cut to 1.8%.  That is not a wide discrepancy, but the core PCE has generally been below the Fed’s 2.0% target rate for most of the past seven years.  In fairness, it climbed essentially to the 2.0% mark in May of last year and remained there through yearend, but it has slowed steadily in the first four months of this year and now stands at 1.6%. Our sense is that rising prices on goods imported from China will lift the yearend rate to 1.8%.  We do not know the logic behind the Fed’s forecast, but it ends up anticipating the same 1.8% increase in the core PCE for 2019 as a whole.

The Fed noted that market-based measures of inflation have declined.  One such measure would be the gap between the nominal yield on the 10-year note and the comparable rate on the inflation-adjusted 10 year.  The difference between the two represents the markets view of inflation for that period of time.  It has slipped to 1.77% which is the slowest anticipated inflation rate in two years.

Survey-based estimates of inflation have also declined in the past six months or so.  The Philly Fed’s survey of professional forecasters now anticipates an inflation rate of 1.68%.

So the question is, how can the Fed get the inflation rate back to its desired path.  Will it get there on its own?  Or might it need help from the Fed in the form of lower rates to make that happen.  Apparently seven Fed officials are currently inclined to think the funds rate needs to be 0.5% lower by yearend to boost inflation back to the 2.0% target.  That would put the funds rate in a range from 1.75-2.0%.  Thus, about half of the FOMC thinks that rates should be steady between now and yearend, the other half looks for rates to be 0.5% lower.

Its press release on May 1 said, “The Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

In June 19 that same sentence read, “The Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”

None of this should be construed as definitive that the Fed will cut rates between now and yearend.  Many members are leaning in that direction currently, but just as many are unconvinced that any rate change will be necessary.  Like the rest of us they are going to stand by and see what develops over the course of the next couple of months.

The fed funds futures market, however, is placing its own bets and seem to be more in line with the views of the more dovish Fed officials.  Market participants anticipate two rate cuts between now and yearend, and a third cut in the first half of next year.  That would put the funds rate at 1.5% a year from now.

We are not changing our view for 2.6% GDP growth this year, 1.8% core PCE inflation, and no change in the funds rate between now and yearend.  The difference between us and the market depends upon the behavior of GDP growth and inflation between now and December.  As always, we will see!

Stephen Slifer


Charleston, SC.

Existing Home Sales

June 21, 2019

Existing home sales rose 2.5% in May to 5,340 thousand after having been unchanged in March.  Sales currently are 2.6% below where they were at this time last year.

Lawrence Yun, NAR chief economist said that consumers are eager to take advantage of the favorable conditions. “The purchasing power to buy a home has been bolstered by falling mortgage rates, and buyers are responding.”

With a modest increase in sales  and a moderate increase in the available inventory, the month’s supply of available homes rose from 4.2 to 4.3 months.  Realtors consider a 6.0 month supply as  the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in very short supply.  Given the low inventory of homes available for sale Yun continues his call for new construction. “More new homes need to be built.  Otherwise, we risk worsening the housing shortage, and an increasing number of middle-class families will be unable to achieve homeownership.”

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade although with an encouraging uptick in recent months.  Realtors cannot sell what is not available for sale.  If sales were not being constrained by the limited supply they would almost certainly be at a 5,800 thousand pace rather than the current 5,200 thousand and we would not be talking about weakness in home sales.

Meanwhile, properties stayed on the market for just 26 days in May.  Fifty-three percent of homes that sold in May were on the market less than a month.  The 26-day length of time between listing and sale is close to the shortest on record.  Back in 2011 homes remained on the market for 100 days.  Thus, the demand for housing still seems to be quite solid.

The National Association of Realtors series on affordability now stands at about 153.  At that level  it means that a household earning the median income has 53.0% more income than is necessary to get a mortgage for a median priced house.  Going into the recession consumers had only 14% more money than was required to purchase that median priced home.  Thus, housing remains quite affordable and should continue to remain affordable throughout 2019 because sizable job gains are boosting income almost as fast as mortgage rates and home prices have been rising.

Existing home prices jumped 4.0% in May to $277,700 after having risen 2.9% in April.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $268,10000.  Over the course of the past year existing home prices have risen 4.8% which is in the middle the 4.0-5.0% range that we saw throughout 2018 .  Yun pointed out that “Solid demand along with inadequate inventory of affordable homes have pushed the median home price to a new record high.”
At the same time mortgage rates are declining.  they reached a peak of 4.9% a couple of months ago, but with global GDP growth slowing, a slower pace of tightening by the Fed, and some softness in the housing sector, mortgage races have dropped to 3.8%.

The housing sector will continue to climb in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Home prices have been rising at a moderate pace.  And mortgage rates have worked their way lower to 3.8%.
 Stephen Slifer


Charleston, SC

Initial Unemployment Claims

June 20, 2019

Initial unemployment claims fell 6 thousand in the week ending June 15 to 216 thousand.  The four-week average of claims rose 1 thousand to 219 thousand.  The 4-week average for the week of April 13 of 202 thousand was the lowest for the current business cycle and  the lowest 4-week average level of claims since November, 1969 when it was 200 thousand.  The current low level of claims indicates clearly that the trend rate of increase in employment of about 180 thousand remains intact.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 219 thousand  we would expect monthly  payroll employment gains to exceed 300 thousand.  However, employers today are having difficulty finding qualified workers.  As a result, job gains are significantly smaller than this long-term relationship suggests and are currently about 180 thousand.

With the economy essentially at full employment, employers will have steadily increasing difficulty getting the number of workers that they need.  As a result, they might choose to offer some of their part time workers full time positions.  But this series is close to where it was going into the recession so they will have limited success in finding necessary workers from this source.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the youth unemployment rate today is close to the lowest on record (for a series that goes back to 1970) so there are not many younger workers available for hire.

Finally, employers may also consider some workers who have been unemployed for an extended period of time.  But these workers do not seem to have the skills necessary for today’s work place.  Employers may have to offer some on-the-job training programs for  those whose skills may have gotten a bit rusty.  But even if they do, the reality is that the number of discouraged workers today is quite low — it is essentially where it was going into the recession.

The number of people receiving unemployment benefits declined 37 thousand  in the week ending June 8 to 1,662 thousand.  The 4-week moving average fell 5 thousand to 1,679 thousand.  This series hit a low of 1,654 thousand in late October of last year.

The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.7%; potential growth has probably picked up from 1.8% a couple of years ago to perhaps 2.5% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer


Charleston, SC

Gasoline Prices

June 19, 2019

Gasoline prices at the retail level fell $0.06 in the week ending June 17 to $2.67 per gallon.  Gas prices have declined in each of the past six weeks by a total of $0.22.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.42. The Department of Energy expects national gasoline prices to average $2.64 in 2019, slightly lower than they are currently.  While retail prices have fallen $0.24 in the past six weeks, spot prices have declined by almost $0.40.  Thus, retail prices should continue to slide for another week or two.

As a result of production declines in Venezuela, Iran, and Saudi Arabia, oil prices climbed to $63 a couple of weeks ago before retreating to $53 in the past couple of weeks.  The Department of Energy expects crude prices to average $59.29 this year.

Crude oil output in both Venezuela and Iran has declined markedly.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  In fact, the blackouts in Venezuela significantly curtailed production in March.  The Iran sanctions went into effect in early November.  Iranian production has since fallen sharply.  The U.S.’s  goal is to reduce exports (and, hence, production) close to zero.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 12,200 thousand barrels per day.  The cut in oil production by the Saudi’s combined with reduced production in Venezuela and Iran initially boosted the  price of oil to about $65.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will quickly boost production.  At the moment the impressive increase in U.S. production is countering the cutbacks from Venezuela and Iran.  The Saudi’s share of global production has been falling steadily for the past couple of years.  However, the Saudis cannot allow its market share to continue to slide.

The Department of Energy expects U.S. production to climb 13% from 11.0 million barrels last year to 12.4 million barrels this year and  to 13.3 million barrels per day in 2020.  The U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production combined with reduced production in Venezuela and Iran  appears to have  gotten supply and demand back into better balance.    At 1,127 million barrels crude inventories are  in line with the 5-year average of 1,116 million barrels.

Stephen Slifer


Charleston, SC

Housing Starts

June 18, 2019

Housing starts fell 0.9% in May to 1,269 thousand after having jumped jumped 6.8% in April and 4.4% in March. Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown above).   That 3-month average now stands at 1,250 thousand.  Housing starts remain 4.5%  below where they were one year ago.

The May decline reflected  a 6.4% decline in single-family starts largely offset by a 13.8% increase in multi-family construction.   It appears that both categories of starts have leveled off but we expect them to rise slowly in the second half of the year.

While the  housing sector has cooled during the past year,  is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is primarily the latter.

Both new and existing home sales have rebounded in recent months which is obviously good.

But sales are being constrained by a dramatic lack of supply.  Realtors simply cannot sell what is not available for sale.

The average home stays on the market for 26 days currently which is down from 100 days a few years ago.  More than 50% of the homes coming to market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

Monthly  employment gains are about 180 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.3% pace which is  slightly below its long-term average of 2.7%.  That will  provide the fuel for additional spending on housing as the year progresses.

Mortgage rates have recently declined by 1.1% to 3.8% which is the lowest mortgage rate since the summer of 2017.  That should provide some  lift to the housing sector in the months ahead.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 153.0 the index  indicates that a median-income buyer has 53.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of both skilled and unskilled labor.  Construction employment has been growing by about 20 thousand per month but it will be difficult for it to grow any faster.  At the same time tariffs on lumber, steel and aluminum  are driving up the cost of production.

There are plenty of homes that have already been authorized but construction has not yet begun because of builders inability to find workers, and because the cost of materials has risen so sharply in the wake of tariffs on steel, aluminum, and lumber.  Once supply constraints begin to abate we will see starts climb at a somewhat more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to climb 14.0% this year and reach 1.30 million by the end of 2019.

Building permits rose 0.3% in May to 1,294 thousand after having risen 0.2% in April.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,294 thousand.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are at 1,294 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,300 thousand by yearend seems about right.  However, keep in mind that builders continue to have difficulty finding enough workers.  The demand for  housing is solid, but can builders get enough workers to push them sharply higher?

Stephen Slifer

Charleston, SC

Homebuilder Confidence

June 17, 2019

Homebuilder confidence declined 2 points in June to 64 after having risen 3 points in May.   A level of 64 is indicative of a solid level of confidence going forward although, admittedly, it is below readings of 70-75  at this time last  year.

NAHB Chairman Greg Ugalde said that, “While demand for single-family homes remains sound, builders continue to report rising development and construction costs, with some additional concerns over trade issues,”

NAHB Chief Economist Robert Dietz said “Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers.”

The NAHB report also indicated that affordability still remains a key concern for builders. The skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets are among the challenges builders face as they strive to construct homes that can sell at affordable price points.

Traffic through the model homes declined 1 point in June to 48 after having risen 2 points  in May.  The combination of falling home prices and lower mortgage rates should boost traffic in the months ahead.

Reflecting optimism about the future the homebuilders expectations index fell 2 points in June but the index remains at a lofty level of 70.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Given the rebound in the expectations component it is likely that housing starts will pick up further in the months ahead.  But builders continue to have difficulty finding labor so the upswing in starts will probably be muted.

However, builders have many units that have been authorized but not yet started.  In fact, the authorized but not yet started units are the highest they have been in a decade.  Our sense is that as labor slowly becomes available builders will continue building new homes.  Thus, we look for starts to climb about 4% this year.

Stephen Slifer


Charleston, SC

The Social Security Clock Continues to Tick

June 13, 2019

Every year the Social Security and Medicare Trust Funds are evaluated for their soundness.  The 2019 Trustees report showed that both programs continue to face long-term financing shortfalls.  The dates for which these trust funds are depleted vary slightly from one report to the next, but in all cases the end is in sight.  The good news is that policy makers have a broad array of options to address the projected shortfall.  If small adjustments are made early on, the pain will be relatively small.  The bad news is that policy makers have little appetite to make the required adjustments.

We typically think of “the” Social Security Trust Fund, but the reality is that there are actually two separate trust funds.  The Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits.  The Disability Insurance (DI) Trusts Fund pays disability benefits.  The OASI Trust Fund has $2.8 trillion in reserves.  It dwarfs the size of the DI Trust Fund which has just $97 billion.  For purposes of this report we will focus on the combination of the two.

The latest report indicates that for the two combined Social Security trust funds expenditures will exceed receipts for the first time in 2020.  At that point reserves will steadily dwindle until they are fully depleted in 2035.  Once depleted Social Security recipients will continue to receive monthly payments, but those payments will be reduced.   Steady income from payroll taxes will be sufficient to pay 80% of the scheduled benefits initially, but then gradually decline to 75% by 2093 (the final year of the 75-year projection period.

Similarly, we talk about a single Medicare Trust Fund but, like Social Security, there are two separate health insurance trust funds.  There is the Hospital Insurance (HI) Trust Fund (Medicare Part A).  It has reserves of $200 billion.  Then there is the Supplemental Insurance Trust Fund (SMI) which helps pay for physician, outpatient hospital, and home health services for the aged and disabled (Part B), as well as drug insurance coverage (Part D).  This trust fund has $104 billion of reserves.

For the HI Trust Fund expenditures began to exceed income in 2018.  The depletion date is 2026 – just seven years from now.  After depletion the allocated tax income will initially be sufficient to pay 89% of the estimated cost, decline to 78% by 2043, and climb again to 83% by 2093.

We tend to talk about the Social Security and Medicare Trust funds simultaneously and quickly note that they will be depleted in the not-too-far-distant future.  But they need to be discussed separately because the big gorilla is Social Security where the two combined trust funds have $2.9 trillion of reserves compared to the two Medicare trust funds which have just $300 billion.  The former is 10 times the size of the latter.

Given widespread recognition that these trust funds will soon be running out of money and the unwillingness of politicians to address the shortfalls, one is tempted to conclude that the solutions are intractable.  That is simply not the case.  The solutions are easy to find.  Any economist can figure out how to make these trusts funds sustainable in a heartbeat.  But the willingness to implement those changes is non-existent.

What might help eliminate the projected Social Security shortfall?  Here are a couple of obvious suggestions:

  1. Boost the retirement age gradually from 67 years currently to 69 years. Most studies recommend an adjustment of one to three months annually.
  2. Raise the maximum earnings subject to the Social Security payroll tax from $132,900 currently to $200,000. Currently, a person that makes $1 million per year pays exactly the same amount of Social Security tax as someone making $132,900.  This seems to make no sense.
  3. Reduce benefits for high income wage earners. The modest amount of Social Security benefits has little significance for individuals making income in excess of $1 million, or even those with income in excess $500,000.  Gradually reduce benefits for these high income individuals.

The solutions for Medicare are equally simple if one is willing to make people responsible for at least some portion of their health care expenditures

  1. For Medigap policies do not cover the first $500 of expenditures.
  2. For expenditures between $500-$5,000 cover 50% of the expenditure.
  3. Raise the eligibility age from 65 currently to 68.
  4. Malpractice suits must subtract from the award any workman’s comp and insurance payments received by that individual.

Interestingly, each of the suggestions above were specifically highlighted in the Erskine-Bowles Commission report back in 2010.  President Obama appointed the commission and charged it with returning fiscal policy to a sustainable path.  Everything was on the table.  The commission was expected to determine the proper individual and corporate tax rates and make specific recommendations to get the Social Security and Medicare programs back onto a sustainable track.  Think about it – 18 commission members — 9 Republicans, 9 Democrats.  Nobody expected them to find a solution, but they did.  Unfortunately, Obama rejected its recommendations because, in his view, they cut too deeply into entitlements.  The brass ring on the merry-go-around was in his grasp, but he missed it.  Nine years ago our two political parties actually talked to each other and were able to reach agreement on a contentious issue.  Such an outcome today seems inconceivable.

Nevertheless, the problems remain and D-day (depletion day) is approaching.

Stephen Slifer


Charleston, SC

Consumer Sentiment

June 14, 2019

The preliminary estimate of consumer sentiment for June came in at 97.9 compared to May level of 100.0 .  Thus, sentiment fell 2.1 points in June.  Despite the modest decline in June sentiment remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “Consumer sentiment reversed the May gain due to tariffs as well as slowing gains in employment. Some of the decline was due to expected tariffs on Mexican imports, which may be reversed in late June, but most of the concern was with the 25% tariffs on nearly half of all Chinese imports.”

Our sense is confidence will maintain a lofty level in the months ahead.  Since the beginning of the year the stock market recovered all of what it lost in the fourth quarter, hit a new record high level, and is currently just 2% below that new record high level.  The Fed has said it intends to leave rates unchanged for the foreseeable future.   And mortgage rates have fallen from 4.9% to 3.8%.

We expect GDP growth of 2.6% in 2019 versus 3.0% last year.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.  We expect worker compensation to increase 3.7% in 2019 vs. 2.6% last year. The core PCE inflation rate (excluding the volatile food and energy components) should be steady at 1.9% in 2019.  Such a scenario would keep the Fed on track for no rate hikes through the end of the year and perhaps for  2020 as well.

The big jump in consumer sentiment in June was entirely attributable to the current conditions component.

Consumer expectations for six months from now fell from 93.5 to 88.6

Consumers’ assessment of current conditions climbed from 110.0 to 112.5.

Trends in the Conference Board measure of consumer confidence and the University of Michigan series on sentiment move in tandem, but there are often month-to-month fluctuations.  Both series remain at levels that are consistent with steady growth in consumer spending at a reasonable clip of about 2.5% in 2019.

Stephen Slifer


Charleston, SC