Sunday, 28 of May of 2017

Economics. Explained.  

No Weekly commentary This Week — Daughter’s Wedding

Hi all,

Sorry, no letter this week.  Our daughter is getting married in  Baltimore on Sunday.  That trump’s the weekly column!  Fortunately, it was  a quiet week.

Think happy thoughts!    Will be back in the weekly column business next Friday.



Existing Home Sales

May 24, 2017

Existing home sales fell 2.3% in April to 5,570 thousand after having increased 4.2% in March.  While these sales bounce around a bit from month to month they clearly continue to trend higher,.  The March sales pace was the fastest since February 2007 so a small drop from that high level is not in the least bit disturbing.

Lawrence Yun, NAR chief economist  says, “New and existing inventory is not keeping up with the fast pace homes are coming off the market,” he said. “Demand is easily outstripping supply in most of the country and it’s stymieing many prospective buyers from finding a home to purchase.”   He added that “Realtors continue to voice the frustration their clients are experiencing because of the insufficient number of homes for sale,”

The months’ supply of unsold homes rose slightly to 4.2 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

The National Association of Realtors series on affordability reached a peak of 213.6 in January of 2013.  It now stands at 158.2 in March.  At 158.2  it means that a household earning the median income has 58.2% 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 despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast mortgage rates are rising.

The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income.  Builders are trying hard to boost production to increase the supply of available homes which should slow the pace of price appreciation. Finally, mortgage lenders should become slightly less restrictive as the economy remains healthy and default rates decline.

Existing home prices rose 3.5% in April to $244.800. Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $232,300.  Over the course of the past year existing home prices have risen 6.0% and have generally been bouncing around in a 4.5-8.0% range.

Stephen Slifer


Charleston, SC

New Home Sales

May 23, 2017

New home sales fell 11.4% in April to 569 thousand.  While that sounds like a big drop, keep in mind that sales rose sharply in each of the previous three months.  They jumped 9.3% in January, 1.3% in February, and an additional 5.8% in March.   This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 606 thousand (shown above) which is within an eyelash of being the fastest sales pace thus far in the cycle (peak was 616 thousand in March).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled labor.  If they could find more workers, builders would build and sell more homes.  Also do not forget that new home sales are single family homes and do not include sales of condos.

The supply of available homes for sale rose 4 thousand in April to 268 thousand.  The small increase in inventories combined with the big drop in sales means that there is now a 5.7 month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing is roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 161.   That means that consumers have 61.0% more income than is necessary to purchase a median priced home.  Existing homes remain quite affordable despite a post-election increase in mortgage rates to 4.0% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.3% by the end of this year.  We estimate the affordability index at that time will be about 156 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices fell 3.0% in April to $309,200.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $309,100.  During the course of this past year prices have declined 2.6%.

Some might be alarmed that builders have had to lower their prices in order to sell homes.  But we have a different spin.  Sales today are are 46% lower than they were at their peak (606 thousand versus 1,316 thousand).  But yet prices are 36% higher than they were earlier.  That makes no sense to us.  Builders have been raising prices far too quickly in the first eight years of this expansion.  It is about time that new home prices are experiencing a dose of reality.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace, builders will continue to boost production, but prices should rise slowly.  Mortgage rates should end 2017 at 4.3% which is still quite affordable.

Stephen Slifer


Charleston, SC

Economics and Politics

May 19, 2017

The firing of FBI Director James Comey and subsequent appointment of former FBI Director Robert Muller as a Special Prosecutor to investigate the Trump campaign’s ties to Russia clouds the economic outlook.  At the end of last year we specifically added 0.1% to GDP growth this year and 0.2% to growth in 2018 with an expectation that Trump’s tax cut proposals, repatriation of corporate earnings, and regulatory relief would boost investment spending and stimulate growth slightly in the near-term, and boost potential GDP growth from 2.0% today to 2.8% by the end of the decade.  Recent developments delay the possible implementation date of these hoped for policy changes, and it is easy to envision a scenario in which they do not happen at all.  Having said that the U.S. and global economic outlook appears to be strengthening.  Thus, we are not yet prepared to alter our GDP forecast despite Trump’s political woes.

The stock market selloff on May 17 was certainly justified.  The S&P had risen 15% since the election last November and a correction is long overdue.  However, the nearly 2% drop on May 17 appears to be nothing more than a single-day event.


The market had also become extraordinarily complacent.  As measured by the VIX index, market volatility fell in early May to its lowest level since 1993.  Following the favorable election outcome in France in early May the markets seemed to believe that they had nothing to worry about.

But President Trump’s firing of FBI Director James Comey and the subsequent hiring of Muller as a Special Prosecutor re-inserted risk into the equation for both the stock market and the economic outlook.  As we see it, it will be far more challenging for President Trump to enact the legislation noted above any time soon.  It is hard to envision any support from Democrats, and many Republicans could abandon ship.

But we do not want to impose judgment on President Trump.  Only two people were in that room and nobody knows exactly what was said.  We are supporters of the Trump policy initiatives — tax cuts, repatriation of earnings, and deregulation.  We are not supporters of the man himself.  He says, and we agree, that the mainstream press has not been particularly fair in their reporting.  It could be that there is less going on than we are being led to believe.  But we also recognize that things could be far worse.  We simply do not know.

One does not have to be a political analyst to recognize that the mid-year election campaign will begin early next year and the election itself is only 18 months away.  If Republicans lose control of the House of Representatives, Democrats will almost certainly initiate impeachment proceedings.  The Senate probably would not convict, but under those circumstances Trump’s agenda would never be enacted and he would be a one-term President.

But what if Muller does not find evidence of any significant wrongdoing by the president or his administration?  A lot of the current uncertainty disappears and a significant portion of his agenda could actually be implemented (although later than we had envisioned).

Certainly Republicans are aware that the midyear election is not far off and will double their effort to pass some of his proposed legislative changes.  If that happens our economic outlook would be largely unaffected.

In short, we believe it is premature to make significant revisions to our economic forecast at this point.  We continue to expect 2.2% GDP growth this year and 2.7% growth in 2018.  A couple of things to consider:

1.  The nearly 2% drop in the S&P 500 index on May 17 is not even remotely close to a stock market “correction” which is usually regarded as a decline of about 10%. A correction is long overdue and would be considered healthy if it were to occur.

2.  One reason the stock market is so strong is that corporate earnings were very robust in the first quarter and are on track for an easy double-digit increase this year.

3.  The strength in corporate earnings reflects in part a rebound in earnings from companies in the oil industry that were crushed as oil prices plunged in late 2014 and 2015. The rebound in oil prices has restored profitability to those companies.  It also reflects the continuation of extremely low interest rates.  While the Fed is gradually raising rates, the process will occur very slowly and gradually.  These two events are not going to change any time soon.  Thus, any stock market drop may be muted.

4.  The labor market continues to improve and is beyond the full employment threshold. The official rate is at 4.4%.  Even the broader measure that Yellen prefers is at 8.6%.  This labor market strength generates income which allows consumers to spend freely and keeps the economy expanding at a respectable clip.

5.  The global economy is gathering momentum.  Faster growth is evident in many countries to Europe – Spain, Germany, and the U.K. in particular.  Now that the French election uncertainty has passed, labor market reforms may actually occur in that country.  In Asia, GDP growth in China is holding steady at about 6.5%, but in India growth is rebounding to 7.5% which is the fastest GDP growth rate in the world.  Emerging Asian economies are benefiting from the rebound in commodity prices.  The IMF believes global GDP growth rate will accelerate from 3.1% last year to 3.5% in 2017.

Politics matter and we will follow developments in Washington closely.  But, for now, it appears that economic fundamentals “Trump” political events.

Stephen Slifer


Charleston, S.C.

Initial Unemployment Claims

May 18 2017

Initial unemployment claims declined 4 thousand in the week ending May 13 to 233 thousand.  Because these weekly data can be volatile the focus should be on the 4-week moving average of claims (shown above), which is a less volatile measure.  It fell 3 thousand to 241 thousand.  The late February average of 234 thousand was the lowest level for this series since April 14, 1973 — 44 years ago!

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 244 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 170 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 will be forced to offer some of their part time workers full time positions.  This series is still high relative to where it was going into the recession.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the youth unemployment rate today is lower than where it was going into the recession so there may not be too 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.

The number of people receiving unemployment benefits fell 22 thousand in the week ending May 6 to 1898 thousand.  The four week moving average fell 20 thousand to 1,946 thousand. This is the lowest level for this 4-week average since January 19, 1974 when it was 1921.   The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.0%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will decline quite slowly.

Stephen Slifer


Charleston, SC

Gasoline Prices

May 17, 2017

Gasoline prices at the retail level were unchanged in the week ending May 15 at $2.37 per gallon.   In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.12. The Department of Energy expects national gasoline prices to average $2.39 this year — almost exactly where they are currently.

As the price of gasoline declined the economy got a tailwind. However,  oil prices today are 6% higher today than they were a year ago.  Hence, the tailwind effect on the economy has run its course but has not yet turned into a headwind.

Crude oil prices are currently about $49.00 mark.  The Energy Information Agency predicts that crude prices will average $50.68 in 2017.  As crude oil and gas prices have leveled off the underlying inflationary pressures have become more apparent.

The number of oil rigs in service dropped 79% to 404 thousand  after reaching a peak of 1,931 wells in September 2014.  However, the number of rigs in operation has actually rebounded in recent months to 885 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.


While the number of oil rigs in production has been cut by 79% between late 2015 and the middle of last year, oil production has declined much less than that.  Since that time the rebound in oil prices has encouraged oil firms to step up the pace of production and at 9.305 million barrels it is now only about 6% lower than its June 2015 peak pace of production which was 9,610 thousand barrels.  The Department of Energy expects production to average 9.3 million barrels per day in 2017 and 10.0 million barrels next year.  .









How can the number of rigs go down but production be relatively steady?  Easy.  Technology in the oil sector is increasing rapidly which allows producers to boost production while simultaneously shutting down wells.  For example, output per oil rig has increased by 32% in the past twelve months.  Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $70 per barrel.  Today that number has declined to about about $44 per barrel.  Six months from now that number will be lower still.

While oil inventories gradually declined for most of 2016 the t increase in production earlier this year caused inventory levels to climb to a record high level in February of this year.  The OPEC cutbacks thus far have only been partially offset by the pickup in U.S. production so inventory levels have declined slightly.  As a result, OPEC now wants to extend the reduced production flow through May 2018.  As inventory levels decline, U.S. producers will continue to boost production to (hopefully) steal some market share from the OPEC producers.

Stephen Slifer


Charleston, SC

Housing Starts

May 16, 2017

Housing starts declined 2.6% in April to 1,172 thousand after having fallen 6.6% 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 in blue above).   That 3-month average now stands at 1,221 thousand which is close to the fastest pace of construction thus far in the cycle.  It should continue to climb slowly.

Both new and existing home sales continue to climb.   Thus, the demand for housing remains robust.

Builders remain enthusiastic in part because they see traffic through the model homes accelerating.

Mortgage rates have risen 0.6% since the election in early November but at 4.1% they are still quite low by any historical standard.

At the same time employment gains are about 170 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.0% pace.

As a result housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising at almost as quickly, hence affordability has not dropped much.  At 161 the index indicates that a median-income buyer has 61% 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 skilled labor.

As one might expect there is a tight correlation between home builder confidence and the starts data which probably makes a great deal of sense.   Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.3 million currently.  However,  as noted above, many home builders  report an inability to get the skilled workers they require.   Overcoming the labor shortage on a long-term basis will be challenging.  Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.

The other thing worth noting is that about 1.3 million new households are being formed every year.  Those families all need a place to live, either a single-family home or an apartment.  Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households.  However, the fact that housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.4 million by the end of 2017 and 1.5 million in 2018.

Building permits declined 2.5% in April to 1,229 thousand after having risen 3.4% in March.  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 1,236 thousand which continues to point towards slow but steady improvement in housing.   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 currently at 1,236 thousand, housing starts will gradually approach the 1.35 million mark.

Stephen Slifer

Charleston, SC

Industrial Production

May 16, 2017

Industrial production rose 1.0% in April after having risen  0.4% in March and  0.2% in February.  Over the past year this series has risen 2.2% and is clearly on the upswing.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) surged by 1.0% in April after having declined 0.4% in March. During the past year  factory output has risen 3.2% (red line, right scale).  It has clearly hit bottom.

Mining (14%) output rose 1.2% in April after having declined 0.4% in March.   Over the past year mining output has risen 7.3%.  But over the past three months mining production has actually increased at an 18.6% pace.

Most of the recent upturn in mining has been concentrated in oil and gas drilling activity  which rose 9.0% in April after having risen 7.7% in March after having surged by 15.1% in February.  It has now risen for eleven consecutive months.  Over the course of the past year oil and gas well drilling has risen 77.5%.  The number of  oil rigs in operation continues to climb.

Utilities output  rose 0.7% in April, It jumped 8.2% in March after having declined 5.2% in February.  The wild swings in earlier months were  caused by abnormal weather patterns.  Over the past year utility output has declined 0.5%.

Production of high tech equipment declined 0.2% in April after having risen 0.7% in March  Over the past year high tech has risen 5.9%.   The high tech sector sector appears to have gathered some momentum during the past several months. This may be an early indication that the long slide in nonresidential investment may be coming to an end which would, in turn, signal some upturn in productivity growth.

Capacity utilization in the manufacturing sector jumped 0.7% in April to 75.9%%.  It is still below the 77.5% that is generally regarded as effective peak capacity but it is beginning to close the gap.  Above that level the factory sector is running too hot and prices begin to rise.  While we are a  ways from that so-called danger level, the reality is that manufacturing capacity is growing by about 0.1% per month while manufacturing output is rising by about 0.4%.  Thus, going forward the utilization rate in the manufacturing sector should rise about 0.3% per month.  At that pace, the utilization rate will hit that so-called “full employment” threshold by late summer or the fall.

Stephen Slifer


Charleston, SC

Homebuilder Confidence

May 15, 2017

Homebuilder confidence climbed 2 points in May to 70 after having dipped 3 points in April    Clearly, builders believe that housing market will perform well in 2017.

Robert Dietz, Chief Economist for the home builders association said, “The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,  Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

“This report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor,” said NAHB Chairman Granger MacDonald.

Traffic through the model homes edged lower by 1 point in May to 51 after having fallen by 1 point in April.  The March reading of 53 was the highest reading thus far in the business cycle.

Not surprisingly there is a close correlation between builder confidence and housing starts.  Right now starts are lagging considerably because builders are having some difficulty finding financing, building materials, an adequate supply of finished lots, and skilled labor.  Starts  currently are at a 1.3 million pace.  They should continue to climb gradually in the months ahead and reach 1.4 million by the end of 2017.

Stephen Slifer


Charleston, SC

Global Growth is on the Rise

May 12, 2017

Because the U.S. is the world’s largest economy U.S. residents tend to focus almost exclusively on the domestic economy.   But in today’s increasingly global environment what happens elsewhere matters.  The IMF believes that global growth will quicken from 3.1% last year to 3.5% in 2017 and that growth pickup is not attributable solely to the United States.  That means that central banks can begin to wean themselves away from the uber-easy monetary policy that has provided life support for the global economy during the past eight years and return to a more “normal” economic environment.  Here is a quick look at non-U.S. countries that are experiencing faster GDP growth.

GDP growth rates for our neighbors to the north and south, Canada and Mexico, are moving in opposite directions.

Canada.  The U.S. and Canadian economies are closely intertwined.  To the extent that the U.S. economy is getting a lift from the expectation of lower individual and corporate taxes, repatriation of overseas corporate earnings, and abatement from needlessly complex federal regulations, that helps the Canadian economy as well.  But the Canadian economy is also highly dependent upon exports of commodities.  Rising prices for both oil and non-fuel commodities provides a further lift to the Canadian economy.  The IMF projects GDP growth in Canada of 1.9% in 2017 compared to 1.4% last year.

Mexico.  Like Canada, Mexico typically benefits from faster U.S. growth.   However, Trump’s comments earlier this year about pulling the U.S. out of NAFTA and uncertainty about U.S. immigration policy have soured relations between the two countries.  As a result, the IMF anticipates that GDP growth in Mexico will slip from 2.3% in 2016 to 1.7% this year.

Latin America.  Like Mexico, most countries in Central and South America are concerned about President Trump’s trade and immigration policies which are weighing heavily on both confidence and growth expectations throughout the region.

The situation in Brazil, the region’s largest economy by far, is different.  That country is poised to end its 2-year long recession.  Rising oil prices have contributed to the rebound.  But, equally important, in January the Brazilian Senate ended a year-long impeachment process by removing from office President Dilma Rousseff who was embroiled in the scandal at the Brazilian national petroleum company, Petrobras.    Hopefully, this development will enhance the government’s ability to implement policy and strengthen the emerging economic upswing.

Europe.  European economic growth is accelerating.  European Central Bank Chairman Draghi noted this week that euro area GDP growth, which had been stuck in a range from 0.3-0.8% for 15 consecutive quarters, picked up to 1.7% last year and should repeat that growth rate in 2017.  The unemployment rate in the Euro area is the lowest it has been since May 2009.  There are numerous success stories.

Spain.  The Spanish economy plunged into recession in 2007-2008.  The situation continued to deteriorate and the economy suffered a financial crisis in 2012 that required a bailout package from the E.U.  But the Spanish economy has recovered vigorously.  Following 3.2% and 3.1% GDP growth rates in 2015 and 2016, the Spanish economy is poised to expand at a solid 2.5% pace this year.  That is a dramatic turnaround in a surprisingly short period of time.

Germany.  The economic data for Germany accelerated in the first quarter, but the YPO Global Pulse measure of CEO confidence in Germany surged in April.  That probably had more to do with the victory by Angela Merkel’s CDU party in the Saarland state’s election in March.  Her party’s 5-seat gain in that election increased her chances of victory in the federal election in September.

United Kingdom.  The government revised up its GDP forecast for this year by 0.6% from 1.4% to 2.0%.  Meanwhile, the unemployment rate dipped to 4.7% the lowest rate since 1975.

France.  The YPO Global Pulse confidence measure for France plunged 8 points in April as CEO’s got a case of the jitters ahead of the French presidential election.  But with the overwhelming victory by centrist leader Emmanuel Macron the possibility of France leaving the European Union has disappeared.  Hopefully Macron will be able to ease some of the currently stifling labor laws in that country and bring down the 10% unemployment rate.

Asia.  As the world’s second largest economy China gets most of the attention when economists discuss Asia.  But, in this case, growth in China is expected to be relatively steady at about 6.5% this year and slow gradually towards the 6.0% mark in the years ahead.  Thus far fear of Trump’s protectionist policies directed at China have not dampened growth expectations by any particular amount but they remain a concern.

India.  The real growth story in Asia comes from India.  After climbing at about a 7.5% pace in 2014 and 2015, growth will slip to 6.8% in 2016 as the result of a temporary cash shortfall as the government removed high value banknotes from circulation in an effort to curb tax evasion and graft.  But GDP growth has recovered quickly and could re-attain a 7.5% pace this year.  That makes India the fastest growing economy in Asia and one of the fastest growing in the world.

Emerging Asia.  The ASEAN nations which include Indonesia, Malaysia, Singapore, Thailand, the Philippines and Vietnam amongst others will benefit from rising commodity prices, but any resurgence in growth amongst those countries will be kept in check by the gradual growth slowdown in China which is their primary trading partner.

Conclusion.  Following Trump’s election last November the possibility of tax cuts, repatriation of corporate earnings, and relief from a stifling regulatory environment have rekindled growth expectations in the United States.  That same tendency is evident in many countries in Europe, Asia, and Latin America.  At the same time fears of rising nationalism have been dealt a series of blows in the wake of elections in Austria, the Netherlands, Germany, and France.  As those fears shrink into the background the gradual pickup in global economic activity should become more apparent.

Stephen Slifer


Charleston, S.C.