Wednesday, 15 of August of 2018

Economics. Explained.  

Small Business Optimism

August 14 2018

Small business optimism rose 0.7  point in July to 107.9 which is 0.1 point below the survey’s record high level of 108.0 set back in July 1983.

NFIB President Juanita Duggan said,  “Small business owners are leading this economy and expressing optimism rivaling the highest levels in history.  Expansion continues to be a priority for small businesses who show no signs of slowing as they anticipate more sales and better business conditions.”

NFIB Chief Economist added that, “Small business owners have never been so optimistic for so long, helping to power the second longest expansion in history.  Despite challenges in finding qualified workers to fill a record number of job openings, they’re taking advantage of this economy and pursuing growth.”

In our opinion the economy is expected to expand at a rapid clip in coming months in response to a number of significant policy changes.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

The stock market has experienced a correction in the past several months but has rebounded and is now within an eyelash of its record high level.    Jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  The housing sector is continuing to climb.  And now investment spending has picked up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.6% in 2017 to 3.0% in 2018.  The core inflation will  climb from 1.8% in 2017 to 2.4% in 2018.  The Fed will continue to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to new record high levels.

Stephen Slifer


Charleston, SC

Rising to Potential

August 10, 2018

There seems to be an emerging consensus that the combination of tax cuts passed last year, and Trump’s deregulation initiative might boost investment spending and GDP growth for an extended period. That has been our position since the tax cuts were adopted and we are happy to see others shift into our camp. A protracted period of robust business investment will boost the economy’s potential growth rate which has already begun to climb.

Potential GDP growth can be estimated by adding the growth rate in the labor force to the growth rate in productivity. It is a measure of how quickly the economy can grow when it is at full employment.

From 2014 through 2016, investment spending slumped as the combination of a high corporate tax rate and a stifling regulatory environment choked off any desire by businesses to invest. But in the wake of the November 2016 election, the expectation of a lower corporate tax rate and deregulation lifted investment spending out of its slump. After three years of essentially no growth, nonresidential investment has surged to a 7.0% pace. It has been growing steadily at that rate for the past six quarters and is showing no sign of slowing down. Why? In an extremely tight labor market where skilled workers are in short supply, what do you as a business person do? You boost investment spending. You spend money on technology to help boost output to satisfy the elevated demand. Meanwhile, the surging U.S. stock market is attracting additional investment from overseas. Foreign firms are starting new businesses and hiring American workers. We anticipate 7.0% growth in investment spending to continue for the foreseeable future.

As investment spending surges it should be no surprise that productivity growth is picking up as well. If firms give their workers better technology and additional capital to do their jobs, they will produce more goods and services. The year-over-year increases in productivity have risen from essentially no growth a couple of years ago to steady gains of 1.3% since the beginning of last year. If investment spending continues to climb productivity growth will remain robust.

So, what does all this mean for the economy’s potential growth rate? It is climbing. Prior to the 2016 election potential growth was widely estimated to be 1.8% which consisted of 0.8% growth in the labor force plus 1.0% growth in productivity. We believe that with a faster pace of investment spending productivity growth will eventually climb from 1.0% to 2.0%, which when combined with 0.8% growth in labor force, should boost potential growth to 2.8% by the end of the decade. So how are we doing?

The labor force part of the equation seems to be picking up. After rising at an 0.8% rate for an extended period, labor force growth has quickened to 1.1% since the beginning of this year. Why? Faster growth in the economy has almost certainly encouraged some discouraged workers to re-join the labor force, and with enhanced opportunities from specific job-oriented programs offered by many technical colleges, and apprenticeship programs at a wide variety of manufacturing firms, those new labor force entrants have found jobs. As new educational opportunities continue to expand, it is not unreasonable to expect labor force growth of 1.1% to continue for several years.

Productivity growth has averaged 1.3% for the past two years. Given that we have already seen labor force growth pick up to 1.1% and productivity climb to 1.3%, potential GDP growth may have already picked up from 1.8% a couple of years ago to 2.4%.

Having said that, potential growth is a longer-term concept and what we have been talking about thus far is relatively short-term improvement. But the upswing in both labor force growth and productivity clearly suggest that potential growth is on the rise. At this juncture we have no reason to alter our view that potential growth will pick up to 2.8% by the end of this decade consisting of 1.0% growth in the labor force and 1.8% growth in productivity. It appears that we are already well on the way.

Stephen Slifer
Charleston, S.C.

Trade-Weighted Dollar

August 10, 2018

The trade-weighted value of the dollar, which represents the value of the dollar against the currencies of a broad group of U.S. trading partners has risen 4.3% from where it was at this time last year.

When you try to figure out the impact of currency movements on our trade, you have to weigh the movements depending upon the volume of trade we do with that country.  For example, our largest trading partners are:

With respect to the Chinese yuan the dollar has risen  about 2.4% over the past year.  A year ago one dollar would buy 6.67 yuan.  Today it buys 6.83 yuan.

The U.S. dollar has risen 3.1% versus the Canadian dollar during the past year.  For example, a year ago one U.S. dollar would purchase $1.26 Canadian dollars.  Today it will buy $1.30 Canadian dollars.

And against the Mexican peso the dollar has risen by 4.6% during the past year.  A year ago one dollar would buy 17.8 Mexican pesos.  Today it will buy 18.6 pesos.

The dollar has weakened by 0.1% against the yen during the course of the past year.  A year ago one dollar would buy 129.7 yen.  Today that same one dollar will buy 129.5  yen.

The dollar has risen 1.6% relative to the Euro during the past year.  A year ago one Euro cost $1.18.  Today one Euro costs $1.16.

Thus, the dollar has strengthened against almost every major currency during the course of the past year.  As a result, the trade-weighted value of the dollar, as noted earlier, has risen 4.3% during the past year.

Currency changes can affect the economy in several ways.   First, a rising dollar can reduce GDP growth of U.S. exports because U.S. goods are now more expensive for foreign purchasers to buy.  Similarly, a rising dollar can increase growth of imports because foreign goods are now cheaper for Americans to buy.  Fewer exports and more imports will reduce GDP growth that year.  A rising dollar can also reduce the rate of inflation in the U.S. because the prices of foreign goods are now lower.  A falling dollar will do the opposite — increased growth in exports, slower growth in imports, and a faster rate of inflation.

From October 2014 to January 2016 the dollar rose 22%.  That is a huge change.  The trade component subtracted about 0.5% from GDP growth in both 2014 and 2015.  A 4.3% increase in the dollar in 2018 is expected to reduce GDP growth this year by 0.3%.

The dollar’s recent strength is attributable to the widespread imposition of tariffs and sanctions by the U.S. which are believed to reduce growth in other countries more than they weaken growth in the U.S.  While changes in the value of the dollar relative to the currencies for our major trading partners have been noted above, it is also important to recognize that the combination of tariffs and sanctions has strengthened the dollar by 18.8% against the Brazilian real, and by 13.4% against the Russian ruble.  The emerging economies have been particularly hard hit.

Stephen Slifer


Charleston, SC

GDP, Inflation, and Interest Rate Forecasts

August 10, 2018

Second quarter GDP growth cane in at 4.1%.  First quarter growth was 2.2%.

Consumer spending rose 4.0% after having risen 0.5% in the first quarter and we expect it to rise 2.5% in 2018.  The consumer and corporate tax cuts should lift the stock market to yet another record high level by yearend.  The increase in stock prices and rising home prices are boosting household wealth.  The gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Consumer confidence is at a multi-year high.  Gas prices are expected to decline somewhat as the year progresses.  Interest rates remain low and are rising very slowly.

Investment spending climbed 7.3% in the second quarter after having jumped 11.5% in the first quarter.  However, investment spending was essentially unchanged for 2014-2016.  It appears that the prospect of corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden is giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% today to 2.8% or so in the years ahead.

The trade gap narrowed by $52.5 billion in the second quarter after having widened by $3.1 billion in the first quarter.  This means that the trade component added 1.2% to GDP growth in the second quarter.  We expect the trade component to add 0.3% to GDP growth in 2018.

Nonfarm inventories declined $27.9 billion in the second quarter and subtracted 1.0% from GDP growth in that quarter.  Inventories never decline by that magnitude.  Inventory restocking in the final two quarters of the year should boost GDP growth by as much in the second half of the year as they subtracted in Q2.

Expect GDP growth of 3.1% in 2018 after having registered growth of 2.5% in 2017 as investment spending surges.  We then expect it to climb by 2.9% in 2019.

The inflation rate is gradually beginning to climb.  The economy is at full employment which finally appears to be boosting wages.  Both manufacturing and non-manufacturing firms are paying high prices for their raw materials so commodity prices are on the rise.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  Thus inflation does, in fact, seem headed higher as the year progresses.   However, the pickup in inflation will be limited as internet price shopping will keep goods prices falling in 2018.  As a result we expect the core CPI to climb from  1.8% last year to 2.4% in 2018.  The overall CPI should also increase 2.4% this year.

Slightly faster inflation will push long-term interest rates higher with the 10-year hitting 3.2% by the end of 2018 and 3.9% in 2019.  Mortgage rates should climb to 4.8% by the end of this year and 5.5% by the end of 2019.

With GDP likely to expand in 2018 at a rate slightly faster than its current potential and inflation expected to rise slightly above its target, the Fed will feel compelled to continue on a path towards gradually higher interest rates.  It needs to do so to get itself into position to lower rates when the time comes, but it appears to have the luxury of taking its time.  We expect two more rate hikes in 2018 which would put the funds rate at 2.3% by the end of the year.  It should rise further to the 3.2% mark by the end of 2019.  The Fed will also continue to run off some of its security holdings throughout 2018 and 2019.

Stephen Slifer


Charleston, SC


Consumer Price Index

August 10, 2018

The CPI rose 0.2% in July after having risen 0.1% in June.  During the past year the CPI has risen 2.9%.  However, that out-sized yearly increase was boosted by huge increases in energy prices in the second half of last year.  The year-over-year increase overall should drop back to about 2.4% by the end of 2018.

Food prices rose 0.1% in July after having increased 0.2% in June.  Food prices have risen 1.4% in the past twelve months.

Energy prices fell 0.5% in July after having declined 0.3% in June.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 11.9%.  However, as noted earlier, energy prices rose sharply in the second half of last year, so the energy component should rise only about 3.0% in 2018.

The recent run-up in energy prices seems to reflect three factors.  First, GDP growth around the world has picked up which is bolstering the demand for both crude oil and gasoline.  Second, oil production in Venezuela has dropped to a multi-decade low level given the chaotic political environment in that country.  And third, the supply situation from Iran is now highly  uncertain given the likely re-imposition of sanctions against that country later this year.  As a result, the International Energy Administration projects that demand will exceed supply by about 0.5 million barrels per day between now and yearend.  As a result, oil prices recently climbed to about $74 per barrel.   However, U.S. production is surging.  It will climb about 15% this year and another 10% in 2019 which will make the U.S. the world’s largest oil-producing country.  At the same time OPEC is talking about gradually increasing its pace of production. A s a result, crude oil prices have dropped from $74 to about $68 per barrel currently and should continue to decline gradually between now and yearend.

Excluding food and energy the CPI rose 0.2% in each of the past three months .  Over the past year this so-called core rate of inflation has risen 2.3%.  Clearly, inflation is on the upswing.  The question is still one of degree.  We expect the core CPI will rise 2.4% for the year as a whole.

The most interesting development in the CPI in recent years has been the dichotomy between the prices of goods (excluding the volatile food and energy components) and services.  For example, in the past year prices for goods have fallen 0.1% while prices for services have risen 3.1%.

With respect to goods prices, it appears that the internet has played a big role in reducing the prices of many goods.  Shoppers can instantly check the price of any particular item across a wide array of online and brick and mortar stores.  If merchants do not match the lowest price available, they risk losing the sale.  Thus, they are constantly competing with the lowest price available on the internet.  Looking at specific items in the CPI we find that prices have been unchanged for almost every major category in the past year.  New cars have risen 0.2%, televisions have declined 18.2%, audio equipment has dropped 12.7%,  toys have fallen 0.8%, information technology commodities (personal computers, software, and telephones) have declined 5.9%.  Prices for all of these items are widely available on the internet and can be used as bargaining chips with a traditional brick and mortar retailers.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 3.1% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.5%.  This undoubtedly reflects the shortages of both rental properties and homeowner occupied housing. Indeed, the vacancy rate for rental property is at a 30-year low. This steady rise in the cost of shelter  will continue for some time to come and, unlike monthly blips in food or energy, it is unlikely to reverse itself any time soon.

While the CPI, both overall and the core rate, will have an upward bias  in the months ahead because of what has been happening to shelter prices, gradually rising labor costs, and rising producer prices.  But on the flip side, the internet is keeping a lid on the prices of goods.  We look for an increase of 2.4% in 2018.

The Fed’s preferred measure of inflation is not the CPI, but rather the personal consumption expenditures deflator, specifically the PCE deflator excluding the volatile food and energy components which is currently expanding at a 1.9% rate but is  likely to head higher.  The Fed has a 2.0% inflation target.  However, going forward we have to watch out for the steady increases in shelter which, as noted above, is being pushed higher by the shortage of both rental properties and homeowner-occupied housing.   Shelter is a long-lasting problem and given its 33% weighting in the CPI it will introduce an upward bias to inflation for some time to come.  We also have to watch rising medical costs(prescription drug prices in particular) and the impact of higher wages triggered by the shortages of available workers in the labor market.

Why the difference between the CPI and the personal consumption expenditures deflator?  The CPI is a pure measure of inflation.  It measures changes in prices of a fixed basket of goods and services each month.

The personal consumption expenditures deflator is a weighted measure of inflation.  If consumers feel less wealthy in some month and decide to purchase inexpensive margarine instead of pricy butter, a weighted measure of inflation will give more weight to the lower priced good and, all other things being unchanged, will actually register a decline in that month.  Thus, what the deflator measures is a combination of both changes in prices and changes in consumer behavior.

As we see it, inflation is a measure of price change (the CPI).  It is not a mixture of price changes and changes in consumer behavior (the PCE deflator).  The core CPI currently is at 2.3%. We expect it to continue to climb at a 2.4% rate through yearend.  And because the core PCE increases at a rate roughly 0.5% slower than the core CPI, the core PCE should increase about 2.1% in 2018.  Both rates are beginning to trend higher.

Keep in mind that real short-term interest rates are negative.  With the funds rate today at 1.9% and the year-over-year increase in the CPI at 2.9% the “real” or inflation-adjusted funds rate is negative 1.0%.  Over the past 57 years that “real” rate has averaged about plus 1.0% which should be regarded as a “neutral” real rate.  Given a likely pickup in GDP growth this year and next and a gradual increase in the inflation rate, we regard a negative real interest rate inappropriate in today’s world.  The Fed should continue to push rates higher and gradually run off some of its longer term securities.

Stephen Slifer


Charleston, SC

Producer Price Index

August 9, 2018

The Producer Price Index for final demand – intermediate demand  includes producer prices for goods, as well as prices for construction, services, government purchases, and exports and covers over 75% of domestic production.

Producer prices for final demand were unchanged in July after having risen  0.3% in June.  During the past year this inflation measure (the red line) has risen 3.2%.  The PPI has been moving steadily higher.  In July falling prices for food and energy countered a small increase in the so-called core PPI.

Excluding food and energy producer final demand prices rose 0.1% in July after having risen 0.3% in both May and June.  They have risen 2.7% since April of last year (the pink line).  This series has been steadily accelerating for the past two years.  Inflationary pressures are gradually re-surfacing.

This overall index can be split apart between goods prices and prices for services.

The PPI for final demand of goods rose 0.1% in both June and July. These prices have now risen 4.4% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods has risen 0.3% in each of the past five months.  During the past year the core PPI for goods (the light green line) has risen 2.8% (right scale).

Food prices fell 0.1% in July after having declined 1.1% in June.  Food prices are always volatile.  They can fall sharply for a few months, but then reverse direction quickly.  Over the past year food prices have declined 1.0%.

Energy prices dropped by 0.5% in July after having risen 0.8% in June.  Energy prices have risen 16.8% in the past year.  These prices are also very volatile but the recent upswing seems to reflect a significant quickening of GDP growth around the globe, the cutback in global supply by OPEC, and a state of complete chaos for oil production in Venezuela.  However, U.S. oil output is now surging and OPEC is talking about an increase in its crude oil output.  Our sense is that the recent surge in energy prices will be at least be partially reversed between now and yearend.

The PPI for final demand of services declined 0.1% in July after having risen 0.4% in June.  This series has risen 2.6% over the course of the past year (left scale).   The July drop was caused by an 0.8% decline in the trade services category which largely reflects the change in margins received by wholesalers and retailers (apparel, jewelry, and footwear in particular).  The PPI for final demand of services excluding trade and transportation (the light blue line) increased 0.3% in both June and July.  It has climbed 2.4% during the past year.  This series, like the overall index, has been gradually accelerating for some time.

The recent increases in producer prices were foreshadowed by the results of the Institute for Supply Management’s series on prices paid by both manufacturing and non-manufacturing firms.  In the case of manufacturing firms the chart looks like the one below.  Price pressure were steadily building for six consecutive months.  Specifically, the price component rose steadily from 64.8 in November of last year to 79.5 in May.  The fact that every month was above 50.0 meant that prices producers were paying increased every single month.  Given that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  In June and July this series actually declined from 79.5 in May to 73.2 by July.  This means that prices continued to climb in those two months, but the rate of increase was less than in other recent months.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

And for non-manufacturing firms it looks like this.  The conclusion is largely the same.

In both cases, the run-up in prices was widespread.  It was not just energy prices.  Once again, we believe this escalation in the prices that producers are having to pay reflects stronger GDP growth around the globe.

Because the PPI measures the cost of materials for manufacturers, it is frequently believed to be a leading indicator of what might happen to consumer prices at a somewhat later date.   However, that connection is very loose.

It is important to remember that labor costs represent about two-thirds of the price of a product while materials account for the remaining one-third.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 3.9 the labor market is beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation should be countered by an increase in productivity.  Nevertheless, the tighter labor market should exert at least moderate upward pressure on the inflation rate.

Some upward pressure on labor costs, rents, and the cost of materials will put upward pressure on inflation.  We expect the core CPI to increase 2.2% in 2018 after having risen 1.8% in 2017.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

August 9, 2018

Initial unemployment claims fell 6 thousand in the week ending August 4 to 213 thousand after  having risen 2 thousand in the previous week.  The 4-week moving average declined 1 thousand to 214 thousand.  The average of 214 thousand on May 12  (actually 213,500) was the lowest level for this average since December 13, 1969 (when it was 211 thousand).

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 214 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 190 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.  This series is a bit higher than it was going into the recession so they might have some 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 April level for the youth unemployment rate today was 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 rose 29 thousand in the week ending July 28 to 1,755 thousand.  The 4-week moving average rose 3 thousand to 1,745 thousand.  The June 16 level of 1,720 was the lowest 4-week average since December 8, 1973 when it was 1,716 thousand.  The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.8%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will continue to decline slowly.

Stephen Slifer


Charleston, SC

Gasoline Prices

August 8, 2018

Gasoline prices at the retail level were unchanged in the week ending August 6 at $2.85 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.60. The Department of Energy expects national gasoline prices to average $2.76 this year.  They are projected to peak right about now and then decline to $2.65 by the end of the year. 

Spot prices for gasoline had been on a steady upswing for the past several  months.  However, spot prices should soon begin to fall if crude prices begin to decline, which should translate into slightly lower pump prices in the weeks ahead.

Crude oil prices recently jumped to $74 per gallon.  The peak price occurred instantly after Trump announced sanctions on Iranian oil exports.  However, crude prices plunged about $5.00 per barrel the past couple of weeks in response to several factors —  talk about OPEC and Russia increasing their crude oil output, an increase in production in the U.S. in the most recent week, a potential tapping of the Strategic Petroleum Reserve later this year, and the possibility of slower global growth as trade flows subside in response to escalating tariffs.  The Energy Information Agency predicts that crude prices will average $64.53 in 2018.  If that is the case, oil prices should continue to decline gradually in the second half of the year.

The number of oil rigs in  operation has  rebounded sharply in recent months to 1,059 thousand.  Thus,  higher crude oil prices are encouraging drillers to accelerate the pace of production.  If crude prices remain above $60 per barrel this year or higher, we should expect the number of oil rigs in operation, and production, to continue to climb.

Production has surged to 10,900 thousand barrels per day.  The Department of Energy expects production to average 10.8 million barrels this year but climb further to 11.8 million barrels in 2019.

To put those production levels in perspective, keep in mind that if U.S. crude oil production picks up as expected the U.S. will become the world’s largest oil producer by the end of this year.

How can the number of rigs rise slowly but production surge?  Easy.  Technology in the oil sector is increasing which allows producers to boost production while simultaneously shutting down wells.  A few years ago some frackers could not drill profitably unless crude oil prices were about $65 per barrel.  Today that number has declined to about $35 per barrel.  Six months from now that number will be lower still.

Oil inventories fell quickly for most of last year.    OPEC output was reduced at the same time that global demand picked up sharply.  While crude inventories have been sliding for a year, at 1,071 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,055 million barrels.  However, with demand continuing to slightly exceed supply for the next several months, stocks may well decline slightly further in the near term.

The International Energy Agency in Paris (IEA) produces some estimates of global demand and supply.  A couple of months ago its estimate had supply and demand relatively in balance between now and yearend.  But now,as shown in the chart below, demand picked up somewhat in recent months and while supply edged lower as production constraints have restrained output.  As a result the IEA now estimates that demand will exceed supply by about 0.2 million barrels per day between now and yearend. The IEA noted that Venezuela has cut production there to a multi-decade low ,and now there is the prospect of further a reduction in global oil supply by yearend stemming from curtailment of Iranian oil exports.

OPEC has chosen to boost output somewhat to counter the shortfall from Venezuela and Iran.  At the same time U.S. production should continue to climb.  And oil demand might shrink if global GDP growth slows in response to the imposition of higher tariffs on imported goods around the world.  That would put demand and supply roughly in balance between now and yearend and allow the price of crude oil to decline somewhat.

Stephen Slifer


Charleston, SC*

Car and Truck Sales

August 3, 2018

Unit car and truck sales fell 3.1% in July to 16.68 million units after having risen 0.1% in June.  A 16.8 million pace is moderate and is essentially the same as it was at this time last year.  Car sales have leveled off in the past year or so and auto industry experts think this  modest pace will continue for the rest of this year.  They talk about the fact that the period of ultra-low interest rates has ended.  The Fed is raising short-term interest rates and is expected to boost rates two more times later this year.  They talk about how automobile quality has improved so that consumers are holding onto their vehicles for longer periods of time.  And now they talk about higher prices for gasoline which could dampen growth.  All of those are fair points.  However, we expect car sales to continue to climb slowly for some time to come for a couple of reasons.

First, all measures of consumer confidence are close to their highest levels thus far in the business cycle.

Second, real, disposable consumer income (what is left after taxes and inflation) is rising at a solid pace as jobs growth continues apace, and as the tax cuts began to boost after tax income

Third, the stock market is in the midst of a correction with the S&P 500 index,  the Russell 2000 and the NASDAQ allessentially at record high levels.  That is an indicator of investor sentiment.  In addition, a rising stock market also boosts consumer net worth.  With corporations destined to benefits from tax cuts this year, interest rates still low, and the consumer spending at a solid 2.5% pace, corporate earnings should continue to rise.  We anticipate a 10% increase in earnings in 2018 which should put the stock market at an even higher record level by yearend.

Fourth home sales remain at s solid pace.  Because car and home sales are the two biggest ticket items in a consumers budget, it is not surprising that a change in trend will be evident in these two categories first.  If home sales seem pretty solid it would be surprising if car sales did not follow suit.

It is true that gasoline prices have risen, but the Energy Information Institute expects gasoline prices to peak at about $2.95 per gallon by the end of June as the summer driving season reaches its peak and then decline slowly in the second half of the year.

Finally, keep in mind that consumers have paid down tons of debt and are now in a position to spend.  Jobs are climbing at a pace of 190 thousand per month.  The unemployment rate has fallen to a level that is far below the full employment mark.  Consumers are benefiting from stable and still low gasoline prices. For all of these reasons we look for  3.1% GDP growth in 2018 and car sales to remain healthy.

Stephen Slifer


Charleston, SC

Consumer Confidence

August 1, 2018

The Conference Board reported that consumer confidence rose 0.3 point in July to 127.4 after having fallen 1.7 points in June.   The February level of 130.0 was an 18-year high (highest since November 2000 — 132.6).

Lynn Franco, Director of Economic Indicators at the Conference Board said,  “Consumers’ assessment of present-day conditions improved, suggesting that economic growth is still strong. However, while expectations continue to reflect optimism in the short-term economic outlook, back-to-back declines suggest consumers do not foresee growth accelerating.”

Confidence data reported by the Conference Board are roughly matched by the University of Michigan’s series on consumer sentiment.   As shown in the chart below, trends in the two series are identical but there can be month-to-month deviations.   Any way you slice it, confidence remains at levels not seen since the early 2000’s.

The consumer should continue to provide support for overall GDP growth in 2018.  The S&P 500 stock market index, the Russell 2000 and the NASDAQ Composite are all at essentially record high levels.  Home prices continue to climb.  Consumer net worth is at a record high level and rising.  Jobs are rising by about 190 thousand per month.  The unemployment rate is falling slowly. The consumer has little debt.  Interest rates remain low.  In addition, consumers will get a cut in income tax rates in 2018.  Clearly, the consumer’s optimism is valid.

We anticipate GDP growth of 3.0% in 2018.

Stephen Slifer


Charleston, SC