Monday, 16 of July of 2018

Economics. Explained.  

There is No “Truth” in Economics

July 13, 2018

Two weeks from today we will get our first look at second quarter GDP growth.  It appears to be somewhere around the 4.0% mark.  We can see the headlines already. “Economy Gathers Momentum in the Second Quarter”, “Inflation Soon to Rise”, “Rapid Growth Accelerates Path Towards Higher Interest Rates”.  While this is not exactly “fake news”, it is important to understand that there is no “truth” in economics.  Every economic indicator we see is an estimate to some extent despite the best efforts of the number crunchers at the Commerce Department, the Census Bureau, and the Bureau of Labor Statistics.  These dedicated people do an outstanding job of providing us with as accurate an estimate as they can.  But in the end, much of what we see is estimated.   Thus, it is imperative for us to view each economic indicator with a healthy degree of skepticism.

The press dutifully reports the published data and the big numbers – GDP, employment, retail sales, and the CPI get page one headlines.  But their job is to get you to buy their paper or watch their television broadcast.  They like to embellish the significance of the latest indicator.  Frequently, the headline number is misleading.  The caveats are buried on page 4.  Then, the broadcast media will get the talking heads to provide “color”.  They first one will support the strength (or weakness) of that number.  The next one will have exactly the opposite view.  All of that is by design and represents their attempt to be “unbiased”.  How in the world are you supposed to make sense of all that?  You need to know what is going on, but you have jobs and cannot spend your day poring over economic statistics.  You rely on economists, like us, to provide the real story.  But even then, you will get different stories depending upon exactly who you ask.  Why is all this so difficult?  Largely because economic analysis and forecasting is much more art than science which means that, like art, beauty is often in the eye of the beholder.

GDP.  Is GDP the best measure of the pace of economic activity?  A recent letter to the editor in The Wall Street Journal discussed the concept of Gross Domestic Income (GDI).  It is an alternative measure of economic activity.  Think of it this way.  You can measure GDP from the income side or the production side.    If we live on an island and have one firm that manufacturers refrigerators.  You could ask consumers how many refrigerators they bought last quarter.  We might say we bought 10 at $1,000 apiece.  Hence, our GDP would be $10,000.  Or you could go to the manufacturer and he would tell you that he produced 10 of them for $1,000 apiece which would make GDP $10,000.  You get the same answer.  But only in theory.  It does not work in the real world.  Why?  The real world is messy.  The manufacturer may have produced some refrigerators and kept them in inventory.  He may have manufactured additional refrigerators and shipped some overseas.  We may have bought some foreign-made refrigerators.  And in the real world we simply do not have the ability or the money to ask every consumer or every businessman that question.  Furthermore, some data is only available with a considerable lag.  Hence, the number crunchers are forced to make estimates based on the data that have been reported.

For example, in the first quarter after an initial estimate and two revisions, GDP growth was reported to be 2.0%.  Relatively anemic.  But GDI grew 3.6%.  Steamy.  So, which is correct?  Nobody knows, but it obviously makes a difference.  The Commerce Department also publishes an average of the two which it believes is the best estimate of all.  But it is hard enough to dissect the published GDP figure and all its components.  How in the world are we going to interpret three different estimates of the same thing?  Economists are fond of saying, “On the one hand” followed by “on the other hand”.  Perhaps you can now understand why they might want to do that.

Retail sales.  Then there is the challenge of adjusting the data for normal seasonal movements.  Department and general merchandise stores make most of their sales for the year during the holiday period.  For example, the Census Bureau expects department store sales to jump 75% between October and December, but then decline by a similar amount in January.  It makes no sense to publish changes of that magnitude, so Census tries to adjust for “normal” seasonal movements.  But if our spending habits change ever so slightly from one year to the next, it means that the published data can show some dramatic changes in the November through January period.  Every economic indicator is adjusted for this seasonality, but the statistical method of doing so is essentially an educated guess based on history.

Employment.  Another favorite release is the monthly employment report.  But there are two measures of employment.  One is known as “payroll employment” which gets the most attention.  There is a separate measure of employment that is calculated separately as part of the unemployment rate.  It is known as “civilian employment”.  The first comes from asking a sample of employers how many people were on their payroll last month.  The other comes from an entirely different survey conducted by BLS employees who knock on people’s doors and ask if they had a job last month. The answers can be wildly different.  A classic example occurred in February of this year.  Payroll employment rose 324 thousand in February.  Civilian employment rose an astonishing 785 thousand.  Both strong numbers, but one was more than double the other.    The numbers can vary widely from month to month but, over time, they grow at roughly comparable rates.

So, how are YOU supposed to interpret all this?  First, look beyond the headline number and focus instead on the most recent three months to get some idea if the trend is changing.

Second, look at other economic indicators.  If second quarter GDP growth is strong, is that strength confirmed by other economic indicators?  There are roughly 25 different indicators released each month.  If only one is strong beware of interpreting that indicator too literally.  But if 15 or 20 of the 25 indicators show strength, you can be reasonably certain that you are getting an accurate assessment of what is happening.

Third, figure out what Fed officials are saying.  Why?  Because they have 1,000 economists who dig more deeply into the numbers than any of the rest of us could possibly do.  Having spent some time in the Fed system, I have found Fed economists to be some of the smartest people in the business.  Perhaps even more important, it is their analysis that really matters.  The FOMC members will make their decision about interest rates based on the Board staff’s interpretation of what is going on.  Your view and my view are irrelevant.

Fourth, listen to your favorite group of economists.  Why?  Because we will delve more deeply into the numbers than you can do on your own.   We hope we are a part of that group.  But, the unfortunate reality is that economists can read the same report but reach widely divergent conclusions.

Finally, put all this information together and draw your own conclusions.  After all, it is your business to run, your investment portfolio to manage.  You are the only one that can make those decisions.  Become an economist.

You may have hated economics in school because it was so theoretical.  But, in my experience, economics is about 20% theory and 80% common sense.  And the fact of the matter is that you already are an economist – you simply do not think of yourself as one. You talk knowledgably all day long to your co-workers, your boss, your employees, your friends, and your spouse about the economy.  You know firsthand what sales in your firm are doing, you talk about the stock market, you know whether your firm is hiring or laying off workers, you know whether you plan to boost investment spending, you can sense when the inflation rate is picking up or slowing down, you have a good idea what interest rates are likely to do.  That makes you an economist.

Want to know what is happening?  Look in front of your own nose.

Stephen Slifer


Charleston, S.C.

GDP, Inflation, and Interest Rate Forecasts

July 13, 2018

First quarter GDP growth initially came in at 2.3%.  The first revision lowered this by 0.1% to 2.2%.  And the final revision took it down slightly further to 2.0%.  We expect GDP growth to rebound to 3.5% in the second quarter.

Consumer spending rose 0.9% but that follows a steamy 4.0% growth rate in the fourth quarter.  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 jumped 10.4% in the first quarter after growing 6.8% in the fourth quarter.  However, investment spending was essentially unchanged for the previous three years.  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 widened by $2.9 billion in the first quarter after having widened by $56.4 billion in the fourth quarter.  We expect the trade component to have no impact on GDP growth in 2018.

Expect GDP growth of 3.0% in 2018 after having registered growth of 2.6% in 2017 as investment spending surges.  We then expect it to climb at the same 3.0% rate 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 2.2% in 2018.  The recent increase in oil prices should cause the overall CPI to increase 2.4% this year.

Slightly faster inflation will push long-term interest rates higher with the 10-year hitting 3.1% by the end of 2018 and 3.8% 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 Sentiment

July 13, 2018

The preliminary reading for consumer sentiment for July fell 1.1 points to 97.1 after having risen 0.2 point in June.  March’s level of 101.4 was the highest level of sentiment since January 2004.  Thus, it remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, ” So far, the strength in jobs and incomes has overcome higher inflation and interest rates. The darkening cloud on the horizon, however, is due to rising concerns about the potential negative impact of tariffs on the domestic economy.”

Given the tax cuts we expect GDP growth to climb from 2.6% in 2017 to 3.0% in 2018.  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 3.5% in 2018 vs. 1.8% last year. The core inflation rate (excluding the volatile food and energy components) rose 1.8% in 2017 but should climb by 2.2% in 2018.  Such a scenario would keep the Fed on track for the very gradual increases in interest rates that it has noted previously.  Specifically, we expect the funds rate to be 2.2% by the end of 2018.

The June changes in both the current conditions and expectations components were statistically insignificant.

Consumer expectations for six months was essentially unchanged at 86.4.

Consumers’ assessment of current conditions fell 2.6 points from 116.5 to 113.9.

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 2018.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

July 12, 2018

Initial unemployment claims fell 18 thousand in the week ending July 7 to 214 thousand after  having risen 4 thousand in the previous week.  The 4-week moving average declined 2 thousand to 223 thousand.  The average of 214 thousand on May 12 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 223 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 declined 3 thousand in the week ending June 30 to 1,739 thousand.  The 4-week moving average rose 10 thousand to 1,729 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 2.5%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will continue to decline slowly.

Stephen Slifer


Charleston, SC

Consumer Price Index

July 12, 2018

The CPI rose 0.1% in June after having risen 0.2% in both March and April.  During the past year the CPI has risen 2.8%.

Food prices rose 0.2% in June after having been unchanged in May.  Food prices have risen 1.5% in the past twelve months.

Energy prices fell 0.3% in June after having risen 0.3% in May.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 11.7%.

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 $71 per barrel currently and should continue to decline gradually between now and yearend.

Excluding food and energy the CPI rose 0.2% in both May and June .  Over the past year this so-called core rate of inflation has risen 2.2%.  Clearly, inflation is on the upswing.  The question is still one of degree..

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 0.7% while prices for services have risen 3.0%.

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 fallen for almost every major category in the past year.  New cars have fallen 0.5%, televisions 19.1%, audio equipment 14.5%,  toys 10.2%, information technology commodities (personal computers, software, and telephones) 4.2%.  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 3.0% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.4%.  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.  So while the CPI should edge higher in 2018, it is unlikely to explode.

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 2.0% 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 2.2%. We expect it to continue to climb at a 2.2% 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 2.0% 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 1.8% and the year-over-year increase in the CPI at 2.8% 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

July 11, 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 rose 0.3% in June after having jumped 0.5% in May as energy prices surged.  During the past year this inflation measure (the red line) has risen 3.3%.  The PPI has been moving steadily higher.

Excluding food and energy producer final demand prices rose 0.3% in both May and June.  They have risen 2.8% 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 June after having jumped jumped 1.0% in May. These prices have now risen 4.3% 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 four months.  During the past year the core PPI for goods (the light green line) has risen 2.7% (right scale).

Food prices fell 1.1% in June after having risen 0.1% in May.  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 0.9%.

Energy prices rose 0.8% in June after having surged 4.6% in May.  Energy prices have risen 17.0% 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 rose 0.4% in June after having climbed 0.3% in May.  This series has risen 2.7% over the course of the past year (left scale).   Changes in this component largely reflect a 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 June after having been unchanged in May.  It has climbed 2.3% 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.  The fact that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  In June this series actually declined from 79.5 in May to 76.8 in June.  This means that prices continued to climb in June, but that the rate of increase was a shade 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 4.0%, 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 2.3% in 2018 after having risen 1.8% in 2017.

Stephen Slifer


Charleston, SC

Gasoline Prices

July 11, 2018


Gasoline prices at the retail level rose $0.02 in the week ending July 9 to 2.86 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.61. 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 have been on a steady upswing for the past several  months.  However, talk about OPEC increasing its crude oil output caused gasoline prices to decline about 9.5% since reaching a peak of $2.20 in late May.   But now, just days after the OPEC announcement the State Department sent both crude and gas prices, soaring by announcing it aims to eliminate most of Iran’s oil exports by the end of this year.

Crude oil prices recently jumped to $74 per gallon.  The recent run-up occurred instantly after Trump announced sanctions on Iranian oil exports.  The Energy Information Agency predicts that crude prices will average $64.53 in 2018.  If that is the case, oil prices should decline gradually in the second half of the year.

The number of oil rigs in service  However, the number of 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 1,076 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 “chronic mismanagement” in Venezuela has cut production there to a multi-decade low,and Iranian production could slip further as a result of the U.S. sanctions.  And now there is the prospect of further curtailment 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.  That would put demand in supply roughly in balance between now and yearend and allow the price of crude oil to decline somewhat.

Stephen Slifer


Charleston, SC*

Unemployment vs. Job Openings

July 10, 2018

This release is generally rather obscure.  But Former Fed Chairwoman Janet Yellen often referred to data from it so its importance has increased in recent years.

The  Labor Department reported that job openings fell 3.0% in May to 6,638 thousand from a record high level of 6,840 thousand in April.  It is worth noting that there are more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.1 million people unemployed in May.

As shown in the chart below, there are currently 0.9 unemployed workers for every available job.   Prior to the recession this ratio stood at 1.7 so the labor market (at least by this measure) is in far better shape now than it was prior to the recession.

In  this same report the Labor Department indicated that the quit rate in May rose 0.1 to 2.4 which is the highest reading thus far in the business cycle.   This is a measure of the number of people that voluntarily quit their jobs in that  month.  During the height of the recession very few people were voluntarily quitting because jobs were scarce.  So the more this series rises, the more comfortable workers are in leaving their current job to seek another one.  The quit rate today is 2.4.  At the beginning of the recession it was at 2.0 and the record high level for this series was 2.6 back in January 2001.

There is one other point that should be made about this report.  Janet Yellen used to  claim that there were a large number of unemployed workers just waiting for jobs if only the economy were to grow fast enough.  She is assuming that these people have the skills and are qualified for employment.  We tend to disagree.  There are plenty of job openings out there.  What is not happening as quickly is hiring.  Take a look at the chart below.  Job openings (the green line) have been rising rapidly (and are far higher now than they were prior to the recession); hires (the red line) have been rising less rapidly.

Indeed, if one looks at the ratio of openings to hires the reality is that this ratio  has not been higher at any point in time since this series began in 2000.  There are plenty of jobs out there, but employers are having a hard time filling them.  Why is that?

A couple of thoughts come to mind.  First and foremost, many unemployed workers simply do not have the skills required for the jobs available.  If they did, why aren’t they being hired?  Why aren’t some current part time workers stepping into the void for those full time positions? Why haven’t discouraged workers begun to seek employment with so many jobs available?  Why haven’t long-term unemployed workers bothered to go back to school and acquire the skills that are necessary to land a  job?

Or perhaps many of these people flunk the drug tests.  They might not be qualified for employment for a variety of possible reasons.

Perhaps also some people in this group find the combination of unemployment benefits and/or welfare benefits sufficiently attractive that there is little incentive to take a full time job when you can sit at home do nothing and make almost as much.

Whatever the case, it appears that the decline in the unemployment rate in the past couple of years is not simply a reflection of workers dropping out of the labor force.  Jobs are plentiful and the only reason the unemployment rate is not falling faster is because the remaining unemployed/discouraged/part time workers do not have the skills required by employers today, flunk the drug tests, or are unwilling to take the jobs that are available.

Stephen Slifer


Charleston, SC

Small Business Optimism

July 10, 2018


Small business optimism declined 0.6 point in June to 107.2 but the May level of  107.8 was the record high level for this series.

NFIB President Juanita Duggan said,  “Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits.  The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow.”  Buried in the details of the report were such milestones as compensation hitting a 45-year high record in May, positive earnings trends reached a survey high, positive sales trends are the highest since 1995, and expansion plans are the most robust in survey history.  It does not get any better than that.

NFIB Chief Economist added that, “Small business owners are already seeing their bottom lines grow due to strong sales and regulatory relief and the new tax law is expected to push profits higher as the year progresses.”

In our opinion the economy is expected to gather momentum 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 but has rebounded and is now only 3% below 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 prior to yearend.

Stephen Slifer


Charleston, SC

Good Policy Will Keep the Economy Humming

July 6, 2018

The economic expansion just celebrated its ninth birthday and is far healthier today than it has been in some time.  It has shrugged off two years of stagnation and is chugging along at nearly a 3.0% clip.  At this time next year, it will enter the history books as the longest U.S. expansion on record.  But the naysayers continue to see a dark side.  They believe that the recent stimulus from tax cuts and deregulation will prove to be temporary.  Furthermore, there is a widespread consensus that the next recession will occur in 2020.  Not so fast.  As we see it, good policy and rapid technological advancements can keep the economy humming for some time to come.  While it will eventually end, the end is not yet in sight.

It does not always feel like it, but policy makers have gotten better at extending periods of growth.  Between 1850 and 1900 a typical business cycle lasted four years – two years of expansion followed by two years of recession.  But in the eleven business cycles since the end of World War II the average expansion now lasts six years followed by a one-year recession.  Expansions have gotten far longer, and recessions do not last nearly as long.  That was not an accident.  Why?  Good policy.

In the past 50 years economists’ understanding of macroeconomic policy has gotten better.  Policy makers at the Fed have gotten smarter.  They seem better able to determine the level of interest rates required to keep the economy on track.  Fiscal policy has also improved, and economists better understand the impact of government spending, tax, and trade policies on the economy.  Good policy can extend the life expectancy of an expansion.

For example, not long ago the unemployment rate was 5.0%.  Most economists thought that the labor market had reached full employment and worried that wage pressures and inflation would soon rise.  But Janet Yellen and her colleagues at the Fed argued that there were still many “underemployed” workers who wanted full time jobs but could only get part-time employment.  Hence, the Fed concluded that the economy was not yet at full employment and it elected to raise rates very cautiously for the next 15 months.  The Fed got it right.  Smart implementation of monetary policy prevented the Fed from prematurely raising rates and inadvertently choking off growth.

In 2015 and 2016 the economy grew at rates of 2.0% and 1.8%, respectively.  Business leaders were frustrated by the political gridlock in Washington.  They lacked confidence and chose not to deploy their vast cash holdings on new technology or to refurbish the assembly line.  Recognizing the lack of investment, Trump campaigned on a promise to lower taxes and significantly reduce the then stifling regulatory burden.  He has done both and suddenly investment spending has picked up to a double-digit pace and GDP growth accelerated to a 2.6% pace last year and is expected to reach 3.0% this year which would be the fastest annual growth rate since 2005.  Thus, good fiscal policy has provided a welcome boost to the pace of economic activity.

However, most economists believe the recent stimulus will prove to be temporary and within a year or two, growth will revert to its old 2.0% potential growth path.  But why should that be the case?  A lower corporate tax rate and the ability to repatriate money from overseas should stimulate investment for many more years.  Businesses should be further encouraged to spend if Trump continues to eliminate unnecessary, overlapping, and confusing Federal regulations.   And rapid technological advancements in artificial intelligence, autonomous vehicles, personal robots, 3-D printing, nanotechnology, and genome research will keep businesses spending for the foreseeable future, and that type of investment will boost productivity growth.  Thus, we believe that potential growth will pick up from 1.8% in the 2000’s to 2.8% by the end of this decade.  There is no reason that today’s surge in investment spending should be regarded as a short-lived event.

Furthermore, what is magic about this expansion reaching the 10-year old mark and becoming the longest recession on record?  The 120-month long expansion during the 1990’s surpassed the previous record (of the 1960’s) by 14 months.  Why can’t the current expansion do the same?  Expansions do not die from “old age”.  They end because of policy mistakes.

Many think that a 10-year is expansion is a big deal.  Certainly by U.S. standards that is the case.  But the Australian economy just completed a world record 27th year of expansion.   Why can’t the U.S. duplicate that astonishing achievement?  Suddenly a 10-year expansion seems modest.

Stephen Slifer


Charleston, S.C.