Friday, 19 of January of 2018

Economics. Explained.  

Gasoline Prices

January 18, 2018

Gasoline prices at the retail level rose $0.04 in the week ending January 15 to $2.56.  In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.31. The Department of Energy expects national gasoline prices to average $2.57 this year which is almost exactly where they are currently.

Crude oil prices are currently about $64.00.  The Energy Information Agency predicts that crude prices will average $55.33 in 2018.  As crude oil and gas prices have risen underlying inflationary pressures have become more apparent.  At the same time producers — both manufacturing and non-manufacturing firms — are having to pay considerably higher prices for their inputs.  Wage pressures are beginning to escalate.  It appears that some modest upward pressure on the inflation rate has finally begin to emerge.

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 939 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 was 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.  Production this past week was 9,750 thousand barrels per day which surpasses the previous record pace of production of 9,610 barrels per day set in 1970.  The Department of Energy expects production to average 10.3 million barrels this year and 11.1 million barrels in 2019.

How can the number of rigs go down but production be relatively steady?  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 about $48 per barrel.  Six months from now that number will be lower still.


Oil inventories have been falling quickly for most of this year.    OPEC output has been reduced at the same time that global demand has picked up sharply.  While crude inventories have been sliding for a year, at 1.077 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,058 million barrels.  Hopefully, both the inventory drop and the price increases are coming to an end.



The International Energy Agency produces some estimates of global demand and supply.  Note how demand picked up sharply in the second quarter of last year (the yellow line) and continued to climb through the end of last year.  It should climb further throughout 2018..  Note also that global demand far exceeded supply (the blue bars) for most of last year.  However the IEA believes that demand and supply are now roughly in balance..  If prices remain close to their current level, U.S. producers will continue to re-open closed wells and, at some point, OPEC will begin to boost its output.  As a result, oil prices should soon level off and eventually begin to decline.


Stephen Slifer


Charleston, SC

Housing Starts

January 18, 2018

Housing starts fell 8.2% in December to 1,192 thousand.  However, that follows a 2.2% increase in November and a surge of 8.4% in October.  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 1,251 thousand.

Both new and existing home sales continue to trend upward but they are being constrained by a lack of supply.   Thus, the demand for housing remains robust.

Builders remain enthusiastic in part because they see traffic through the model homes climbing at a steady rate.

Mortgage rates are at 4.0% which is quite low by any historical standard.

The average home stays on the market for about 40 days currently which is down from 90 days a few years ago.  One-half of the homes coming on the market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

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 1.9% pace.  That is not particularly robust, but disposable income does hit slack periods from time to time and then rebounds.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 160.0 the index  indicates that a median-income buyer has 60.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of skilled labor.  Construction employment is growing by about 15 thousand per month.  Slow, but steady.

As one might expect there is a fairly 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 1.25 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.

Another 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.  And because housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.35 million in 2018.

What is interesting is that beginning in mid-2016 single family starts have begun to climb while multi-family buildings such as apartments have been slowing down.  It appears that many of the millennials who chose to rent for the last decade are getting older, perhaps starting families, and are now choosing to purchase a single family house.  In the past year single family starts have risen 6.8% while multi-family units have declined by 13.8%.

As a result, multi-family construction as a percent of the total has slipped from 37% in mid-2015 to 29%.

Building permits fell 0.1% in December after having declined 1.0% in November.  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 1,307  thousand which is the fastest pace thus far in the business cycle and 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 1,307 thousand, housing starts will soon surpass the 1.3 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

January 17, 2018

Homebuilder confidence fell 2 points in January to 72 after having climbed 5 points in December.  The December level of 74 was the highest for this series since July 1999 over 18 years ago.

NAHB Chairman Randy Noel, a homebuilder from LaPlace, Louisiana, said, “Builders are confident that changes to the tax code will promote the small business sector and boost broader economic growth.  Our members are excited about the year ahead, even as they continue to face building material price increases and shortages of labor and lots.”

Traffic through the model homes fell 4 points in January to 54 after having surged 8 points in December to 58 which was by far the highest level thus far in the business cycle.  Despite the January setback high traffic volume and is a sign that buyer demand is on the rise.

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 1.25 million pace.  They should continue to climb gradually in the months ahead and reach 1.35 million by the end of 2018.

Stephen Slifer


Charleston, SC

Industrial Production

January 17, 2018

Industrial production jumped 0.9% in December after having declined 0.1% in November.   During the past year industrial production has risen 3.6%.  It is gradually gathering momentum.  The swings in November and December were largely weather related.   Relatively warm November weather caused utility output to decline 3.1% in that month.  In December a brutal cold snap in most of the country caused utility output to surge by 5.6%.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) rose 0.1% in December after having climbed 0.3% in November. During the past year  factory output has risen 2.4% (red line, right scale).  The 2.5% year-over-year increase for November was the largest 12-month increase since July 2014.

Auto output rose 2.0% in December after having declined 0.5% in November.    During the past year motor vehicle production has risen 0.4%.  Industrial production ex motor vehicles has risen 3.8% in the past year.  Thus, factory output has been climbing, but its rate of increase in the past year has been curtailed by a  slowdown in the sales and production of motor vehicles.

Mining (14%) output jumped 1.6% in December after having risen 0.1% in November.  Over the past year mining output has risen 11.5%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling rise 0.9% in December after having fallen 3.3% in November.     Over the course of the past year oil and gas well drilling has risen 40.1%.  The number of  oil rigs in operation has rebounded in recent months.

As noted above, utilities output jumped 5.6% in December after having fallen 3.1% in November.  Abnormally warm weather in November followed by unseasonably cold weather the following month accounted for the swings in those two months.    During the past year utility output has risen 1.8%.

Production of high tech equipment rose 0.4% in December after having jumped 1.6% in November.  Over the past year high tech has risen 3.8%, but in the past three  months high tech production has climbed at a 16.2% pace.   Thus, the high tech sector sector appears to have gathered some momentum in recent months. This is an indication that the long slide in nonresidential investment has come to an end which would, in turn, signal an upturn in productivity growth.

Capacity utilization in the manufacturing sector was unchanged in December at 76.4%.  It is slightly below the 77.4% that is generally regarded as effective peak capacity.

Stephen Slifer


Charleston, SC

Overheating Fears Awaken the Bond Bears

January 12, 2018

Solid economic data and a string of record high levels for the stock market are stoking fears that the economy may soon overheat which would boost the inflation rate and induce the Fed to accelerate the pace of rate hikes.  Such fears have boosted long-term interest rates and encouraged investors to reallocate a portion of their investment portfolios from bonds into stocks.  Expect more of the same.  In the months ahead, bond rates and stock prices are headed higher.

One gauge of the expected inflation rate is to compare the actual yield on the 10-year note to the comparable inflation-adjusted rate.  The difference between the two is a measure of the bond market’s expected inflation rate during the next 10 years.  It recently climbed above the 2.0% mark which is the highest it has been since mid-2014.  Because we believe the overall CPI inflation rate in 2018 will climb to 2.4% and average 2.3% or so for the next decade, the expected inflation rate is probably headed higher.

This combination of robust economic growth and higher inflation has boosted the yield on the 10-year note to 2.56% which is the highest rate since mid-2014.  Three expected rate hikes by the Fed later this year and a gradual pickup in the inflation rate to 2.4% should boost the yield on the 10-year note to 2.9% by yearend.

The market is suddenly awakening to the fact that inflation and long-term interest rates are going to rise in the months ahead.  As a result, investors are likely to re-think their portfolio allocation between stocks and bonds. Their investment advisor is likely to recommend a shift out of bonds (the price of which declines as interest rates rise) into stocks.  Indeed, portfolio reallocation may explain some of the stock market’s exuberance in the first two weeks of January.

Does any of this change our view of the economy?  Not at all.  We continue to expect GDP growth to quicken from 2.7% in 2017 to 2.9% this year as investment spending accelerates.  We expect the core CPI to rise from 1.8% in 2017 to 2.2% in 2018.  And we think the Fed will raise rates three times as the year progresses.  The reality is that interest rates – both short and long rates – remain low by any historical standard.  For example, at its projected yearend 2018 level of 2.0% the federal funds rate is about one percentage point lower than the so-called “neutral”” rate of about 3.0%.  Even though rates should continue to climb as the year progresses, they remain well below the level that could threaten the expansion.  That point is unlikely to be reached until sometime in the early 2020’s.

The other financial market indicator that would worry us is if the U.S. Treasury yield curve were to ”invert”, which means that short rates are higher than long rates.  Such an event is frequently a precursor to recession because it means that the Fed is aggressively raising short rates (the federal funds rate) to slow down the pace of economic activity and short circuit a further pickup in the inflation rate.  Note that prior to both the 2000 and 2008-09 recessions the Fed raised short-term rates to about 0.5% higher than long-rates, i.e., the yield curve was inverted.  With the funds rate today at 1.3% and the yield on the 20-year note at 2.5% the yield curve has a positive slope of 1.2%.  It has been getting steadily flatter for the past couple of years and some worry about a possible inversion later this year.  That is not going to happen.  Yes, the Fed will raise short-term interest rates by about 0.75% this year to 2.0%, but with the inflation rate climbing we expect the yield on the 10-year note to climb to 2.9%.  So by yearend our expectation is that the curve will be 0.9% — somewhat flatter than it is currently, but in no danger of inverting.

So, all is well.  The earlier anticipation and now the reality of tax cuts is having the desired effect of stimulating growth in the economy.  Our first look at fourth quarter GDP growth will be on Friday morning, January 26 and it should be about 3.5%.  If that forecast is accurate, it would be the third consecutive quarter with GDP growth above the 3.0% mark.  There can no longer be any doubt that the economy has shifted onto a faster growth track.

Stephen Slifer


Charleston, S.C.

Retail Sales

January 12, 2018

Retail sales rose 0.4% in December after having jumped 0.9% in November after having climbed 0.7% in October and 2.0% in September.  During the course of the past year sales have risen a solid 5.2%.  Consumer spending appears to be gathering momentum as consumers expect to benefit from tax cuts in 2018..

Sometimes sales can be distorted by changes in autos which tend to be quite volatile.  In this particular instance the unit selling rate for car sales rose 2.1% in December to a 17.65 million pace.

Fluctuations in gasoline prices can also distort the underlying pace of retail sales.  If gas prices rise, consumer spending on gasoline can increase even if the amount of gasoline purchased does not change.  Gasoline sales were unchanged in December.  Clearly, higher gas prices boost the overall increase in sales, but do not reflect an actual increase in the volume of gasoline sold.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales rose  0.4% in December after having jumped 1.2% in November.  In the last year retail sales excluding cars and gasoline have risen 5.7%, but in the last three months that index has picked up to an 8.4% pace.  Core retail sales appear to be accelerating.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments (like Macy’s, Sears, K-Mart, and Limited) the reality is that they need to develop a better business model.  The action these days is in non-store sales which have been growing rapidly. Consumers like the ease of purchasing items on line.  While sales at traditional brick and mortar general merchandise sales have risen 4.3% in the past year, on-line sales have risen 12.2%.  As a result, their share of total sales has been rising steadily and now stands at a record 11.2% of all retail sales.

We believe that retail sales will continue to chug along at a 2.5% pace for some time to come..  First of all,  existing home sales are selling at a rapid clip and would be selling at a faster pace if there were more homes available for sales.  Consumers do not purchase homes and cars — the two biggest ticket items in their budget — unless they are feeling confident about their job and the future pace of economic activity.

Second, the stock market is at a record high level.  That increase in stock prices boosts consumer net worth.

Third, all measures of consumer confidence are at their highest levels thus far in the business cycle, and consumer sentiment from the University of Michigan is at its highest level since the early part of 2004.

Fourth, cuts in individual income tax rates will be forthcoming in 2018.

Finally, the economy is cranking out 170 thousand new jobs every month which boosts consumer income.  Consumers have paid down a ton of debt and debt to income ratios are the lowest they have been in 20 years.  That means that consumers have the ability to spend more freely and boost their debt levels if they so choose.

Thus, the pace of consumer spending seems steady.  We continue to expect GDP growth to quicken from 2.7% in 2017 to 2.9% this year.

Stephen Slifer


Charleston, SC

Consumer Price Index

January 12, 2018

The CPI rose 0.1% in December after having jumped 0.4% in November .  During the past year the CPI has risen 2.1%.  Excluding food and energy the CPI rose 0.3% in December after having risen 0.1% in November.  Over the past year this so-called core rate of inflation has risen 1.8%.

Food prices rose rose 0.1% in December having having been unchanged in both October and November.  Food prices have risen 1.6% in the past twelve months.

Energy prices declined 1.2% in December after having umped 3.9% in November.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 6.9%.  The recent run-up in energy prices seems to reflect strengthening GDP growth around the world which is bolstering the demand for both crude oil and gasoline.  However, prices should not rise much beyond their current level of $60 per barrel.   U.S. producers are already opening some previously closed wells.  That should cap any further meaningful increase in prices.  The Department of Energy expects oil prices to average $55.33 in 2018 slightly lower than where they are currently.

Excluding the volatile food and energy components, the so-called “core” CPI rose 0.3% in December after having climbed 0.1% in November.  The year-over-year increase now stands at 1.8%.  The core rate was held in check last year by a variety of factors.  There was price war amongst telecommunications firms which caused a double-digit drop in wireless phone prices.  That exaggerated price drop appears to have run its course as phone prices have risen somewhat in the past four months.

The core CPI has also benefited from a sharp slowdown in the rate of increase of prescription drug prices.  That appears to reflect President Trump’s threat to the pharmaceutical industry that he intends to cut the prices of prescription drugs by allowing consumers to purchase such drugs overseas, and by having Medicare negotiate prices directly with the insurance companies.  That caused prescription drug prices to slow markedly from a 6.3% increase in 2016 to an increase of just 2.8% in 2017.

While there have been some special factors that have caused the CPI to come in well below what was expected in 2017, the most starting development 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 2.6%.  However, core good prices rose 0.2% in December which is the first increase since January of last year.

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 0.6%, used cars have dropped 1.0%, appliances 1.0%, televisions 6.2%, audio equipment 16.2%, sporting goods 1.0%, toys 9.1%, information technology commodities (personal computers, software, and telephones) 3.8%.  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 retailer.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 2.6% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.2%.  This undoubtedly reflects the shortages of both rental properties and homeowner occupied housing. Indeed, the vacancy rate for rental property is close to 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, have been very well contained in the first half of this year we believe that as the year progresses the core rate of inflation will have an upward bias  because of what has been happening to both 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 1.5% rate but is poised 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 1.8%.  However, with the economy growing steadily, rents rising, and wage pressures climbing, the core inflation rate should pick up from 1.8% in 2017 to  2.2% this year.  And because the core PCE increases at a rate roughly 0.5% slower than the core CPI, the core PCE should increase  1.8% 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 1.3% and the year-over-year increase in the CPI at 2.1% the “real” or inflation-adjusted funds rate is negative 0.8%.  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

January 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 surprisingly declined 0.1% in December after having risen 0.4% in September, October and November.  During the past year this inflation measure has risen 2.8%.  It had been bouncing around in a range from 2.0-2.5% for the some time but has broken out of that range to the upside.

Excluding food and energy producer final demand prices also declined 0.1% in December after having jumped 0.4% in both September and October and 0.3% in November.  They have risen 2.3% since December of last year. The October reading of 2.7% was the largest year-over-year increase since November 2011 .  This series has been quietly accelerating for the past two years.  Inflationary pressures are re-surfacing.

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

The PPI for final demand of goods was unchanged in December after having jumped 1.0% in November and 0.3% in October. These prices have now risen 3.6% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.2% in December after having risen 0.3% in September, October and November.  During the past year the core PPI for goods has risen 2.3% (right scale), but in the  past three  months the rate of increase has climbed further to 2.8%.

Food prices fell 0.7% in December after having risen 0.3% in November and 0.5% in October.  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 risen 1.4%.

Energy prices were unchanged in December after having jumped 4.6% in November.  Energy prices have risen 10.7% 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.  Hence, we should not expect energy prices to fall substantially any time soon.  But by the same token they should not rise too much further.  Should they do so, U.S. producers as well as oil exporting nations around the world will begin to open the spigots and thereby cap the increase.

The PPI for final demand of services declined 0.2% in December after having risen 0.2% in November and 0.5% in October.  This series has risen 2.3% over the course of the past year (left scale).  The October year-over-year increase of 3.0% is the biggest 12-month increase since the BLS began collecting producer prices for services in November 2009.  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 rose 0.1% in December after having climbed 0.4% in November .  It has climbed 2.3% during the past year.  The 2.3% year-over-year increase is the largest 12-month increase in the history of this series which dates back to November 2009.

The recent increases in producer prices was 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 this:

And for non-manufacturing firms it looks like this:

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 4.1%, the labor market is beyond full employment.  As a result, wages pressures are sure to rise, and once that happens firms are almost certain to pass that along to the consumer in the form of higher prices but some of the upward pressure on inflation should be countered by an increase in productivity,.

Some upward pressure on labor costs, rents, and medicare care will further increase the upward pressure on inflation.  We expect the core CPI to increase 2.2% in 2018.

Stephen Slifer


Charleston, SC

Small Business Optimism

January 9, 2018

Small business optimism fell 2.6 points in December to 104.9 after having jumped 2.7 points in November.

NFIB President Juanita Duggan said, “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index.  With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans. The evidence is overwhelming that small business owners pay close attention to Washington, and that federal policies affect their decisions on whether to hire, whether to invest, whether to grow inventory, and whether to seek capital.”

NFIB Chief Economist added that, “We’ve been doing this research for nearly half a century, longer than anyone else, and I’ve never seen anything like 2017.  The 2016 election was like a dam breaking. Small business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”

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.

Already we see the stock market at a record high level.   Jobs are being created at a reasonably robust pace.  The unemployment rate is below the full employment threshold.  The housing sector is continuing to climb.  And now investment spending should pick up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.7% in 2017 to 2.9% in 2018.  The core inflation will  climb from 1.7% in 2017 to 2.5% 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

The Rosy Economic Environment Remains Intact

January 5, 2017

The trick in economic forecasting is figuring out how much importance to attach to the data for any given month.  And sometimes that requires examining a broad range of economic indicators rather than just one.  So, as we start a new year perhaps it is worthwhile to sniff the air for possible threats to our view that the economy will perform well in 2018.

The December employment report was on the soft side with a reported jobs gain of 148 thousand.  However, that follows much-larger-than-expected increases in October and November of 211 thousand and 252 thousand, respectively.  Thus, the 3-month average increase in employment is now 204 thousand which compares to an average increase for the past twelve months of 171 thousand.  Payroll employment, like every economic indicator, can be volatile from month to month.  With the 3-month increase still quite solid there is no evidence of any emerging weakness in the labor market.

Then there is the stock market.  It has picked up in early 2018 right where it left off last year.  It has risen 3.5% since the beginning of December and reaches a record high level every couple of days.  That will continue to bolster consumer and business confidence which should encourage both groups to spend freely in the early stages of 2018.

Thus far we only have retail sales data through November, but they appear to be on a roll.  The overall retail sales data incorporate auto sales which can be volatile from month to month, and gasoline prices which can be distorted by price changes.  Thus, most economists will look at “core” sales which exclude those two volatile categories.  In the past year such spending has risen at a 4.8% pace.  But with gains of 0.8%, 0.4%, and 0.9% in the September-November period such spending has skyrocketed to an 8.2% pace in the past three months.  We do not yet know much about December, but car sales in that month climbed 2.0% to a 17.8 million pace, and retailers apparently registered particularly robust Christmas sales.  Thus, there is no reason to believe that the pace of sales softened in the final month of the year.

Putting all of this together we continue to expect fourth quarter GDP growth to increase 3.2%.  Most estimates we have heard range from 2.9-3.9%.  Thus, it is likely that GDP growth will register growth in excess of 3.0% for the third consecutive quarter. Our first look at that growth rate will be Friday morning, January 26.   If that forecast is accurate, we feel quite comfortable in anticipating GDP growth for 2018 of 2.9%.

The recent acceleration in GDP growth is primarily attributable to business leaders’ decisions to spend more money on investment, whether that is on technology to enhance productivity or building a new factory.  After languishing for three years investment spending surged in the first three quarters of last year to 6.0% pace and is expected to continue its enhanced pace in the fourth quarter.  There can be little doubt that this pickup is a direct result of economic policy decisions.  Business people anticipated early on that the proposed combination of cuts in individual and corporate income tax rates, an ability to repatriate overseas earnings at a favorable tax rate, and significant relief from the stifling regulatory environment, would significantly bolster GDP growth and corporate earnings in the months and quarters ahead.  And now, of course, those anticipated policy changes have been enacted.

We have noted on many occasions that a pickup in investment spending will boost growth in productivity and that, too, seems to be happening.  After barely growing for a couple of years, productivity climbed 1.5% in the second quarter of last year and a hefty 2.9% in the third quarter.  The year-over-year increase has risen to 1.5%.  Remember, in the past three years productivity growth averaged just 0.8% but it appears to be expanding more rapidly.  As long as investment spending continues its upward trajectory, productivity growth will also grow more rapidly.  And if that is the case, our economic speed limit is likely to climb from 1.8% today to perhaps 2.8% by the end of the decade.  That means faster growth in our standard of living.

There is nothing new in the analysis just presented.  But our job is to read to economic tea leaves and give you, our readers, a heads up when something surfaces that might short-circuit our particularly rosy economic climate.  In our view the December employment report was nothing more than statistical noise.  Everything else from consumer and business confidence, the stock market, investment spending, and GDP growth are starting out 2018 with as much momentum as they had in the final few months of last year.

Stephen Slifer


Charleston, S.C.