Tuesday, 19 of February of 2019

Economics. Explained.  

A Sharp – But Temporary — Growth Slowdown

February 15, 2019

Many economic statistics for December and January were delayed by the government shutdown.  As those reports have become available, we discovered that the economy was considerably weaker at the end of last year than had been anticipated.  But keep in mind that the stock market experienced a 20% selloff that began in October, the Fed raised rates in mid-December, and the government shutdown began on December 22.  While economists expected some economic softness as a result of these factors, recent data indicate that the slowdown was far more pronounced than expected. However, the stock market has already reversed most of its earlier drop, the Fed has pledged to keep rates steady for the foreseeable future, and the government shutdown has now ended.  Thus, it is a virtual certainty that the December/January economic slump will be largely reversed in the months ahead.

Without question the biggest surprise in recent statistics is that retail sales plunged 1.2% in December.  That was the largest single-month decline since the end of the recession.  Furthermore, the drop was widespread with virtually every category of sales contributing to the decline.  Clearly, the stock drop, the expectation for further rate hikes, and the first few days of the government shutdown produced a much larger-than-expected drop-off in sales.  But despite the surprisingly large December decline we believe that retail sales and the pace of economic activity in general will rebound in the months ahead for a variety of reasons.

Consumer sentiment.  Sentiment was hit hard in January.  But the seven point drop in that month was partially offset by a 4.3-point increase in early February.  Furthermore, the University of Michigan indicated that at the time of the most recent survey there was still a lingering threat of a second government shutdown which, of course, did not happen.  Thus, sentiment should complete its recovery in March or April.

Stock market.  The stock market selloff that began in October contributed significantly to the decline in confidence.  The S&P 500 index fell 20% from its October high through mid-December as the prospect of further Fed rate hikes, a widening trade war, and a looming federal government shutdown frightened investors.  That combo produced the biggest stock market selloff since the recession.  While most economists believed the selloff would prove to be moderate, the magnitude of the decline and its extreme volatility raised concerns that a recession might be in the cards late this year or in 2020.  Subsequent events have made it clear that those earlier fears were exaggerated and, as a result, the stock market has recovered two-thirds of its earlier losses and is now only about 6% below its prior peak.  So, what changed?

The Fed.  Perhaps the biggest change is with respect to the Fed.  It raised the funds rate by one-quarter point at its meeting in mid-December and indicated that some further gradual increases in the target range for the federal funds rate would be required.  Market participants feared that the Fed was ignoring reality, could raise rates too much, and perhaps trigger an unintended early end to the expansion.  However, subsequent speeches by Fed Chair Powell have made it clear that while additional rate hikes could be necessary at some point, the Fed intends to leave rates unchanged for the foreseeable future.  The tone of his recent remarks was completely different from the policy statement made in December and became the catalyst for the recent upswing in stock prices.

Mortgage rates.  As the stock market fell in the fourth quarter economists began to fear a sharp slowdown in the pace of economic activity in the months ahead.  Such a growth slowdown would eliminate upward pressure on the inflation rate and, as a result, long-term, interest rates began to decline.  The 30-year mortgage rate, for example, has fallen 0.5% in the past six weeks from a peak of 4.9% to 4.4% which is where it was a year ago prior to much of the recent weakness in the housing market.  That should re-invigorate home sales in the months ahead although the lack of supply will continue to curtail the rebound.

Jobs.  Finally, keep in mind that monthly job gains are steady at a rate of 200 thousand per month.  Continued increases in employment of that magnitude will generate income and provide the fuel to grease consumer spending in the months ahead.

The bottom line is that the lack of timely data shrouded the extent to which the economy took a hit late last year and in the early part of this year.  But, given that all the factors contributing to the slide have been largely reversed, our sense is that the trend rate of economic activity has not changed much if at all.  We continue to expect 2.7% GDP growth for this year although first quarter growth could slip to the 1.9% mark.

Stephen Slifer


Charleston, S.C.

GDP, Inflation, and Interest Rate Forecasts

February 15, 2019

GDP growth rose 3.4% in the third quarter.  We expect fourth quarter growth of 2.6%.  Ordinarily, the early look at GDP growth in that quarter would have been released by now, but its release has been delayed as a result of the partial government shutdown.  We have reduced our first quarter estimate from 2.7% to 1.9% as the shutdown took its toll.  But because of the lack of any solid data, that estimate should be regarded as highly tentative.  We also lifted second quarter growth to 3.1% as, presumably, the shutdown ended and government workers go back to work.  That forecast is equally tentative.  Taking all of this together we expect 2.7% GDP growth this year.

Consumer spending rose 3.4% in the third quarter after having risen 3.8% in the second quarter.  We expect it to rise 2.6% in 2019.  The consumer and corporate tax cuts should lift the stock market to yet another record high level by yearend.  Stock prices should rebound which will boost 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 remains high despite the stock market selloff and the government shutdown.  Interest rates  are rising very slowly but remain low.

Investment spending took a breather and slowed to 2.5% in the third quarter after having climbed 8.7% in the second quarter.  Investment spending was essentially unchanged for 2014-2016.  It appears that the corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden are 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 by the end of this decade.

The trade gap widened by $108.7 billion in the third quarter to -$949.7 billion after having narrowed by $61.4 billion in the second quarter.  This means that the trade component subtracted 1.9% from GDP growth in the third quarter after having added 1.4% to GDP growth in the second quarter.  We expect the trade component to subtract 0.2% from  GDP growth in 2019.

Nonfarm inventories surged by $89.8 billion in the third quarter after having declined $36.8 billion in the second quarter. Going forward we expect inventories to climb by about $75 billion per quarter.

Expect GDP growth of 2.7% in 2019 versus 3.1% last year.

The inflation rate should be fairly steady in 2019.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  That will put upward pressure on the inflation rate.  However, the pickup in inflation will be limited as internet price shopping will keep goods prices steady in 2019.  At the same time, rising productivity growth will offset much of the increase in wages.  As a result, we expect the core CPI to edge upwards from  2.2% this year to 2.3% in 2019.

With GDP growth at 2.7% and inflation relatively steady at 2.4%, the Fed will leave rates unchanged through midyear but may tighten  twice in second half of the year which would raise the funds rate to 3.0%.

With a couple of Fed rate  hikes this year and fairly steady inflation, long-term interest rates should rise slightly in 2019 with the 10-year climbing from  2.8% at the end of 2018 to 3.3% in 2019.  Mortgage rates should climb from 4.7% at the end of 2018 to 5.0% by the end of 2019.

Stephen Slifer


Charleston, SC


Consumer Sentiment

February 15, 2019

The initial estimate of consumer sentiment for February rose 4.3 points to 95.5 following a 7.1 point drop in January.  Thus, it has recovered about one-half of its earlier decline.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “The early February gains reflect the end of the partial government shutdown as well as a more fundamental shift in consumer expectations due to the Fed’s pause in raising interest rates. The lingering impact of the shutdown was responsible for some of the negative economic evaluations, and, at the time that these interviews were conducted, uncertainty about whether a second shutdown would occur continued to have a slight depressing impact on confidence. Although the majority of consumers expected some additional rate hikes during the year ahead, that proportion has shrunk to the smallest level in the past two years. Perhaps more importantly, consumers’ long term inflation expectations fell to the lowest level recorded in the past half century.”

Our sense is confidence will climb further in the months ahead.  Since the beginning of the year the stock market has recovered most of what it lost in the fourth quarter.  The Fed has said it intends to leave rates unchanged for the foreseeable future.   The government shutdown has ended.  And mortgage rates have fallen from 4.9% to 4.4%.

We expect GDP growth of 2.7% in 2019 versus 3.1% last year.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.  We expect worker compensation to increase 3.7% in 2019 vs. 2.6% last year. The core inflation rate (excluding the volatile food and energy components) should climb from 2.2% in 2018 to 2.4% in 2019.  Such a scenario would keep the Fed on track for no rate hikes at least through the middle of year.

The February rebound was attributable to a moderate increase in the current conditions index and a big jump in the expectations component.

Consumer expectations for six months from now rose from 79.9 to 86.2.

Consumers’ assessment of current conditions climbed from 108.8 to 110.0.

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

Stephen Slifer


Charleston, SC

Industrial Production

February 15, 2019

Industrial production fell 0.6% in January after having risen 0.1% in December.   During the past year industrial production has risen 3.8%.  Despite monthly wiggles, production continues to trend upwards.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.9% in January after having risen 0.8% in December.  The January drop was led by motor vehicle production which plunged 8.8% in that month, but that decline should be reversed in the months ahead.  During the past year  factory output has risen 2.9% (red line, right scale).   Factory activity in January hit a speed bump, but given that it occurred in the wake of a 20% selloff in the stock market, a Fed rate hike in that month, and the beginning of a government shutdown, it should perhaps not be too surprising.  But because the stock market has already recovered most of what it lost in the fourth quarter, the Fed has promised to refrain from further rate hikes for the foreseeable future, and the shutdown has finally come to an end, manufacturing activity should rebound in the months ahead.

Mining (14%) output rose 0.1% in January after having climbed 1.5% in December.  Over the past year mining production has risen 15.3%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling fell 0.9% in January after having declined 0.3% in December.     Even with the declines in recent months, over the course of the past year oil and gas well drilling has risen 15.3%.

Utilities output rose 0.4% in January after having plunged 6.9% in December as relatively warm weather trimmed the need for heating.  During the past year utility output has declined 5.6%.

Production of high tech equipment rose 0.1% in January after having climbed 0.3% in December.  Over the past year high tech has risen 6.5%.  Thus, the high tech sector sector appears to be expanding nicely. This is an indication that nonresidential investment is continuing to climb which is, in turn, a signal of renewed growth in productivity.

Capacity utilization in the manufacturing sector fell 0.7% in December to 75.8%.  It remains somewhat below the 77.4% level that is generally regarded as effective peak capacity.  However, factory owners will soon have to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Stephen Slifer


Charleston, SC

Retail Sales

February 14, 2019

Retail sales plunged 1.2% in December which is the largest single-month decline since the end of the recession in 2009.  While that is clearly a disturbing decline it should be viewed as a temporary setback which will be reversed during the next several months for a variety of reasons.  First, the drop came in the midst of a 20% drop in the stock market during the fourth quarter.  Second, the Fed had not yet given an indication that it was going to refrain from further rate hikes.  And, third, the government shutdown began right round Christmas.  But the stock market has already recovered most of its fourth quarter loss.  The Fed said it is going to refrain from further rate hikes at least through midyear.  And the protracted government shutdown is now over.  Hence, retail sales should rebound in the months ahead.  Over the  past year retail sales have risen 2.7%.

Sometimes sales can be distorted by changes in autos and gasoline which tend to be quite volatile.  In this particular instance car sales fell 1.8% in December.  Gasoline sales plunged 5.1%.  Changes in gas prices  impact the overall change in sales, but they typically do not reflect any significant change 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 fell 1.4% in December.  Any way one slices it, sales across the board fell sharply at the end of last  year.   In the last year retail sales excluding cars and gasoline have risen 2.8%.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments  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 stores have risen 2.3% in the past year, on-line sales have risen 11.3%.  As a result, their share of total sales has been rising steadily and now stands at a rear record 11.3% of all retail sales.

Despite the December drop we believe that retail sales will rebound in the months ahead.  First, the stock market has recovered much of its fourth quarter decline.

Second, the economy continues to crank out 200 thousand jobs a month,  Those job gains will produce growth in income.

Third, because of those steady job gains real disposable income should continue to climb at a solid 2.8% pace which is roughly in line with its 25-year average growth of 2.7%.

Fourth, as the Fed tightened steadily for the past couple of years mortgage rates rose to 4.9%, but in the past couple of months as the Fed has pledged to refrain from any further rate increases at least until midyear and as inflation has remained in check, the 30-year mortgage rate has fallen to 4.4%.  That should bolster the housing market as we move into the spring.

Finally, consumers have paid down a ton of debt and debt to income ratios are very low.  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 should rebound in the months ahead.  We continue to expect GDP growth to rise 2.7% in 2019 after having climbed 3.1% last year.

Stephen Slifer


Charleston, SC

Producer Price Index

February 14, 2019

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 fell 0.1% in both December and January.  During the past year this inflation measure (the red line) has risen 2.0%.

Excluding food and energy producer final demand prices rose 0.3% in January after having been unchanged in December.  They have risen 2.6% since January of last year (the pink line).  This series was steadily accelerating for a couple of years, but it has leveled off in the past 12 months or so.

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

The PPI for final demand of goods fell 0.8% in January after having declined 0.5% in November and 0.2% in December. These prices have now risen 0.4% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods rose 0.3% in January after having climbed 0.1% in December.  During the past year the core PPI for goods (the light green line) has risen 2.4% (right scale).

Food prices fell 1.7% in January after having  jumped 2.6% in December.  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 fell by 3.8% in January after having plunged 4.3% in December.  Energy prices have declined 7.8% in the past year.   This recent drop is in large part because U.S. oil output is now surging and global demand has been slowing down.  But now OPEC countries appear to have cobbled together an agreement to cut oil production in the months ahead.  This should stabilize oil prices for the time being although OPEC would like them to rise to the $85-90 per barrel mark.  Not going to happen with U.S. output surging.

The PPI for final demand of services rose 0.3% in January after having been unchanged in December.  This series has risen 2.7% over the course of the past year (left scale).   The jump in service goods prices in recent months were caused by a run-up in the trade services category.  These swings largely reflect 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) was unchanged in both December and January.  It has climbed 2.0% in the past year.

The recent increases in producer prices were foreshadowed by the results of the Institute for Supply Management’s series on prices paid by 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.  However, from June through January this series has actually declined to 49.6  This means that prices are not fairly steady.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

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  2.4% in 2019 after having risen 2.2% in 2018.

Stephen Slifer


Charleston, SC

Gasoline Prices

February 13, 2019

Gasoline prices at the retail level rose $0.03 in the week ending February 11 to $2.28 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.03. The Department of Energy expects national gasoline prices to average $2.47 in 2019.

Spot prices for gasoline have fallen sharply in recent months primarily because of the decline in crude prices.

The selloff in the stock market that began in October pushed oil prices lower as investors believed that higher short- and long-term interest rates would slow the pace of economic activity and, hence, reduce the demand for oil.  At the same time  oil production around the globe surged in response to the higher prices and prices  sank to $45 per barrel.  But Saudi Arabia recently announced it was cutting production by 0.7 million barrels per day to boost prices and, as a result, oil prices have risen to about $54.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 11,900 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s has boosted the  price of oil to about $54.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will boost production.  The Saudi’s will not permit the U.S. to increase its market share of the global markets.

The Department of Energy expects U.S. production to climb 11% from 10.9 million barrels last year to 12.4 million barrels this year and 13.2 million barrels per day in 2020.  The U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production appears to have arrested the recent increase in crude stocks and gotten supply and demand back into better balance..    At 1,100 million barrels crude inventories are  roughly in line with the 5-year average of 1,116 million barrels.

The wild cards right now are production levels for Venezuela and Iran.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  Iran is different.  The Iran sanctions went into effect in early November.  Iranian production has not fallen too sharply yet, but the U.S.’s  goal is to reduce exports (and, hence, production) close to zero.  Thus, as we go forward Iranian output could fall sharply and counter much of the recent oversupply.

Stephen Slifer


Charleston, SC

Consumer Price Index

February 13, 2019

The CPI was unchanged in January for the second straight month.  During the past year the CPI has risen 1.5%.

Food prices rose 0.2% in January after having risen 0.3% in December.  Food prices have risen 1.6% in the past twelve months.

Energy prices fell 3.1% in January after having declined 2.6% in December.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have declined 4.9%.

The recent drop in energy prices is  partly related to a drop-off in demand outside the U.S., principally in China.  It also reflects a huge jump in U.S. oil production.  As a result, oil prices plunged from $76 per barrel back in October to a low of about $45 billion in early January.  However, a cut in Saudi output announced last week has lifted prices back to about $54 per barrel so the recent slide in  oil prices appears to have come to a halt.

Excluding food and energy the CPI rose  0.2% in each of the past five months.  Over the past year this so-called core rate of inflation has risen 2.1%.  We expect the core CPI will rise 2.4% in 2019.

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 risen 0.3% while prices for services have risen 2.8%.

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 0.1%, televisions have declined 16.8%, audio equipment has dropped 1.8%,  toys have fallen 7.6%, information technology commodities (personal computers, software, and telephones) have declined 5.8%.  Prices for all of these items are widely available on the internet and can be used as bargaining chips with traditional brick and mortar retailers.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 2.8% 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 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.

The CPI, both overall and the core rate, will have a slight 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, productivity gains are countering much of the increase in labor costs, and the internet is keeping a lid on the prices of goods.  We look for an increase in the core CPI of 2.4% in 2019.

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.  We expect it to climb 2.2% in 2019.  The Fed has a 2.0% inflation target.

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 pricey 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 PCE should increase 2.0% in 2019.  That compares to the Fed’s targeted rate of 2.0%.

Keep in mind that real short-term interest rates are quite low.  With the funds rate today at 2.4% and the year-over-year increase in the CPI at 1.5% the “real” or inflation-adjusted funds rate is 0.9%.  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, a rate that low is inappropriate in today’s world.  The Fed should continue to push rates somewhat higher and gradually run off some of its longer term securities, although the Fed’s anticipated two rate  hikes in 2019 will not occur until the second half of the year.

Stephen Slifer


Charleston, SC

Unemployment vs. Job Openings

February 12, 2019

The  Labor Department reported that job openings rose 2.4% in December to 7,335 thousand after having risen 0.5% in November.   It is worth noting that there are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.3 million people unemployed in December.

As shown in the chart below, there are currently 0.9 unemployed workers for every available job.   Think of that — there are more job openings today than there are unemployed workers.  Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

In  this same report the Labor Department indicated that the quit rate in December was  at 2.3 which is just slightly below the September level of 2.4 which was the highest level since January 2001.   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 2.3.  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.

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

February 12, 2019

Small business optimism fell 3.2 points in January to 101.2 after having declined 0.4 point in December to 104.4.  But given the return of divided government, the partial government shutdown, and uncertainty about the next round of tariffs, the January level remains robust.  Keep in mind that the August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.  So while confidence has slipped in recent months, it has fallen from a record high level.

NFIB President Juanita Duggan said,  “Business operations are still very strong, but small business owners’ expectations about the future are shaky.  One thing small businesses make clear to us is their dislike for uncertainty, and while they are continuing to create jobs and increase compensation at a frenetic pace, the political climate is affecting how they view the future.”

NFIB Chief Economist added that, “Although January’s index showed some positive developments among current business conditions, the return to divided government in Washington created an inability to agree on basic policy measures.  This produced the longest partial government shutdown in history, elevating the level of uncertainty, which is damaging to economic activity.”

In our opinion the economy is expected to expand at a reasonably robust pace this year.  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.

After falling 20% late last year the stock market has recovered much of the earlier loss.   Jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  Mortgage rates have fallen in the past couple of months from 4.9% to 4.7%.  And investment spending remains solid.  We expect GDP growth to be 2.7% this year after having risen 3.1% in 2018.  The core inflation should be relatively stable at 2.4% in 2019 after rising 2.2% in 2018.  The Fed will continue to raise short-term interest twice this year but the hikes will not occur until after midyear.  Moderate GDP growth, low inflation, and low interest rates should continue to bolster the stock market in the months ahead.

Stephen Slifer


Charleston, SC