Monday, 11 of December of 2017

Economics. Explained.  

Category » Miscellaneous

Trade Deficit

December 5, 2017

The trade deficit for October widened by $3.8 billion to $48.7 billion after having widened by $0.6 billion in September.     Exports were unchanged.  Imports rose by 1.6%.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit was widened by $3.1 billion in October to $65.3 billion after having been unchanged in September.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quintupled from $2.0 billion to almost $10.0 billion, while real oil imports have fallen from $20.0 billion to $18.0 billion. As a result, the real trade deficit in oil has been cut by about $10.0 billion or 55% in the past several years and is the smallest since the early 1990’s.  Most energy exports believe that by the end of the decade the U.S. will not only surpass Saudi Arabia and Russia  and become the world’s biggest producer of oil, but also become a net exporter of oil.  Very impressive!  And now with U.S. producers allowed to export oil, that could happen even sooner.

Significant strength or weakness in the dollar can impact the trade deficit for any given period of time.  For example, the dramatic 22% rise in the value of the dollar from October 2014 through the end of 2015 subtracted about 0.5% from GDP growth in both 2014 and 2015.  But the dollar has weakened slightly this year.  As a result, we expect the trade component to add about 0.1% to GDP growth in 2018.

The non-oil trade ga phas widened somewhat in the past year to about $61.0 billion as non-oil exports rose 0.8% while non-oil imports climbed by 5.3%.

Stephen Slifer

NumberNomics

Charleston, SC


Corporate Profits

November 29, 2017

Corporate profits with inventory valuation and capital consumption adjustments rose 4.3% in the third quarter to $2,215.0 billion after having risen 0.7% in the second quarter.  During the last year profits on this basis have risen 5.4%.  The IVA and CC adjustment deals with the difference in depreciation allowances used for accounting and income tax purposes.  Hence, changes in tax laws impact this series and it does not accurately reflect profits from current production.

Corporate profits without such adjustments, or profits from current production, rose 3.7% in the third quarter too $2,337.8 billion after having fallen 1.0% in the second quarter.  Over the course of the past year such profits have risen  7.3%.    A  large part of the earlier decline reflects weakness in one specific sector — the oil patch.   Without these huge declines corporate profits would have been much closer to the corporate profits reported in the past couple of years.

The economy will continue to climb at roughly a 2.6% pace in 2017 and 2.8% in 2018, inflation will rise modestly, and interest rates will remain low.  As a result, corporate profits should climb at roughly a double-digit pace in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Small Business Optimism

November 14, 2017

Small business optimism rose 0.8 point in October to 103.8 after having fallen 2.3 points in Septembe.  This is slightly lower than the cycle high reading of 105.9 set in January which was the highest level for this index since 2004.  A couple of months ago the NFIB noted that the level of the index during the past year represents a hot streak not seen since 1983.

NFIB Chief Economist Bill Dunkelberg added, “Consumer sentiment surged based on optimism about jobs and incomes, an encouraging development as consumers account for 70 percent of GDP.  We expect a pickup in auto spending as people in Texas and Florida continue to replace cars that were damaged in the hurricanes. We expect the same increase in home improvement spending, partly because of the hurricanes, but also because of the skyrocketing price of homes.”

In our opinion the economy is expected to momentum in coming months if the new Trump Administration produces a number of significant policy changes.  Specifically, we believe that later this year or in 2018 we will see both individual and corporate income tax cuts, and legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 10% rate.  Trump will continue to eliminate all unnecessary, confusing and overlapping federal regulations.  And health care reform of some type is still at least possible.  These changes 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 2.0% in 2016 to 2.3% in 2017 and 2.8% in 2018.  The core inflation will  probably slip from 2.2% in 2016 to 1.9% in 2017 but then up 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

NumberNomics

Charleston, SC


Trade-Weighted Dollar

November 3, 2017

The trade-weighted value of the dollar, which represents the value of the dollar against the currencies of a broad group of U.S. trading partners has fallen 2.5% from where it was at this time last year.

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

With respect to the Chinese yuan the dollar has weakened  about 1.0% over the past year.  A year ago one dollar would buy 6.73 yuan.  Today it buys 6.65 yuan.

The U.S. dollar has weakened 5.6% versus the Canadian dollar during the past year.  For example, a year ago one U.S. dollar would purchase $1.33 Canadian dollars.  Today it will buy $1.25 Canadian dollars.

And against the Mexican peso the dollar has weakened by 3.2% during the past year.  A year ago one dollar would buy 18.9 Mexican pesos.  Today it will buy 18.3 pesos.

The dollar has strengthened by 8.5% against the yen during the course of the past year.  A year ago one dollar would buy 104  yen.  Today that same one dollar will buy 113  yen.

The dollar has weakened 6.6% relative to the Euro during the past year.  At that one Euro cost $1.10.  Today one Euro costs 1.17.

Thus, the dollar has weakened against every major currency except the yen during the course of the past year.   As a result, the trade-weighted value of the dollar, as noted earlier, has fallen 2.5% during the past year.

Currency changes can affect the economy in several ways.   First, a rising dollar can reduce growth of U.S. exports because U.S. goods are now more expensive for foreign purchasers.  Similarly, a rising dollar can accelerate growth of imports because foreign goods are now cheaper for Americans to buy.  A rising dollar can also lower the rate of inflation in the U.S. because the prices of foreign goods are likely to fall.

From October 2014 to January 2016 the dollar rose 22%.  That is a huge change.  The trade component subtracted about 0.5% from GDP growth in both 2014 and 2015.  We expect the dollar to fall about% this year.  If that is the case the trade component of GDP should add about 0.3% to GDP growth in 2017.  In 2018 we expect little change in the value of the dollar and, hence, the trade component should be roughly a neutral factor in calculating GDP growth next year.

Stephen Slifer

NumberNomics

Charleston, SC


Corporate Cash

June 8, 2017

Corporate cash holdings  rose $51 billion in the first quarter to $2.64 trillion (above) , and  continues to be quite high at 10.2% of non-financial assets (below).

As the recovery first began in mid-2009 corporate CEO’s needed to increase cash holdings for defensive reasons.  They had no idea if the expansion would be sustainable.  Similarly, they could not anticipate the likely pace of growth.  By the end of 2010 they appear to have become confident that they had ample cash on hand to weather almost any economic upset that might occur.  But given considerable concern about the high corporate tax rate, the inability to repatriate overseas earnings to the U.S., unhappiness about the onerous regulatory burden, and a failing health care program in serious need of revision,  corporate leaders have been reluctant to deploy these ample cash holdings.

But it is important to remember that all of these cash holdings — checking account balances, CD’s, holdings of government securities and municipal securities — all yield less than 1.0%.  It is not good management to have a considerable portion of your assets earning so little.   As we go forward and the stock market continues to climb and the economy continues to expand at a moderate pace firms should become more willing to invest.  The prospect of cuts in the corporate tax rate, an ability to repatriate earnings at a favorable 10% tax rate, relief from the onerous regulatory burden, and revisions to Obamacare, they might be more willing to loosen their purse strings by putting more money into technology to boost productivity.  Or they might build a new factory.  Whatever they choose to do, putting these cash holdings back into the economy will support GDP growth and boost productivity in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


S&P 500 Stock Prices

March 15, 2017

S&P 500 Stock Prices

The S&P is at record high level. of 2383. Since the election the stock market has gotten excited about possible policy changes supported by President Trump.  In the upcoming months we should see both corporate and individual income tax cues, corporations being allowed to repatriate overseas earnings to the U.S. at a 10% tax rate, a significant reduction in the regulatory burden, revamping of the dysfunctional Obamacare system, and in the years ahead some shrinkage in the budget deficit.

The cut in the corporate tax rate and repatriation of overseas earnings should give rise to a tidal wave of investment spending which should, in turn, boost growth in productivity.  If productivity growth accelerates than the economic speed limit should climb from 1.8% or so currently to 2.8% within a couple of years.  Those gains in productivity will help to keep inflation in check.  Specifically, we look for the core inflation rate to increase from 2.2% in 2016 to 2.5% in 2017.  And if all of that transpires the Fed will continue on its very gradual pace of rate hikes.  By the end of 2017 the funds rate is expected to be about 1.25%.  More rapid GDP growth, low inflation, and low interest rates should be a dynamite combination for the stock market.

As we see it the stock market and the economy will continue to climb at a moderate pace in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


Business Inventories / Sales Ratio

March 15, 2017

Inventory to Sales Ratio

Firms are always trying to keep their inventories in line with sales.  When the economy falls into recession, typically businesses do not cut back production as quickly as sales decline, so the inventory/sales ratio rises sharply  — which is exactly what happened during the 2008-2009 recession.  Then, as the economy recovers and sales once again begin to rise, corporate leaders are able to  get inventory levels into closer alignment with sales.

In January business inventories rose 0.3% while sales rose 0.2%.  As a result, the inventory to sales ratio was unchanged at 1.35.  In recent months sales have outpaced inventories and the inventory/sales ratio has declined.  That may continue for a while longer but ultimately a faster pace of sales will eventually require business people to build inventories at a faster pace than sales to ensure that they have adequate supplies on hand to satisfy demand.

Stephen Slifer

NumberNomics

Charleston, SC


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