Sunday, 25 of June of 2017

Economics. Explained.  

Category » Miscellaneous

Small Business Optimism

June 13, 2017

Small business optimism was unchanged in May at 104.5.  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.  Indeed, with the index hovering close to this same level for the past six months the NFIB notes that that represents a hot streak that has not seen since 1983.

NFIB President and CEO Juanita Duggan said, ”The remarkable surge in optimism that began last year right after the election shows no signs of slowing down.  Small business owners are highly encouraged by the President’s regulatory reform agenda, and they remain optimistic there will be tax reform and health-care reform. This is a policy-driven phenomenon.”

In our opinion the economy is bouncing along at a respectable pace and should gather momentum in coming months as the new Trump Administration produces a number of significant policy changes.  Specifically, we believe that later this year we will see both individual and corporate income tax cuts, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 10% rate, elimination of all unnecessary, confusing and overlapping federal regulations, and re-vamping of our health care system to a less expensive and less complicated health care system consisting of tax-advantaged health savings accounts combined with a high deductible health insurance plan to ensure against catastrophic problems.  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  at full employment.  The housing sector is booming.  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 2.2% in 2017 and 2.7% in 2018.  The core inflation will  probably quicken from 2.2% in 2016 to 2.4% in 2017 and 2.7% in 2018.  The will 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


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


Trade Deficit

June 4, 2017

The trade deficit for April rose $2.3 billion to $47.6 billion after having widened by $0.4 billion in March.     Exports declined 0.3%.  Imports rose by 0.8%.

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 widened by $2.7 billion in April after having been essentially unchanged in March.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quadrupled from $2.0 billion to $9.5 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 $9.5 billion or 50% 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 of 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.  The dollar rose sharply right after the November election as hopes rose that Trump-initiated policy changes would significantly boost GDP growth in 2017 which would presumably also make the U.S. a more attractive place for foreigners to invest.  However, the dollar has given back some of those gains.  For the year we now anticipate little change in the value of the dollar and, hence,expect the trade deficit to have little impact on GDP growth this year.

The non-oil trade gap has been essentially unchanged in the past year with a deficit steady at about $58 billion as non-oil exports rose 3.2% while non-oil imports climbed by 5.6%.  Going forward the non-oil trade gap should widen slightly during 2017 but be essentially countered by a slide narrowing of the trade deficit for oil.

Stephen Slifer

NumberNomics

Charleston, SC


Corporate Profits

May 26, 2017

Corporate profits with inventory valuation and capital consumption adjustments fell 1.9% in the first quarter to $2,109.7 billion after having risen 0.5% in the fourth quarter.  During the last year profits on this basis have risen 3.7%.  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, fell  0.2% to to $2,274.3 billion after  having risen 1.6% in the third quarter.  Over the course of the past year such profits have risen  9.4%.    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 2.4% pace in 2017, inflation will rise modestly, and interest rates will remain low.  As a result, corporate profits should climb at a double-digit pace in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


Trade-Weighted Dollar

March 15, 2017

Trade-weighted dollar

The trade-weighted value of the dollar, which represents the value of the dollar against the currencies of a broad group of U.S. trading partners has risen 4.0% from where it was at this time last year.  But that pattern is a bit skewed.  The dollar’s valued declined in the first few months of 2016, was relatively steady throughout the summer, and then rose sharply since the election in November as potential policy changes advocated by President Trump seem likely to accelerate GDP growth, raise the inflation rate, and cause the Fed to push interest rates steadily higher.  All of those changes are attractive to foreign investors as they seek the relatively higher returns available in the U.S. stock market, and the higher yields of U.S. Treasury securities.

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 strengthened about 6.0% over the past year.  A year ago one dollar would buy 6.50 yuan.  Today it buys 6.89 yuan.

Trade-weighted dollar -- China

The U.S. dollar has strengthened 1.2% versus the Canadian dollar during the past year.  For example, a year ago one U.S. dollar would purchase $1.32 Canadian dollars.  Today it will buy $1.34 Canadian dollars.

Trade-weighted dollar -- Canada

And against the Mexican peso the dollar has strengthened by 12.3% during the past year.  A year ago one dollar would buy 17.6 Mexican pesos.  Today it will buy 19.8 pesos.

Trade-weighted dollar -- Mexican Peso

The dollar has strengthened by 1.2% against the yen during the course of the past year.  A year ago one dollar would buy 112 yen.  Today that same one dollar will buy 114 yen.

Trade-weighted dollar -- Yen

The dollar has strengthened by 5.3% against the Euro during the course of the past year.  A year ago one Euro cost $1.11.  Today that same Euro costs $1.05.

Trade-weighted dollar -- Euro

Thus, the dollar has strengthened against every major currency during the course of the year.   That appreciation has been the largest against the Mexican peso (12%), the Chinese yuan (6%) and the Euro (5%) with relatively small 1% increases against the Canadian dollar and the Euro.   As a result, the trade-weighted value of the dollar, as noted earlier, has risen 4.0% 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 rise about 10% this year.  If that is the case the trade component of GDP should subtract a relatively modest 0.2% from GDP growth in 2017.  The rising dollar will also help to keep the inflation rate in check this year as the prices of imported goods decline, but this effect will be quite small.

From the European and Japanese vantage points a weaker currency will help to boost GDP growth which is currently anemic.  That is a good thing  Furthermore, both Europe and Japan suffer from too little inflation.  A weaker currently will tend to raise it.  That, too, is a good thing.  So from a European and Asian viewpoint more growth and inflation caused by a weaker currency is a good thing.  If Europe and Japan are successful, stronger growth in those sectors of the world will ultimately help stimulate the U.S. economy.

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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