Saturday, 21 of October of 2017

Economics. Explained.  

Category » Commentary for the Week

2018 Economic Outlook Conference


 2018 Economic Outlook Conference

In times of uncertainty whether you are running a business or planning your investments,

knowledge can be your most valuable asset.

Stephen Slifer, Owner and Chief Economist at NumberNomics  will provide insight regarding what to expect in 2018.

Why is growth so slow?  Will it ever accelerte?

When will interest rates begin to bite?

Why is inflation so low?  When will it accelerate?

Can Trump pass anything that will help?

When might the expansion end?

DATE:., Tuesday, December 5, 2017

TIME: 7:30 to 9:00 A.M.

PLACE: Daniel Island Club, 600 Island Park Drive, Charleston, SC 29492

COST: ..$40.00 includes breakfast

Stephen Slifer:  From 1980 until his retirement in 2003, Mr. Slifer was the Chief U.S. Economist for Lehman Brothers in New York City.  In that role he directed the firm’s U.S. economics group and was responsible for the firm’s forecasts and analysis of the U.S. economy.

Prior to that, he spent a decade as a senior economist at the Board of Governors of the Federal Reserve in Washington, D.C.  He has written two books about the various economic indicators and how they can be used to forecast economic activity.  He writes a regular bi-weekly economics column for the Charleston Regional Business Journal.

Proudly sponsored by:

Charleston Digital Corridor ……………… ..Charleston Regional Business Journal

Daniel Island Business Association ………Daniel Island Town Association

NumberNomics …………………………….. Wells Fargo Advisors

Robert W. Baird ……………………………..Trident Technical College


To Register:  Click Here

The Fed Gets Criticized – But It Doesn’t Deserve It

October 20, 2017

A recent Wall Street Journal editorial blamed the Fed for “anticipating little growth impact from Mr. Trump’s deregulation or tax reform”.  It claimed that “new leadership at the Fed will be required because the current leadership believes that tax cuts are not pro-growth and the U.S. is fated to a long era of secular stagnation”.  I have great respect for the Journal, but in this this case its criticism is way off base.

For the record, I have a bias.  I began my career at the Board of Governors of the Federal Reserve many years ago.  I have found Fed officials – Fed Governors, Bank presidents, and staffers – to be some of the smartest, hardest working, and dedicated individuals I have ever had the pleasure to work with.  When something goes wrong the Fed always gets the blame.  When things go right it never gets any credit.  That comes with the territory.  But often the endless criticism is unwarranted.

The Fed is not to blame for our current slow-growth pace of economic activity.  It cannot control an Administration and Congress that have successfully managed to achieve fiscal gridlock and demonstrated an inability to produce policy changes that might enable the economy to grow faster.  It cannot control consumers who were burned so badly during the recession that they have chosen to be frugal and not spend more than their income.  It cannot control business leaders’ unwillingness to invest in a regulatory environment that is the most stifling in our history.  It cannot control the pace of technological advancement which has, in fact, left some workers behind.  Today’s economy is cranking out lots of new jobs.  But they are often highly skilled positions and some workers simply do not have the requisite skills.  Through a combination of education and apprenticeship programs this issue can be resolved, but it takes time.

It is hard to imagine what the Journal would have liked the Fed to do during the past eight years.  It lowered the federal funds rate to a record low level of 0% and kept it there for six years.  It adopted an innovative bond-buying strategy that flooded the banking system with reserves that could be lent to consumers and businesses.

Some might argue that the Fed kept interest rates too low for too long, and that the “quantitative easing” did not work.  But somehow that combination has produced an expansion that has endured for eight years and four months and is showing no sign of ending any time soon.  In June 2019 it will go into the history books as the longest expansion on record.  Sure, the pace of expansion has been slower than in other business cycles.  But what exactly could the Fed have done to produce faster growth?  The Fed is a very powerful institution but it only has so many policy levers to manipulate.  It can control monetary policy, but Congress also plays a role in determining the pace of economic activity via fiscal policy and Congress has failed miserably.  The Fed does not control fiscal policy.

Congress has created a regulatory environment that is so stifling business leaders have for years chosen not to invest in new buildings and technology.  It is not because corporate America does not have the cash.  It does.  It is not because businesses are not making money.  They are.  It is because businesses are stymied by more than 90,000 pages of often unnecessary, overlapping, and confusing regulations.  Rather than invest in the United States, corporate leaders would rather invest overseas where the regulatory environment is less stifling, use their cash to buy back outstanding shares of stock, or return the money to stockholders in the form of increased dividend payments.  The Fed did not do that.

To his credit President Trump is trying to eliminate many unnecessary regulations and create a more business friendly regulatory environment.  He has proposed sizable corporate tax cuts, immediate deductions for corporate spending on equipment, and a route by which corporations can return to the United States profits currently locked overseas at a favorable 10% tax rate rather than today’s prevailing 35% rate.  If Congress can actually pass such legislation it would unleash a wave of investment spending as an estimated $4 trillion of corporate profits find their way back to the United States and as corporate executives, filled with new found optimism, direct more of their current profits towards the latest technology and equipment.  Such spending would, in fact, boost potential GDP growth towards the 3.0% mark that President Trump has suggested.

Some may suggest that with the economy already at full employment this accelerated pace of GDP growth would be highly inflationary which would cause the Fed to raise interest rates more rapidly and higher than the Fed currently envisions.  But that is not necessarily the case. If faster growth is accomplished via enhanced investment spending, then potential GDP growth – the economy’s non-inflationary speed limit – would climb from 1.8% or so today to something close to the 3.0% mark.  That speed limit can be calculated as the sum of the growth rates for the labor force and productivity.  Today the labor force is growing by 0.8% and productivity is climbing by about 1.0%.  Add them up and today’s potential growth rate is about 1.8%.  But a faster pace of investment spending will boost productivity growth to perhaps a 2.0% pace.  Now the arithmetic becomes 0.8% growth in the labor force plus 2.0% productivity growth or 2.8% potential growth – 1.0% higher than today and close to Trump’s estimate of 3.0%.

How does the Fed respond to all of this?  Over the next three years the Fed has said it will gradually raise the funds rate from 1.0% today to the 2.75- 3.0% range that it believes represents a “neutral” level – one at which it is neither stimulating economic growth nor trying to slow it down. At the same time it will very gradually shrink its portfolio of U.S. Treasury and mortgage backed securities from $4.5 trillion today to $1.5-2.0 trillion which it believes will be the minimum level required to effectively implement monetary policy.  It will not matter much whether current Fed Chair Yellen, current Fed Governor Jerome Powell, past Fed Governor Kevin Warsh, or Stanford professor John Taylor is the next Fed Chair.  These people all know what the Fed needs to do over the next several years.  Differences between them vary only at the margin.

As for the Journal’s criticism that by currently projecting GDP growth of only about 2.0% over the next several years the Fed is somehow anti faster growth and would respond by vigorously raising interest rates if growth should accelerate, the Journal does not understand how those forecasts are produced.  The Fed must assume that current fiscal current policy prevails over the forecast period.  It cannot incorporate tax cuts and deregulation into its forecasts until they are Implemented.  Hence, it is currently projecting a a relatively slow growth environment for the next three years.  But if favorable tax and regulatory policy changes are implemented, the Fed will undoubtedly raise its forecasts.  Every one of the four likely candidates for the Fed Chair are well aware of the concept of “potential growth”.  If the economy’s non-inflationary potential growth rate rises, its GDP forecasts will climb as well.  And there will be no need for the Fed to vigorously raise interest rates to combat faster potential growth because it is being produced by additional investment, a faster growth rate for productivity, and is thereby noninflationary.  The economy will be able to sustain something close to 3.0% GDP growth and still achieve the Fed’s 2.0% inflation target with a funds rate around the 3.0% mark.

The Journal has it wrong.  The Fed is not opposed to faster growth.  It simply wants to see Congress do what is necessary to raise the economy’s speed it.  Once that happens its growth forecasts will rise and it will have no reason to combat it.

Stephen D. Slifer


Charleston, S.C.

Growth on the Upswing – It’s Not Just U.S.

October 13, 2017

While hurricanes will dampen third quarter GDP growth in the U.S, the pace of expansion elsewhere has been accelerating.  Undaunted by slower near-term growth, U.S. investors are convinced that growth will rebound in the quarters ahead and that economic activity elsewhere around the globe is on the upswing.  If non-U.S. growth accelerates, U.S. growth will get a lift as exports climb.  And if President Trump can deliver on tax reform – particularly for corporate taxes – the investment portion of GDP will accelerate as well.

In the United States, the S&P 500 climbs to a new record-high level every few days.  Indeed, it has risen 20% since this time last year.  And this is not just statistical noise.  There are solid reasons why corporate profits and the S&P should continue to climb.

Some of that upswing reflects an expectation that President Trump will be able to deliver on his campaign promise of tax reform.  The corporate world is getting particularly excited about a possible cut in the corporate tax rate from 35% to 20%, the immediate expensing of expenditures on equipment, and the re-patriation of overseas earnings at a favorable 10% tax rate.  Nobody knows what the final legislation might look like.  Our expectation is that a modest package will pass, and that it will stimulate GDP growth from 2.3% or so this year to 2.8% in 2018, and boost our economic speed limit from 2.0% today to 2.8% by the end of this decade.

Elsewhere around the globe growth is accelerating.  The IMF, for example, just raised its global GDP growth rates for 2017 and 2018 by 0.1% apiece to 3.6% and 3.7%, respectively.  The upward revisions may not seem impressive, but just keep in mind that these are the fastest global GDP growth rates since 2011.

The IMF lowered its projected rate of expansion for the U.S. by 0.1% and 0.2% for 2017 and 2018.  It had projected a considerable amount of fiscal stimulus coming from Trump’s tax cuts but, given the Administration’s current difficulty in passing legislation, they have lowered their growth expectations accordingly.  We never expected a lot of stimulus so we have not trimmed our forecasts.  Given that the IMF has trimmed its projected U.S. growth rates but raised global growth, growth elsewhere in the world must be looking better.  So where might that be?

Europe.  The IMF raised its projected GDP growth rates for Europe for 2017 and 2018 by 0.4% and 0.3%, respectively.  Its forecasts for Germany, Italy, Spain, and France were all revised higher.  European growth in 2017 is expected to be 2.1% which is the fastest growth rate since 2010 with roughly comparable growth likely for next year.  That may seem like relatively subdued growth, but potential GDP growth in Europe is only about 1.5%.  With that in mind, a couple of years of 2.0% growth is impressive.  Remember, this is a region that weathered the financial crises in Greece, Ireland, Portugal and Spain in the early part of this decade.  It survived elections earlier this year this where populist movements, particularly in France but also in the Netherlands and Germany, threatened to turn the political scene topsy-turvy and reduce the future pace of economic expansion.

China.  The IMF raised the 2017-18 forecasts for China, the world’s second largest economy, by 0.2% and 0.3%, respectively, to 6.8% and 6.5%.  GDP growth in China had been growing at a double-digit pace for years and peaked in 2007 at 14.2%.  Then government leaders decided to transform the industrial-based economy to a more consumer driven model, growth slowed to about 6.5%, and threatened to continue its slide to the 6.0% mark.  But growth in recent quarters squashed those earlier 6.0% forecasts and now GDP growth seems to be stabilizing at about 6.5%.

Latin America.  The October revisions to the IMF’s forecasts for Latin America for 2017 and 2018 were negligible with significant upward revisions to Brazil and Mexico largely offset by a darker outlook for Venezuela where growth is projected to fall 12.0% his year.   But look at the projected growth rates for the region of 1.2% and 1.9% for 2017 and 2018.  Those growth rates are not impressive, but they are in sharp contrast to 0.1% growth in 2015 and negative growth of 0.9% in 2016.  Growth in those years reflect the two-year-long economic recession in Brazil, as the Petrobras corruption scandal brought down President Dilma Rousseff, created a political vacuum, and snared dozens of high-level business people.  Reforms designed to ensure fiscal stability appear to have restored confidence and, hopefully, allow the country to achieve modest growth of 0.7% growth in 2017 and 1.5% next year.

The point is that GDP growth around the globe is on the rise and likely to produce the fastest global rate of expansion since 2011.  The reasons for the improvement vary by region.  In the U.S. it appears to be reflect an expectation that individual and corporate tax cuts will boost growth in the years ahead.   In Europe it is the cessation of a series of financial crises and a continuation of ultra-easy monetary policy by the European Central Bank.  In China it seems to reflect the fact that expected GDP growth of 6.0% in 2017 and 2018 was too pessimistic.  And in Latin America the two-year-long recession in Brazil appears to have finally come to an end.  While the reasons vary, the reality is that GDP growth in countries around the world is in sync and re-accelerating.  No wonder that global investor confidence is so high.  The MSCI All World Index has risen 20% in the past 12 months.  GDP growth seems to be picking up almost everywhere around the globe.  It is not just U.S.

Stephen Slifer


Charleston, S.C.

Hurricanes Blew Out Jobs in September- Or Did They?

October 6, 2017

The employment report for September had, in our opinion, four significant takeaways.

  1. The official report for hiring said that the economy lost 33 thousand jobs in September as the combined impact from Hurricanes Harvey and Irma took their toll.
  2. But the household survey, from which the unemployment rate is derived, said that jobs rose by 906 thousand in September. So which is it?  Up by a lot?  Or a decline?
  3. Average hourly earnings have finally begun to climb. The yearly increase is now 2.9% which is the largest 12-month increase since June 2009.
  4. The increase in wages portends a pickup in the inflation rate. The Fed has been wondering why inflation has not begun to climb.  It will not accelerate the pace of rate hikes that it has previously described, but the wage and forthcoming inflation data will keep the funds rate on a steadily upwards growth trajectory.

The Bureau of Labor Statistics reported that hiring declined 33 thousand in September and it noted that the combined effect of Hurricanes Harvey and Irma produced that result.  This is the first drop in employment since September 2010, but it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  But those workers will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  For what it is worth the hiring decline occurred almost exclusively in the food services and drinking places category where employment contracted by 105 thousand.  Despite the September drop American consumers have not stopped eating out or given up drinking.

At the same time that BLS reported that payroll employment declined by 33 thousand in September, it then said that household employment, from which the unemployment rate is determined, jumped by 906 thousand in September.  Huh?  That is a pretty wide discrepancy.  What are we supposed to believe? Did employment increase?  Or decline?   In this case, it is important to understand that in the household survey people are counted as being employed even if they miss work for the entire survey period.  As noted, household employment actually increased 906 thousand in September but that follows a decline of 74 thousand in August.  This series is always volatile.  Over the two months combined the average increase in household employment was 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  No sign of any softening in the household employment data.  Thus, it is hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

The third important takeaway from the September employment report is that average hourly earnings are beginning to rise.  Upward pressure on wages has been conspicuously absent thus far, but that seems to be changing.  Hourly earnings rose 0.5% in September after rising 0.2% in August and 0.5% in July.  In the past year wages have climbed 2.9%.  With the sole exception of December 2016 that is the largest increase in hourly earnings since June 2009.  And, note also, that in the past three months wages have climbed at an even speedier 4.3% pace.  It seems like upward pressure on wages has finally arrived.

This series would be growing more quickly except for the impact from retiring baby boomers.  When you lose a number of people who have been working for 40 years who are making high wages, and replace them by younger workers who are making much less, this series will have a downward bias.  The Atlanta Fed has a series called “wage tracker” in which it tries to adjust for this bias and it believes that wages are currently rising at a 3.4% pace.  Any way you slice it, wages pressure are finally beginning to quicken.

Given that labor costs represent about two-third of an employer’s total costs, it stands to reason that if wages are on the rise, there will be a tendency for firms to raise prices as well.  Hence, a likely increase in the inflation rate.

At the same time manufacturing and non-manufacturing firms are paying higher prices for the raw materials they use in production.  The chart below reflects prices pressures reported by manufacturing firms.  All 18 industries reported paying higher prices in that month.  And the price gains were widespread from metals like steel and aluminum to food ingredients, electronic components, lumber and wood products, chemicals, and plastics.

The price increases for non-manufacturing firms are equally impressive – both dramatic and widespread.  These higher prices will boost the PPI data for September and October and, presumably, begin to push the CPI higher by yearend.

For the Fed’s Open Market Committee members the missing ingredient has always been the lack of upward pressure on the inflation rate.  But all of that seems to be changing.  Wages pressures are mounting.  Commodity prices are on the rise.  The Fed has indicated that it is willing to live with an inflation rate higher than its 2.0% target for a period of time because it has run below target for so long.  However, these recent developments will also suggest that it needs to keep gradually raising the funds rate back towards its presumed neutral level of 2.7-3.0%.  They plan one more rate hike later this year, presumably in December.  They anticipate three more rate hikes in 2018 which would boost the funds rate to the 2.0% mark by the end of next year, and further increases to the presumed neutral level by the spring of 2020.

So despite the modest decline in payroll employment, the September employment report is, in our opinion, not nearly as benign as that particular figure might suggest.  The labor market continues to add jobs to the tune of about 180 thousand per month, and wages pressure are beginning to intensify.  Further, but gradual, increases in the funds rate are in store.

Stephen Slifer


Charleston, S.C.

Hurricanes, Tax Reform, Make GDP Forecasting a Challenge

September 29, 2017

Third quarter GDP growth will be released on Friday morning, October 27.  We had expected third quarter GDP growth of 3.0%, but Hurricanes Harvey and Irma led us to revise it downwards to 1.8%.  Thus, third quarter GDP growth will suggest that the economy is still limping along at the same anemic 2.0% pace we have seen for the past several years.  But is that really the case?  Most lost sales will be made up in the months and quarters ahead which will boost GDP growth for the fourth quarter and the first quarter of next year.  GDP growth in those quarters will be distorted on the upside as much as third quarter growth is biased downwards.  So how is the economy doing?  We may not be able to answer to that question until the spring.  Completely apart from weather-related distortions we can now add uncertainty regarding the President’s newly-released tax plan.  Sweeping cuts in corporate and individual tax rates will be at least be partially offset by fewer allowable deductions.  What will be its impact on the budget?  Who wins?  Who loses?  Can it pass Congress?  While it will be difficult to read the tea leaves, we believe that economic activity is gradually picking up both in the U.S. and around the world.  And we believe that the ultimate tax package will boost investment spending, stimulate GDP growth and productivity, and raise the economic speed limit.

We have trimmed our third quarter GDP growth from 3.0% to 1.8% as Hurricanes Harvey and Irma took their toll.  Virtually every economic indicator weakened in August from Hurricane Harvey, and should slip farther in September as the result of Hurricane Irma.  For example, car and truck sales fell 4.0% in August.  The housing sector has been impacted as both new and existing home sales fell in August and pending home sales suggest further weakness will be evident for September.  Payroll employment rose a modest 156 thousand in August after having risen 181 thousand per month in the previous three months.  The data for October will be released this coming Friday and an even smaller increase of 130 thousand or so should be expected.

Given all of the above, it is clear that GDP growth of 3.0% is not in the cards.  We currently anticipate a third quarter GDP growth rate of 1.8%.  Back-to-back monster hurricanes are likely to whack third quarter GDP growth by slightly more than 1.0%.

But all those cars that were flooded during the hurricanes will have to be replaced.  Damaged homes will be rebuilt.  Home sales may have been postponed but potential buyers will probably not walk away completely.  Workers who could not get to their place of employment for a short period of time will be back on the job.  Economic activity in the fourth quarter of this year and the first quarter of next year will undoubtedly be biased on the upside.  We currently expect fourth quarter GDP growth of 3.0% and first quarter growth of 2.8%.  But those growth rates are biased on the high side by roughly the same amount that third quarter growth came in lower than expected.  Unfortunately, we will not see fourth quarter GDP growth until the end of January, and first quarter GDP growth will be released at the end of April.  Data distortions will make it difficult to determine the trend rate of growth.

But GDP growth is always distorted for one reason or another so this is nothing new.  Having said that we do not typically have back-to-back hurricanes with the intensity of Hurricanes Harvey and Irma.  Thus, the distortions this time should be somewhat more pronounced, but the process is the same – data distortions to the downside followed by roughly comparable distortions to the upside in subsequent quarters.  Truth is somewhere in the middle.

If that is not challenging enough, President Trump has now announced his long-awaited tax overhaul and he expects action to be completed by the end of the year.  But his proposal is short on details which makes it difficult to assess.  The biggest question appears to be its impact on the budget.  The Congressional Budget Office will undoubtedly report that tax cuts partially offset by the elimination of some deductions will shrink tax revenues and, as a result, boost budget deficits during the next 10 years.  But Treasury Secretary Mnuchin will claim that cuts in corporate tax rates combined with repatriation of corporate earnings will sharply boost investment spending and GDP growth which will, in turn, boost growth in productivity and raise our economic speed limit from 1.8% or so currently to 2.8% by the end of this decade.  This will make the package revenue-neutral.  We largely agree with that assessment, but the CBO will not score the tax proposal in that matter.  So will this tax program adversely impact the budget outlook or not?  It depends on you ask.  The Administration says no.  The budget hawks will say yes.  The bottom line is that the package will be fleshed out in the next couple of months.  We expect some version of tax reform to pass Congress.  But we also expect the ultimate package to be a watered down version of the initial proposal.  It is hard to say much more than that until we get more details.

The bottom line is that the economy still seems to be chugging along at a respectable pace, but whether growth is picking up somewhat (our contention) and will be able to sustain that pickup throughout 2018 (also our contention) will be difficult to determine for several months.

Stephen Slifer


Charleston, S.C.

Fed’s Glide Path Remains Slow but Steady

September 22, 2017

At its FOMC gathering this week the Fed left the federal funds rate at its current level of 1.0-1.25%.  That was not a surprise.  The important takeaway from this meeting is that the Fed intends to continue on a path of slowly returning monetary policy to a neutral stance.  That implies two things.  First, FOMC members intend to gradually raise the funds rate to an estimated equilibrium rate of 2.9% by early 2020.  Second, beginning in October the Fed will gradually reduce the size of its portfolio and thereby shrink the volume of excess reserves in the system.  It did not specify exactly what the ultimate size of its portfolio should be, but it is clear that getting there will be a multi-year process and unlikely to be completed until mid-2023.  All of us need to understand that the days of ultra-easy monetary policy have come to a halt.  It is equally important to understand that with the snail-like pace of normalization, the risk that the Fed will raise rates too quickly and inadvertently push the economy into recession is minimal for the next several years.

With respect to the funds rate, the projected glide path is little different from what the Fed has described previously.  The biggest difference is that, for the first time, they provide a glimpse of their expectations for GDP growth, the unemployment rate, inflation, and the level of the federal funds rate for 2020.  The Fed anticipates one final rate hike in 2020 which would bring the funds rate to 2.9%, which happens to be its estimate of the long-term equilibrium rate.  At that point short rates would no longer be “stimulative”.  For the first time in more than a decade they would be “neutral”.

For the Fed to follow that trajectory for the federal funds rate several things must happen.  First, the Fed expects GDP growth to be essentially 2.0% in in 2018, 2019, and 2020.  It believes that the economy’s “potential growth rate is 1.8%.  With the economy at full employment and growing at a pace only marginally faster than potential, the unemployment rate will decline very slowly.  It is at 4.4% currently.  The Fed expects it to fall only 0.2% in the next three years to 4.2% by the end of 2020.  Similarly, with GDP growth only slightly exceeding its potential growth path, the Fed expects the inflation rate (as measured by its preferred measure which is the personal consumption expenditures deflator) to climb from 1.4% currently to 2.0% throughout the entire 2018-2020 period.

If all of that transpires the Fed would achieve its two stated goals of full employment and a 2.0% inflation rate.

The other important part of the Fed’s formal announcement this week is that it intends to gradually reduce its holdings of U.S. Treasury and mortgage-backed securities beginning next month.   Initially it will reduce its holdings by $6 billion per month.  The monthly reduction in its security holdings will increase in steps of $6 billion at three month internals until it reaches $50 billion per month.  At that pace it will take until mid-2023 for its portfolio to shrink to the level the Fed believes is the minimum necessary to effectively implement monetary policy.

But nothing about this forecast is cast in stone.  The Fed believes that potential GDP growth will be steady at 1.8% between now and 2020.  Our sense is that individual and corporate income tax rates will be cut, and that Trump will continue to eliminate unnecessary and duplicative Federal regulations.  That combination of policy changes will significantly boost corporate spending on technology, new plants, and equipment.  The additional investment spending, in turn, will boost productivity growth.  As a result, we believe that between now and 2020 potential GDP growth will accelerate from 1.8% to perhaps 2.8%.  If actual GDP growth is roughly in line with this faster potential growth pace, then the inflation rate should not exceed the Fed’s 2.0% target.  However, faster nominal GDP growth will imply higher interest rates, in particular a higher equilibrium level for the funds rate (perhaps 3.5%).

But nobody – neither the Fed nor us – knows what the president and Congress will be able to achieve.  But if we are right and some of the previously described policy changes are implemented, the Fed’s current forecasts of GDP growth, the inflation rate, and the equilibrium funds rate will change.  But make no mistake.  Regardless of which set of forecasts might be more accurate, the Fed has told us as explicitly as it can, that it intends to very gradually, but steadily, return its monetary policy to a more neutral stance.  They key word, in our view, is “gradual”.  The gradual nature of the described rate hikes, and the gradual shrinkage of its balance sheet, will allow the economy to remain on a steady growth path through 2020.  If that occurs the expansion will break the current record of 120 consecutive months (or exactly 10 years) established during the decade of the 1990’s and become the longest expansion on record. That would be an impressive outcome.

Gradual is good.

Stephen Slifer


Charleston, S.C.

Job Gains Boost Income, Reduce Poverty

September 15, 2015

This Census Bureau recently released its annual report on income and poverty.  The results were encouraging as family income rose to its highest level on record.  In addition, the percentage of Americans in poverty has fallen sharply in the past two years and has now returned to its pre-recession level.  After a long period of recovery from the lethal combination of the 2000 tech bust and the 2008-09 housing meltdown, the economy is on the road to renewed prosperity.  In our view these results came about because nearly five million new jobs were created in 2015 and 2016 and the job gains are continuing at a healthy clip thus far this year.  The economy is now in its ninth year of expansion with no end in sight.  While some economists bemoan the relatively slow pace of expansion, in our view that is exactly what is needed.  Slow and steady GDP growth with its commensurate creation of new jobs will keep the expansion on track in the quarters and years ahead, produce jobs, further boost income, and reduce poverty.

Median inflation-adjusted household income rose 3.2% last year to a $59,039.  That follows a 5.2% gain in 2015.  Those back-to-back gains have boosted inflation-adjusted family income to a record high level.  The previous high of $58,665 occurred in 1999.  But income fell when the technology bubble burst in 2000.  Income staged a partial recovery between the end of that recession and 2007, but got clobbered again during the housing crash and global financial crises in 2007-2008.  Household income hit bottom in 2012, edged upwards in 2013 and 2014 and has taken off in the past two years.

Why this impressive rebound?  Jobs.  The economy produced five million new jobs in 2015 and 2016 and is on track to add another two million jobs this year.  And they are good jobs with almost all of them full-time, all-year-around positions.  Once more Americans start receiving paychecks it is not surprising that income rises.  The income gains were widespread.  Whites, blacks, Hispanics, and Asians all registered solid growth in income (although gaps between races remain wide).   Income rose across all age categories.  Males and females both experienced rising income and, perhaps most important, the female-to-male ratio of earnings rose sharply in 2016 for the first time since 2001 and, at .805, is the highest such ratio since record keeping began in 1960.

Having said all of this, income dispersion remains wide.  The widely used Gini index of income dispersion was .481 in 2016.  On this scale a reading of “0” would mean that all households have an equal share of income, while a score of “1” would means that one household has it all.  Many Americans justifiably remained concerned about the widening income gap between rich and poor.  We share that concern.  Some suggest that this was the result of the Obama presidency which advocated for many income reallocation policies.  While it is true that the Gini index rose during the Obama administration from 2009 to 2016, this income disparity has been steadily widening since the mid-1970’s which transcends the administration of many presidents from both political parties.

What should politicians do to narrow the income gap?  Simple.  Keep the economy growing!  In our opinion, any policy which attempts to re-distribute income from the rich to the poor will simultaneously reduce GDP growth.  We oppose any significant increase in taxes on super-wealthy Americans.  We also oppose additional entitlement programs to boost income for those at the lower end of the spectrum.  We cannot afford such measures.  As it stands, spending on entitlements now accounts for $0.70 of every $1.00 spent by the U.S. government and that percentage has doubled in the past 50 years.  Our sense is that if the economy continues to grow at a moderate clip and, in the process produces jobs, the income disparity will, at a minimum, level off.  It is perhaps noteworthy that in the past two years the Gini index was essentially unchanged.  That does not happen very often in an expansion.

As a result of this solid growth in income the percentage of Americans in poverty fell 0.8% in 2016 to 12.7%.  This comes on top of a 1.3% drop in 2015.  At 12.7% the poverty rate for 2016 is back to where it was prior to the recession. And with additional jobs gains this year and continuing low inflation, the poverty rate is almost certain to decline again in 2017.  Keep in mind that the lowest poverty rate on record was 11.1% in 1973.  We are not there yet, but if we keep the expansion going we should duplicate that level within another couple of years.

Economists love to find the dark side of every economic indicator.  Our sense is that such pessimism is unwarranted.  While far from perfect, the economy is doing well.  And if, as we expect, the economy continues to expand for at least another three years (to mid-2020) the job gains produced will boost income, lift more and more Americans out of poverty, and reduce the income disparity between rich and poor.

Stephen Slifer


Charleston, S.C.

Hurricane Economics

September 8, 2017

Hurricanes are currently dominating the headlines and for good reason.  For those in the path of a major hurricane the impact is devastating between winds, storm surge, and flooding.  The images from Houston and the Caribbean islands are disturbing.  As this article is being written Miami is in the bullseye.  In our hometown, Charleston, S.C. the topics of discussion are all hurricane-related – evacuation, the inability to find water, gasoline stations running out of fuel, etc.  Jim Cantore has not arrived yet.  He is still in Miami.  Clearly, parts of the country have been clobbered and others will soon suffer a similar fate.  But will this trigger a recession for the economy as a whole?  Will the post-hurricane rebuilding effort significantly boost GDP growth in the quarters ahead?  The answer to both questions is no .  Here is what history suggests.

The two most recent hurricanes that might provide some guidance are Hurricanes Katrina and Sandy.

Katrina slammed into the Gulf Coast on August 29, 2005, devastated New Orleans and the surrounding areas in Louisiana, Alabama, and Mississippi.  While the storm itself did significant damage its aftermath was catastrophic as levees were breached which led to massive flooding.  Hundreds of thousands of people were displaced.  The hurricane caused $108 billion in damage.  Theory suggests that Katrina must have had a huge negative impact on GDP growth when the storm hit, followed by a rebound during the re-building.  But did that happen?  In the four quarters prior to the storm GDP growth averaged 3.4% (3.6%, 3.5%, 4.3%, and 2.1%).  The economy was humming along nicely.  What happened in the third quarter of 2005?  3.4%.   It is hard to see any negative hurricane impact.  What about the fourth quarter?  2.3%.  A little softer than in other recent quarters perhaps but nothing of consequence.

What about the next four quarters?  Wasn’t there a big rebound from the rebuilding effort?  Not really. GDP growth averaged 2.4% (4.8%, 1.2%, 0.4%, and 3.1%).  The 4.8% growth rate in the first quarter of 2006 may have incorporated a post-storm rebound, but nothing beyond that.

Why wasn’t there a more noticeable effect from Katrina?  Perhaps because the storm did not hit any major cities.  New Orleans was, at that time, a city of about 500,000 and was the country’s 50th largest city.

Hurricane Sandy worked its way up the entire length of the east coast between October 26 and October 29, 2012 inflicting damage in every state along the way.  The National Hurricane Center estimates that Sandy caused $71 billion of damage.  The most significant problems occurred along the New Jersey coast and in New York City when the East River overflowed its banks and flooded seven subway tunnels.  What happened to GDP growth?  In the four quarters prior to the hurricane GDP growth averaged 2.4% (4.5%, 2.7%, 1.9%, and 0.5%).  In the fourth quarter GDP of 2012 growth was 0.1%.  The negative impact on GDP growth was more noticeable.

In the subsequent four quarters growth averaged 2.7% (2.8%, 0.8%, 3.1%, and 4.0%).  The re-building rebound is very hard to decipher.

So what about the Harvey/Irma duo?  Hurricane Harvey hit Houston which is the fourth largest city in the U.S. with 2.3 million people and a major oil and shipping center.  Miami is farther down the list in the number 42 position with a population roughly equivalent to New Orleans.  Some suggest that the impact from Harvey alone could exceed Katrina.  Add in Miami and wherever else Irma might go and total damage could reach $140 billion.

History suggests that whatever negative GDP impact we get will be concentrated in third quarter GDP with perhaps some spillover into the fourth quarter.  Currently, with about half of the data for the quarter having already been reported, estimates for the third quarter are centered on the 2.5% mark.  We are at 2.7%.  Don’t be surprised if those estimates get marked down somewhat between now and October 27 when we get our first look at third quarter growth.

The positive impact from rebuilding may harder to decipher.  We might see some modest impact in the first quarter of next year but with little discernible impact thereafter.   We currently peg first quarter GDP growth at 2.8%.  If we reduce our growth estimate for the third quarter of this year we might raise first quarter growth slightly.  Given what we know now, we expect GDP growth to average 2.7% or so over those two quarters.

The most important conclusion is that hurricanes may create some short-term GDP distortion on both the downside and then the upside.  That makes them just like any other major weather-related event – a like snowstorm.  The effect is temporary.  There is no evidence to support some economists’ contention that the rebuilding effort will significantly boost GDP growth in 2018.  If you think about it that makes sense.  The economy is at full employment with the unemployment rate at 4.4%.  To have a significant positive impact on the economy builders need to hire lots of additional bodies.  But where do they come from?  Employers are already having a hard time finding qualified workers.  For that reason the positive impact on GDP growth will be muted.  Construction firms may lure some workers to help in the re-building process, but those people will not be working elsewhere in the economy.  That may alter the composition of growth in favor of construction at the expense of growth in other sectors.  It will not change the trend rate of expansion.

In general, the macro impact will be small with some shifting in growth from one quarter to the next.  Do not buy into the notion of any long-term positive stimulus.  That is not going to happen.  The micro impact is something quite different.  You do not want to be in the path of one of these monsters.

For now stay safe.  We can worry about the GDP impact later.

Stephen D. Slifer


Charleston, S.C.

Recession Fears Fade into the Past

September 1, 2017

Consumers not only feel good they are increasing their appetite for debt.  Much has been made of the fact that consumer debt outstanding has climbed to a record high level.  Some economists view this as a danger signal.  We do not.  While debt outstanding has risen steadily, consumer income has also been growing.  As a result, debt in relation to income remains close to a 30-year low.  Rather than view this with alarm, we see it as a sign that consumers are finally shedding the fear caused by the recession and are, at long last, beginning to finance some of their spending with debt.

Consumers’ began to tack on some debt in mid-2013 and it has been rising steadily for the past four years.  It gets a catchy headline when economists note that it has now surpassed its pre-recession high and risen to a record level.  That sounds worrisome.  It is not.

While the amount of debt outstanding has been growing steadily, its growth rate at 4.5% currently is modest.  Growth of that magnitude is not a problem.

The reason consumers feel comfortable taking on more debt is because their income has been rising.  The growth in income has been driven by extraordinarily steady gains in employment.  In fact, payroll employment has climbed every month for the past seven years — since September 2010 to be exact.  When employment rises more people receive a paycheck, and that generates growth in income.

Thus, consumers have become more willing to take on additional debt (and are easily able to do so) because their income has been rising.  The financial obligations ratio measures aggregate consumer debt in relation to income.  That ratio remains at essentially the lowest level since the early 1980’s.

Keep in mind also that consumer net worth is at a record high level and continuing to climb at a solid 8.3% pace. That increase reflects the combination of the relentless upward movement in stock prices and 5.0% growth in home prices.

Given all of the above it is not surprising that the University of Michigan’s consumer sentiment index and the Conference Board’s measure of consumer confidence are both at their highest levels in more than a decade.   With the unemployment rate at 4.4% consumers have little fear of losing their job and the  monthly job gains show no sign of wavering.  Thus, consumer income should continue to rise.  The stock market and home price increases continue to boost the value of their assets.  They have very little debt.  Furthermore, there is still a reasonable chance that individual income tax rates will be cut by the end of this year.  No wonder consumers are feeling good and willing to take on more debt.

Consumer’ willingness to incur debt is a good omen, not a cause for alarm.  Clearly, consumers got whacked during the recession.  Many lost their job – some for a very long time.  Even if they found a job quickly the unemployment rate remained high for years and they worried about what might happen if they lost their new job.  The value of their home fell 25%.  Many could not sell even if they wanted to because they were underwater and owed more than their house was worth.  Not surprisingly consumers – and business leaders – behaved cautiously.  They refrained from unnecessary spending.  They were unwilling to take on debt.  Business people were reluctant to hire new bodies.  The 2007-08 recession was the steepest drop in economic activity since the great depression seventy years earlier.  Few people alive today have ever experienced anything quite like that.  They were truly scared.  But eventually time heals all wounds and the fear factor begins to recede into the background.

Renewed willingness to borrow is a healthy sign for the economy in the quarters ahead.  If consumers become more willing to spend and take on debt, the animal spirits of business people will get a boost as well.

Stephen Slifer


Charleston, S.C.

Lots of Jobs — And Most Are Good

August 25, 2017

The economic pessimists grudgingly admit that the economy has produced a significant number of jobs thus far in the expansion, although at a slower pace than in other business cycles.  However they also claim that they are not “good” jobs.  They are part-time jobs rather than full-time positions.  They are low-paying jobs in the leisure and hospitality industry or in retail trade rather than higher paying positions.  Our sense is that these claims are grossly misleading.  The labor market is healthy, a steady stream of new jobs is being created each month with no end in sight.  They are all full-time positions.  And jobs being created in low paying industries are only a small part of overall job growth.

Since the expansion began in July 2009 the economy has produced 15.6 million new jobs.  That works out to 1.95 million jobs per year or 162 thousand jobs per month.  Yes, that is a slower pace than in other business cycles.  However, with the unemployment rate at a 17-year low of 4.3% it is hard to argue that the economy has not been creating enough jobs.

The current expansion has continued for eight years and one month – 97 months – which makes it the third longest expansion on record.  Remarkably, the economy has created jobs every single month since September 2010.  So while job creation has been relatively slow, it has been extremely steady.

A while back the boo-birds suggested that the jobs being created were part-time positions or temps.  That is simply not the case.  They are full-time positions.  Of the 15.6 million jobs created since the expansion virtually all are full time jobs.  Less than 0.1 million jobs are part time.

Aren’t most of those jobs “low-paying”?  No.   First, let’s define what jobs should be counted as “low-paying”.  In July average hourly earnings were $26.36 with hourly wages ranging from a low of $14.43 per hour to a high of $39.13.  For purposes of this discussion we categorized low-paying jobs as ones which pay less than $20.00 per hour.  High-paying jobs are ones where hourly earnings are in excess of $30.00 per hour.

When economists talk about low-paying positions (less than $20 per hour) the categories that typically come to mind are ones in the leisure and hospitality industry ($15.46) and ones in retail trade ($18.14).  But there are other types of jobs in this category – for example, janitorial services ($14.43), security guards ($17.21), landscaping ($18.64) and office clerks ($19.79).  Of 146.6 million total jobs, 43.4 million or 30% can be categorized as low-paying.

High paying jobs (in excess of $30 per hour) include utility workers ($39.13), information industry ($38.44), financial ($33.09), mining ($33.08), and the very broad “professional and business services” category $31.63).  Included in this latter category are legal services, tax preparation, accounting, architectural firms, engineering, computer system design, management, scientific research, advertising, supervisors, and operations managers.  There are 21.6 million “high-paying” jobs in the economy which represents 15% of the total.

Everything else falls into the $20-30 per hour range which we categorize as “middle-paying” jobs.  There are 81.6 million jobs in this category or 55% of the total.  So while the discussion seems to focus on whether jobs are low- or high-paying in nature, the bulk of the jobs in our economy are in the $20-30 per hour, middle category.  Remember, average hourly earnings are currently $26.36.

But what about job growth since the recession began.  Which categories have produced the largest number of new jobs?  As noted earlier the economy has generated 15.6 million new jobs since the expansion began in July 2009.  Of those, 6.8 million or 44% are low-paying positions, 6.5 million or 41% are medium paying jobs, and the remaining 2.3 million or 15% are high paying occupations.  So while a significant number of low paying positions have been created in the past eight years, two-thirds of the hiring (41% plus 15%) has been done for medium- and high-paying positions.


It would be nice to create more high-paying jobs.  But those jobs typically require some sort of advanced degree or a specific skill to attain – which is why they are high-paying jobs in the first place.  Certainly the economy is moving in the direction of providing the requisite education.  Technical colleges are working closely with employers to train workers with exactly the skillset that they need.  Here in the Charleston area we see Trident Tech working with Boeing, Bosch, Mercedes and Volvo on just such programs.

Apprenticeship programs are becoming increasingly available.  Typically, high school kids go to school four days a work and work at an employer such as the ones above the other day of the week to learn exactly what they need to know.  Once they graduate from high school there is a good, high-paying job awaiting them.  Employers might also want to think about in-house apprenticeship programs for workers who have been out of a job for a long period of time.  Educating workers is a lengthy process but the nation as a whole is responding quickly.

The point of all this is that the economy is not just cranking out a large number of “low-paying” positions.  Two-thirds of all jobs created since the recession ended are in the middle and high paying categories.  It is an egregious distortion of the facts to suggest otherwise.

Stephen Slifer


Charleston, S.C.