Wednesday, 22 of November of 2017

Economics. Explained.  

Category » Commentary for the Week

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.

Dampening Expectations

August 18, 2017

The economy is chugging along nicely.  But non-economic events like the North Korean crisis and Charlottesville, and disquieting tweets from President Trump, are causing business leaders and politicians to wonder if he can accomplish his political agenda.  If it ever becomes clear that tax cuts are not going to happen, the stock market is going to pull back sharply.  Investment spending will be curtailed, and GDP forecasts will be trimmed.  Rather than having a legitimate hope that GDP growth could quicken from its current 2.0% pace to 2.8% or so by the end of the decade, forecasts would revert to the same slow growth rate we have seen for the past several years.

GDP growth was 1.2% in the first quarter and 2.6% in the second.  Third quarter growth is likely to be about 3.0%.  Consumer spending is holding steady at about 2.5%.  What gives us hope for faster growth ahead is the fact that investment spending surged in the first half of this year.  Nonresidential investment jumped 7.0% in the first quarter followed by 5.1% growth in the second quarter and is on track for a 4.0% increase in the third quarter.  Keep in mind that business spending was largely unchanged in 2015 and 2016.

There can be little doubt that this acceleration is due in large part to President Trump.  He came into office advocating significant health care reform, lower individual and corporate income taxes, relief from a stifling regulatory environment, and an opportunity for business leaders to repatriate overseas earnings at a favorable tax rate.  That is a very pro-business agenda.  It would enhance corporate earnings, boost growth in productivity, and trigger faster GDP growth both near-term and in the years beyond.

In response to Trump’s proposed agenda the stock market climbed 18% between the election and mid-August.  The dollar jumped 4.0%.  Both domestic and foreign investors were encouraged.  But now all are beginning to question Trump’s ability to actually implement his agenda.  He promised to quickly repeal and replace Obamacare.  That did not happen.

His steady diet of disturbing tweets is bringing further into question his ability to pass his agenda.  For example, his extraordinary warning that any further threats by North Korea against the United States would result in “fire and fury like the world has never seen” brought the U.S. the closest it has been to a nuclear confrontation since the Cuban missile crisis in the 1960’s.  Those statements were scary and drew widespread criticism.  However, they sent a strong signal to both North Korea and China that the U.S. treated those threats seriously.  For now Kim Jong-Un has backed off his threat to fire missiles at Guam and said instead that he wanted to monitor the “reckless Yankees” but left open the door for a strike later.  While the crisis is far from over it has abated for now.

Following the attack in Charlottesville Trump initially said, “We condemn in the strongest possible terms this egregious display of hatred, bigotry and violence on many sides”.  That seemed to suggest that both groups were at fault.  A day later he said “Racism is evil.  And those who cause violence in its name are criminals and thugs, including the KKK, neo-Nazis, white supremacists and other hate groups that are repugnant to everything we hold dear as Americans.”   A day later he recanted that statement and said “I think there is blame on both sides.”  His unwillingness to explicitly and consistently attribute blame to the far-right extremists has cost him the support of many business leaders as one after another chose to resign from his business councils and he was eventually forced to dissolve them.  Republican leaders like John McCain, Lindsey Graham, and Marco Rubio strongly denounced his comments.

What does all of this mean from an economic viewpoint?  It suggests that both U.S. and foreign investors are becoming increasingly nervous and concerned that Trump will be unable to accomplish what he had hoped to do.  The dollar rose sharply between the time of the election and the end of January.  It has since fallen 6.5%.  Earlier this year the Euro cost $1.06.  Today it costs $1.18.  Earlier this year one U.S. dollar bought 115 yen.  Today it purchases 110 yen.  Admittedly, not all of the drop can be attributed to a lack of faith in President Trump.  In the past several months GDP growth in Europe and Asia has gathered some momentum which enhanced the desire by foreign investors to pull back from dollar-denominated investments.

The S&P 500 index rose 18% from the time of the election through mid-August, but it has contracted by 2% in the past few days.  That is another hint that U.S. investors are beginning to question Trump’s ability to achieve tax cuts and health care reform.  We share that concern but are unwilling to abandon the idea that a diluted version of tax cuts and health care reform will pass at some point.

If it becomes increasingly apparent that Trump will have neither the legislative nor business support to pass his agenda, the markets will make the requisite adjustment.  The stock market will encounter a correction and give back much of its run-up since the election.  Business leaders will experience a renewal of uncertainty and curtail investment spending.  Economists will have to trim their expectations for GDP growth and give up on the notion of a pickup in potential growth to 2.8% by the end of the decade.  GDP forecasts will, instead, revert to the 2.0% mark for the foreseeable future with little hope of breaking out of the slump.  Let’s hope we do not have to go there.

Stephen Slifer


Charleston, S.C.

War Talk – Real?  Or Rhetoric?

August 11, 2017

This is an economics column and for the most part we shy away from political events — unless they are likely to have a significant impact on the U.S. economy.  The threats of war emanating from both Pyongyang and Washington are clearly disturbing and could have dire consequences around the globe.  This is not the same discussion as whether President Trump’s proposed tax cuts, repatriation of earnings, and de-regulation can boost GDP growth by a couple tenths of a percent.  Or whether the Fed will continue it glacially slow pace of raising interest rates.  This is about an event that could potentially leave millions of people dead and quickly spread around the globe.  We would be remiss in not discussing the possibility.

We do not expect a war outcome.  Our sense is that there is a lot of political posturing on both sides.  But the reality is we know nothing.  We do not know what is in the heart of either Kim Jong-un or President Trump.  Mr. Kim has been referred to as “a total nut job” by President Trump.  But, then again, our own president has made some rather outrageous statements in the seven months he has been in office and may be viewed similarly by others.  Both men are prone to exaggerated rhetoric.

Mr. Kim took office six years ago at the age of 27 and most people viewed him as an inexperienced leader and thought he would not last long.  They significantly underestimated him.  Now he has nuclear missiles that can strike the United States and he is not going to give them up.  Our view (or perhaps our hope) is that he is willing to contain his nuclear arsenal in exchange for an end to the sanctions that limit North Korea’s ability to trade with the world.  But the quid pro quo  is that the United States and the rest of the world will have to accept the fact that North Korea has nuclear weapons.

Given the current war of words between North Korea and the United States we do not know how we get from where we are to the less threatening outcome described above.  Should the U.S. establish a naval blockade?  Should it perhaps shoot down missiles launched by North Korea? Should it launch a limited strike against nuclear launching missile sites?  What would be the consequences if it chose any of those options?  All of them carry the risk of escalating the crisis into a full blown military confrontation.  Who is going to blink first?  The best hope is that China will intervene and use its influence to get North Korea to halt its nuclear weapons agreement.

The threat by Kim Jong-un to launch four missiles that would fly over Japan and land near Guam by mid-August is impossible to retract without losing face.  President Trump’s threat to respond with “fire and fury like the world has never seen” is equally troublesome.  Such threats cannot be taken lightly give the potential consequences.  Neither side will “win” if nuclear missiles are launched or even in the event of a non-nuclear confrontation.  Large portions of the Korean peninsula – both North and South Korea – will get flattened.  Damage could further spread to Japan, U.S. military bases in the region or even Guam, Hawaii, or Alaska.

What strikes us is the lack of concern around the globe.  The Korean Stock Exchange has declined 4.5% since the beginning of August which strikes us as a rather modest selloff.  South Koreans are apparently so used to living under constant threat from the North that they are not particularly disturbed by the current war of words.

The S&P has dipped only about 1.5% from a record high level earlier this month.

The decline in the Shanghai Composite Index has been largely imperceptible.

We certainly hope these various stock exchanges are correct in their apparent conclusion that the current war of words will, in the end, be nothing more than that.  We share the same conclusion, but are well aware that the downside risk if that view is wrong is enormous.  The downside risk that would occur if Trump cannot pass his tax cuts or is frustrated by his inability to simply the federal regulatory process is minuscule by comparison.  Given the enormous downside risk of war we would suggest that stock investors pare their positions slightly to guard against the possibility of a near-term adverse event.

We are well aware that hope is not a strategy.  Having said that, we hope that President Trump and his advisers as well as world leaders everywhere can find the wisdom to peacefully resolve this crisis.  In the meantime, a somewhat more cautious investment stance is warranted.

Stephen Slifer


Charleston, S.C.

Free Trade Is Not the Issue –Fair Trade Is the Problem

August 4, 2017

The U.S. trade imbalance has been maligned by many.  Some economists contend that the U.S. losses jobs when American companies build plants overseas rather than in the United States. They also believe that continuous trade deficits allow foreigners to accumulate so many dollars that they are “buying up America”.  The solution is, therefore, to slap massive tariffs on goods coming into the United States from China and Mexico (in particular) in an attempt to rein in the deficit.

But let’s be clear.  The trade deficit itself is not the problem.  Rather, it is a sign of a healthy economy.  The United States economy is growing more quickly than the rest of the world and, as a result, we are buying more goods from foreign countries than they are buying from us.  That is not a bad thing.  Furthermore, Americans are freely buying all those goods from China, Mexico, and elsewhere.  It is not some nefarious plot to undermine the economic health of the U.S.   The reality is that if Americans would choose to save more and spend less, we would not be purchasing so many goods from China, Mexico and elsewhere in the first place.  But, primarily to take advantage of lower prices, we willingly purchase imported products.  As a result, our imports grow rapidly and the trade gap widens.

Furthermore, it is hard to argue that the size of our trade deficit is costing jobs.  With the unemployment rate at 4.3% and a shortage of available workers, that contention is a little hard to swallow.

The other side of the coin is the current account surplus.  Whenever, we buy goods from other countries they accumulate dollars.  Therefore, the current account surplus is the mirror image of the trade account deficit.  Those countries then invest those dollars in U.S. assets like real estate, the stock market, or financial assets – U.S. Treasury securities in particular.  It is important to recognize that the capital stock of the U.S. is not a fixed amount to be divvied up amongst U.S. and foreign entities.  It is constantly growing.  Thus, foreign investment in the United States is a good thing.  But right now the U.S. budget deficit is so large that these foreign capital inflows are being gobbled up largely by the government sector.  If our policy makers would take action to cut government spending and shrink the budget deficit, more of these overseas funds would flow to the private sector.  Private sector investment is what boosts productivity growth and raises our standard of living.  Thus, “free trade” is a good thing.

But free trade is not the same thing as “fair trade” and that is where the problem exists.  When countries impose tariffs on goods coming into their country to protect domestic industries they are carving out an unfair advantage for themselves.  In a recent op-ed piece in the Wall Street Journal, Commerce Secretary Wilbur Ross noted that China’s tariffs are higher than those of the U.S. in 20 of 22 major categories of goods.   Europe imposes higher tariffs in 17 of 22 categories.  In the automobile industry, for example, the E.U. charges a 10% tariff on imported American cars while the U.S. imposes a mere 2.5% tariff on European cars arriving in the United States.  China slaps U.S. automakers with a 25% tariff and an even higher tariff on luxury vehicles.

The non-tariff trade barriers are even more oppressive and come in a variety of forms like daunting procedures to register imports and requirements that foreign companies build local plants.  Both the E.U. and China boost their export industries via low-cost loans to export companies, refunds of value added taxes, and below market real estate purchases.  The U.S. simply does not provide this type of assistance to its export industries.  Secretary Ross does a nice job of highlighting these tariff and non-tariff barriers to trade.

Economists generally agree that free trade is a good thing, boosts economic growth in both countries, and reduces the prices that consumers pay.  A trip to WalMart, COSTCO or Target will quickly highlight the advantage of lower prices for imported goods.  But all countries need to play with the same set of rules.  Tariff and non-tariff barriers to trade can only be characterized as “cheating”.  None of us will willingly choose to play in any game where the deck is stacked against us.  Why should our export industries be forced to do so?  Trump is right in going after those countries that have chosen to protect their domestic industries via these mechanisms.  And that is not “protectionist”.   It is simply calling out cheaters for what they are and insisting on a level playing field.

Stephen Slifer


Charleston, S.C.

GDP Growth Rebounds, Healthy Growth Will Continue

July 28, 2017

Second quarter GDP growth came in at 2.6% which was roughly in line with what had been expected.  More importantly, the mix of spending was positive and portends a solid pace of expansion in the quarters ahead.

Consumer spending which is about two-thirds of the GDP pie climbed by a robust 2.8% rate in the second quarter.  Looking ahead, the outlook for consumer spending seems solid.  Fueled by a steadily rising stock market and increases in home prices, net worth is at a record high level.  Consumer confidence is the highest it has been thus far in the cycle.  The economy continues to crank out 170 thousand jobs per month which boosts growth in consumer income.    Interest rates remain low with mortgage rates at the 4.0% mark.  It is hard to see how consumer spending is going to slow down in the second half of this year.  We expect this spending category to climb 2.6% both this year and next.

Another GDP component that needs to be highlighted is nonresidential investment.  After having been essentially unchanged in 2015 and 2016, corporate spending jumped 7.0% in the first quarter and continued at a solid 5.1% pace in the second quarter.  Those are the fastest back-to-back growth rates in three years.  We had hoped that the prospect of corporate tax cuts, a reduced regulatory burden, and the ability to repatriate corporate earnings at a favorable tax rate would boost business confidence and enhance their willingness to spend on additional equipment and technology.  We are clearly encouraged by the first half results.

Because investment spending is a primary determinant of growth in productivity, our hope is that renewed vigor in the pace of investment spending will boost productivity growth from 0.8% currently to 1.8% or so by the end of the decade.  The additional 1.0% increase in productivity growth should boost potential GDP growth for the U.S. from 1.8% today to 2.8% by the end of the decade.  A fastest potential growth rate means faster growth in our standard of living.

The other category we would like to highlight is net exports.  The net exports deficit narrowed slightly in each of the past two quarters.  When it narrows it adds to GDP growth in that quarter.  As shown below, we expect this category to be essentially unchanged between now and yearend and in 2018.  What happens in this category is determined, to a large extent, by what happens to the dollar.

As oil prices plunged in the second half of 2014 and 2015 the dollar strengthened by more than 20%.  When that happens U.S. goods are more expensive for foreigners to purchase.  Foreign goods are cheaper for Americans to purchase.  As a result, the trade gap widened considerably during that period of time and subtracted about 0.5% from GDP growth in those two years.  Following the election the dollar initially rose sharply as foreign investors believed that the tax cuts, repatriation of earnings, and a reduced regulatory burden would substantially boost GDP growth.  But now those expectations have been curtailed and the dollar has fallen 5% in the past six months.  Initially, it looked like the dollar might strengthen this year and trade would subtract a modest amount from GDP growth in 2017.  But now the dollar is likely to change very little and trade should not subtract anything.

Putting all of this together we conclude that GDP growth in the second half of this year should climb by 2.7% and expand at roughly that same pace in 2018.  Keep in mind that GDP growth was stuck around the 2.0% mark in 2015 and 2016.

For the Fed faster GDP growth is part of the equation that will determine what they are going to do in the months and quarters ahead, the other part is inflation which has been extremely well-behaved in the first half of this year.  The core CPI rose 2.2% in 2017.  It has since backtracked and is now climbing at a modest 1.7% pace.

However, it has been distorted by changes in wireless phone and prescription drug categories.  There is currently a bidding war amongst wireless phone providers and, as a result, phone prices have declined 13% in the past year.  This will not continue forever.

At the same time prescription drug prices have declined since the election.  In October of last year prices were rising at a 7.0% pace.  Since the election prescription drug prices have fallen at a 1.0% rate.  During the election campaign Trump promised to drive down drug prices by allowing consumers to import prescription drug medicines from abroad, and having Medicare negotiate prices directly with pharmaceutical companies.  Thus far he has been quite successful.  However, this category is unlikely to remain constrained for a protracted period of time.

Thus we remain convinced that the tightness in the labor market will boost wages, and the shortage of available housing will put upward pressure on rents.  For that reason, we expect the overall CPI and the core inflation rate to increase 2.5% in 2018 which is slightly above the Fed’s target.

In short, we were pleased with the composition of the second quarter GDP report and think it bodes well for GDP growth both in the near-term and in the longer-term.  Over time the inflation rate will move above the Fed’s target.  This scenario will keep interest rates on a gradual upward trajectory and, in a new wrinkle, the Fed will start running off some its security holdings by the end of the year.

Stephen Slifer


Charleston, SC

No Commentary This Week — Vacation

Hi all,

Seems to be a rather quiet time.  Decided to take a few days off.  Back in full swing next week.

All the best.


Can Women Solve the Problem?

July 14, 2017

The economy’s speed limit has slipped from 3.5% during the 1990’s to 1.8% today.  That growth rate can be estimated by adding the growth rate of the labor force to the growth rate of productivity.  We have long argued that with so many baby boomers retiring that little could be done to stimulate growth in the labor force during the next decade.  Hence, the only viable way to boost potential growth was via increased corporate investment which would boost the growth rate of productivity.  But in a recent speech Fed Chair Yellen suggested that the U.S. could adopt policies designed to encourage women to work, boost labor force growth, and lift potential GDP growth in the United States.  Could potential growth rebound to the 3.5% pace seen in the 1990’s?  Perhaps.

Potential GDP growth represents the sum of two numbers – the growth rate of the labor force and the growth rate of productivity.   In the 1990’s the labor force was zipping along at 1.5%, productivity growth was 2.0%.  Add them up and the economy’s potential growth rate was 3.5%.  Today labor force growth has slipped to 0.8% while productivity has slowed to 1.0%.  Thus, potential growth today is 1.8%.  But it does not have to be 1.8% forever.  Policy measures can help.

With respect to the labor force side of the equation, when baby boomers retire they drop out of the labor force.  Given that the boomers will continue to retire for another decade we have argued that there is little chance for a pickup in the growth rate of the labor force.  Janet Yellen disagrees.

Citing a Cornell University study released in 2013 by Francine Blau and Lawrence Kahn, Yellen pointed out that between 1990 and 2010 the participation rate for women rose dramatically throughout Europe, but in the U.S. it was essentially unchanged.  For example, the non-U.S. average climbed from 67% in 1990 to 79.5%.  Furthermore, the pickup in female participation was widespread – Canada, Australia, France, Germany, Italy, and Spain all experienced a double-digit gain. Meanwhile, in the U.S. the female participation rate edged upward from 74% to 75.2%.  The survey included 22 countries.  In 1990 the U.S. ranked #6.  By 2010, it had dropped to a shocking #17.  Participation rates elsewhere not only caught up with the U.S., they surpassed it.

This result was no accident.  It came about because of family friendly policies designed specifically to incorporate women into the labor force.  Some women choose to drop out of the labor force to raise their offspring.  But others would like to work but the financial strains of doing so prevent that from happening.  Those women represent untapped potential GDP growth.

  1. Paid maternity leave.  In the U.S. employers must provide 12 weeks of unpaid maternity leave.  Elsewhere, maternity benefits were longer and usually paid.  During the survey period outside the U.S. these entitlements rose from 37.2 weeks to 57.3 weeks.   Having the right to get their job back almost certainly raises the job prospects who those women who leave the labor force during childbirth.  But several questions arise.  Does offering such a benefit encourage women to remain out of the work force longer than they otherwise would?  Does the employer benefit?  During leave time the employers must pay the person on leave as well as her replacement.  This raises the expected cost of employing women of childbearing age.
  2. Right to work part time. During the survey period many European countries adopted policies that give women the right to demand a change to a part-time work schedule.  Clearly this is a benefit to women.  But would employers be less willing to hire in a woman in the first place given that at some point down the road she could demand such a benefit?
  3. Publicly provided child care services. Such a benefit would be attractive to women because it reduces the cost of working outside the home.  And, unlike the part time benefit, it would not increase the employer’s cost of hiring women for part time positions.

Yellen noted that “policy differences – in particular, the expansion of paid leave following childbirth, steps to improve the availability and affordability of childcare, and increased availability of part-time work – go a long way toward explaining the divergence between advanced economies.”  And, “if the United States had policies in place such as those employed in many European countries, female labor force participation could be as high as 82%.”

But will higher labor force participation rates among women boost potential GDP?  Ms. Yellen thinks so. A Fed study concluded that between 1948 and 1990 the rise of female participation contributed about 0.5% per year to the potential growth rate of real gross domestic product.

So what might happen to potential GDP growth?  Suppose for a moment that the policies described above by Fed Chair Yellen boost labor force growth by 0.5%.  Let’s further assume that the combination of Trump’s proposed corporate tax cuts, repatriation of earnings, and a reduced regulatory burden boost productivity growth by 1.0% (which we have described in previous articles).  These policy changes would raise potential GDP growth by 1.5% from 1.8% currently to 3.3% or so.  That puts it back close to the glory decade of the 1990’s.  The economy may not be able to grow quickly today, but it can surely resume vigorous growth if our policy makers in Washington can get with the program.

Stephen D. Slifer


Charleston, S.C.