Tuesday, 22 of January of 2019

Economics. Explained.  

Category » NumberNomics Notes

Overcoming Fears

January 18, 2019

In the first three weeks of January the stock market recovered one-half of what it lost in the fourth quarter.  Investors have found renewed optimism.  The catalysts for the downturn included slower growth from China, a steady drumbeat of rate hikes by the Fed, weakness in the housing market, and concern about the impact of the government shutdown.  Some pundits feared a recession as early as the end of this year. But in the past couple of weeks many of those fears have been reduced .  While the government shutdown rolls on, it is important to remember that almost all of what is lost during the shutdown will be recovered in subsequent months.

The S&P 500 hit bottom on Christmas Eve and has been climbing slowly but steadily for three weeks.  While the downslide was unnerving, we did not see corresponding weakness in the economic statistics, so we concluded that the drop was primarily attributable to exaggerated stock market volatility and, therefore, was not a harbinger of slower growth in the months ahead.  We have no reason to change that view.

GDP growth in China is clearly slowing.  The IMF currently estimates 2018 GDP growth for China of 6.5% with even slower growth expected in 2019 and 2020.  For most countries 6.5% growth would be welcome news.  But for China that would be the slowest rate of expansion since 1990.  But two things are important.

First, much of China’s slower growth woes have been caused by the U.S.-imposed tariffs.  With trade representing nearly one-half of the Chinese economy versus about 10% in the United States, China has much more to lose in a trade war.  Since tariff talk began in the early part of last year, the Chinese yuan has declined  almost 10%.

That, in turn, has caused the Shanghai Composite stock index to fall 23%.  Slower growth in exports will negatively impact Chinese GDP growth for the foreseeable future.

The U.S. does not come out unscathed.  Growth in the U.S. will be reduced as well.  Both countries lose, but China loses far more than the U.S.  Thus, the pressure is on both countries, the Chinese in particular, to reach a deal.  The U.S. is not asking not just for a trade deal, it is asking China to completely alter its way of doing business.  The U.S. wants China to recognize our patent and copyright laws.  Quit stealing trade secrets.  Stop forcing companies to share their technology as a prerequisite for permission to do business in China.  Despite those harsh requests, we still expect some sort an agreement to be announced in the months ahead and recent talks are encouraging.  Both countries can claim victory.  Once that happens stock markets around the world will rebound as investors’ concerns about a significant slowdown in China’s GDP growth will be alleviated.

But there is more going on than just China and trade.  Late last year the markets feared that the Fed would raise rates three times this year. In mid-December the Fed lowered its expectation of rate hikes this year from three to two.  At the same time, it said that it would refrain from further rate hikes until some of the current economic uncertainty and market angst disappears, which probably means no further rate hikes until midyear.  That is also good news.

Finally, home sales took at big hit last year.  Some believe that the combo of higher home prices and higher mortgage rates has made housing less affordable for many Americans.  For those economists, recent developments should allay their concern.

As the stock market swooned and a fear of slower growth materialized in the fourth quarter, mortgage rates fell from 5.0% to 4.5% which is where they were last summer.

At the same time, the run-up in home prices has slowed dramatically.  The year-over-year increase has ebbed from a peak of 6.4% at this time last year to 4.7%.  And data for the last six months suggest a further slowdown to about 3.0%.

These developments mean that housing has become more affordable for the average American family.  The National Association of Realtors series on housing affordability has climbed from 138 a few months ago to almost 150 currently.  That means that a median-income family now has 50% more income than is required to  purchase a median-priced home.  Increased affordability should re-invigorate home sales in the months ahead.

These are all small, tentative developments but, collectively, they provide support for the notion that any slowdown in economic activity will be modest and perhaps short-lived.

Stephen Slifer


Charleston, S.C.

Consumer Sentiment

January 18, 2019

The final reading for consumer sentiment for January fell 7.6 points to 90.7 versus 98.3 in December.  After peaking in March at 101.4 sentiment has gradually declined.  However, at 90.7 sentiment remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.”  Curtin added, “iI does not yet indicate the start of a sustained downturn in economic activity. It is the strength in personal finances that will continue to support consumption expenditures at favorable levels in 2019. Nonetheless, consumers now sense a need to buttress their precautionary savings, which is typically done by reducing their discretionary spending.”

His statements are true, but only if the factors he notes remain negative.  Since the beginning of the year the stock market has rallied sharply.  The U.S. and China seem somewhat close to a trade deal.  Mortgage rates have dropped from 5.0% to 4.5%.  The Fed has said it intends to leave rates unchanged through midyear.   Our sense is that in the months ahead consumer sentiment will rebound as these issues are resolved.

We expect GDP growth of 2.8% in 2019 versus 3.1% last year.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.  We expect worker compensation to increase 3.7% in 2019 vs. 2.6% this year. The core inflation rate (excluding the volatile food and energy components) should climb by 2.2% in 2018 and 2.3% in 2019.  Such a scenario would keep the Fed on track for no rate hikes through the middle of year and only a couple of increases thereafter.  Specifically, we expect the funds rate to rise 0.5% or so from 2.4% at the end of 2018 to 3.0% by the end of this year.

The modest September decline was attributable to the expectations component.

Consumer expectations for six months from now fell from 87.0 to 78.3.

Consumers’ assessment of current conditions declined from 116.1 to 110.0.

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

Stephen Slifer


Charleston, SC

Industrial Production

January 18, 2019

Industrial production rose 0.3% in December after having risen 0.4%  in November.   During the past year industrial production has risen 4.0%.  So despite monthly wiggles, production continues to trend upwards.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) jumped 1.1% in December after having climbed 0.1% in November.  The December increase was led by a 4.7% increase in motor vehicle production.  During the past year  factory output has risen 3.2% (red line, right scale).   As 2018 came to a close factory activity seemed upbeat.  Thus far, no hint of a slowdown from this sector of the economy.

Mining (14%) output rose 1.5% in December after having gained 1.1% in November.  Over the past year mining production has risen 13.4%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling fell 0.3% in December after having risen 0.1% in November.     Over the course of the past year oil and gas well drilling has risen 18.2%.

Utilities output plunged 6.3% in December as relatively warm weather trimmed the need for heating.  Utility output rose 1.3% in November.  During the past year utility output has declined 4.3%.

Production of high tech equipment climbed 1.0% in December after having risen 0.5% in November.  Over the past year high tech has risen 5.6%.  Thus, the high tech sector sector appears to be expanding nicely. This is an indication that nonresidential investment is continuing to climb which is, in turn, a signal of renewed growth in productivity.

Capacity utilization in the manufacturing sector rose 0.8% in December to 76.6%.  It remains below the 77.4% level that is generally regarded as effective peak capacity.  However, factory owners will soon have to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

January 17, 2019

Initial unemployment claims declined 3 thousand in the week of January 12 to 213 thousand.  The 4-week moving average declined 1 thousand to 221 thousand.  The lowest level for this series in the cycle was set back in mid-September at 206 thousand.  It obviously remains close to that level.  That, in turn, was the lowest level since December 6, 1969 when it was 205 thousand.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 221 thousand  we would expect monthly  payroll employment gains to exceed 300 thousand.  However, employers today are having difficulty finding qualified workers.  As a result, job gains are significantly smaller than this long-term relationship suggests and are currently about 200 thousand.

With the economy essentially at full employment, employers will have steadily increasing difficulty getting the number of workers that they need.  As a result, they might choose to offer some of their part time workers full time positions.  But this series is exactly where it was going into the recession so they will have limited success in finding necessary workers from this source.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the December level for the youth unemployment rate today is close to the lowest on record (for a series that goes back to 1970) so there are not many younger workers available for hire.

Finally, employers may also consider some workers who have been unemployed for an extended period of time.  But these workers do not seem to have the skills necessary for today’s work place.  Employers may have to offer some on-the-job training programs for  those whose skills may have gotten a bit rusty.  But even if they do, the reality is that the number of discouraged workers today is quite low — it is essentially where it was going into the recession.

The number of people receiving unemployment benefits rose 18 thousand  in the week ending January 5 to 1,737  thousand.  The 4-week moving average rose 8 thousand to 1,729 thousand.  This series hit a low of 1,635 thousand in late October.

The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.8%; potential growth has probably picked up from 1.8% previously to perhaps 2.3% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer


Charleston, SC

Homebuilder Confidence

January 16, 2019

Homebuilder confidence rose 2 points in January after having fallen 4 points in December and having plunged 8 points in November.  It is clear that the stock market decline, slower growth overseas, the Fed continuing to raise interest rates, and the softness in home sales is denting builder’s confidence.  But at a level of 58 builder confidence remains positive, just less positive than it was a couple of months earlier.

NAHB Chairman Randy Noel said, “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment.  Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”

NAHB Chief Economist Robert Dietz said  “Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market.  Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year.”

Traffic through the model homes rose 1 point in January to 44 after having declined 2 points in December and having dropped 8 points in November.  Traffic through model homes has slipped somewhat in recent months as potential homebuyers have become cautious about rising mortgage rates.  The volatility in the stock since early October and fears of slower growth ahead may also be taking a toll on buyer confidence.  However, some of the dramatic stock market volatility has disappeared in the early part of this year.  Mortgage rates have fallen from 5.0% to about 4.5%.  And no economic data are pointing toward any sources of economic weakness.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Confidence took a big hit in November and December while housing starts have been fairly flat for most of this year.

However, builders have many units that have been authorized but not yet started.  In fact, the authorized but not yet started units are the highest they have been in a decade.  Our sense is that as labor slowly becomes available builders will continue building new homes.  Thus, we look for starts to climb about 4% this year.

Stephen Slifer


Charleston, SC

Gasoline Prices

January 16, 2019

Gasoline prices at the retail level fell $0.01 in the week ending January 14 to $2.25 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.00. The Department of Energy expects national gasoline prices to average $2.50 in 2019.

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

The selloff in the stock market that began in October pushed oil prices lower.  Investors believed that higher short- and long-term interest rates would slow the pace of economic activity and, hence, reduce the demand for oil.  At the same time  oil production around the globe surged in response to the higher prices and prices  sank to $45 per barrel.  But Saudi Arabia recently announced it was cutting production by 0.7 million barrels per day to boost prices and, as a result, oil prices have risen to about $52.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 11,900 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s has boosted the  price of oil to about $52.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will boost production.  The Saudi’s will not permit the U.S. to increase its market share of the global markets.

The Department of Energy expects U.S. production to average 10.9 million barrels this year and climb 10% further to 12.1 million barrels in 2019 and 12.9 million barrels per day in 2020.  As a result, the U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production appears to have arrested the recent increase in crude stocks and gotten supply and demand back into better balance..    At 1,086 million barrels crude inventories are  roughly in line with the 5-year average of 1,116 million barrels.

The wild cards right now are production levels for Venezuela and Iran.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  Iran is different.  The Iran sanctions went into effect in early November.  Iranian production has not fallen too sharply yet, but the U.S.’s  goal is to reduce exports (and, hence, production) close to zero.  Thus, as we go forward Iranian output could fall sharply and counter much of the recent oversupply.  OPEC claims it has ample reserves to offset any Iranian shortfall, but its surplus equipment is old and has not been used in some time so we will see.

Stephen Slifer


Charleston, SC*

Producer Price Index

January 15, 2019

The Producer Price Index for final demand – intermediate demand  includes producer prices for goods, as well as prices for construction, services, government purchases, and exports and covers over 75% of domestic production.

Producer prices for final demand fell 0.2% in December after having risen 0.1% in November.  During the past year this inflation measure (the red line) has risen 2.4%.

Excluding food and energy producer final demand prices fell 0.1% in December after having risen 0.3% in November.  They have risen 2.6% since December of last year (the pink line).  This series was steadily accelerating for a couple of years, but it has leveled off in the past 12 months or so.

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

The PPI for final demand of goods fell 0.4% in both November and December. These prices have now risen 1.7% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods rose 0.1% after having climbed 0.3% in November.  During the past year the core PPI for goods (the light green line) has risen 2.4% (right scale).

Food prices jumped 2.6% in December after having risen 1.3% in November and having climbed by 1.0% in October.  Food prices are always volatile.  They can fall sharply for a few months, but then reverse direction quickly.  Over the past year food prices have risen 3.2%.

Energy prices plunged by 5.4% in December after having fallen 5.0% in November.  Energy prices have declined 2.8% in the past year.   This recent drop is in large part because U.S. oil output is now surging and global demand has been slowing down.  But now OPEC countries appear to have cobbled together an agreement to cut oil production in the months ahead.  This should stabilize oil prices for the time being although OPEC would like them to rise to the $85-90 per barrel mark.  Not going to happen with U.S. output surging.

The PPI for final demand of services fell 0.1% in December after having risen 0.3% in November after having jumped 0.7% in October.  This series has risen 2.6% over the course of the past year (left scale).   The jump in service goods prices in recent months were caused by a run-up in the trade services category.  These swings largely reflect the change in margins received by wholesalers and retailers (apparel, jewelry, and footwear in particular). .  The PPI for final demand of services excluding trade and transportation (the light blue line) rose 0.1% in both November and December.  It has climbed 2.5% in the past year.

The recent increases in producer prices were foreshadowed by the results of the Institute for Supply Management’s series on prices paid by manufacturing firms.  In the case of manufacturing firms the chart looks like the one below.  Price pressure were steadily building for six consecutive months.  Specifically, the price component rose steadily from 64.8 in November of last year to 79.5 in May.  The fact that every month was above 50.0 meant that prices producers were paying increased every single month.  Given that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  However, from June through December this series has actually declined to 54.9  This means that prices continued to climb in those months, but the rate of increase was considerably less than in other recent months.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

Because the PPI measures the cost of materials for manufacturers, it is frequently believed to be a leading indicator of what might happen to consumer prices at a somewhat later date.   However, that connection is very loose.

It is important to remember that labor costs represent about two-thirds of the price of a product while materials account for the remaining one-third.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 3.9% the labor market is beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation should be countered by an increase in productivity.  Nevertheless, the tighter labor market should exert at least moderate upward pressure on the inflation rate.

Some upward pressure on labor costs, rents, and the cost of materials will put upward pressure on inflation.  We expect the core CPI to increase  2.3% in 2019 after having risen 2.2% in 2018.

Stephen Slifer


Charleston, SC

Recession Fears Linger

January 11, 2014

The Wall Street Journal  recently published its monthly poll of economists with the headline, “Economists See Rising Risk of Downturn”.  After getting off to a good start in the early part of the year the stock market turned south.  This highlights the extent to which recession fears are ingrained in investors’ psyche, which probably means that the stock market recovery this year will be slow going.  Ultimately, the economic data win and we expect the economy to rise 2.8% in 2019 and the stock market to achieve a new record high level later in the year.

The Journal noted that the surveyed economists saw a 25% chance of a recession in the next twelve months.   While few could identify a specific trigger, the worries included the usual cast of characters — trade tensions with China, rising interest rates, and a sharp stock market selloff last year.  But economists are always worrywarts.  When asked if they see a recession in the next year they invariably say “no”, but then add that there is some non-zero chance of one occurring.  Well, that about covers it.  There is always a chance of bad things happening and the economy unexpectedly slipping into recession.  Fair enough.  But it seems to us that economists are simply hedging their bets.   If the economy performs well, they can say that they were right.  If the economy slips into recession, they can still say they were right because they highlighted a rising risk of recession in their forecasts.  You can’t have it both ways.  Either you expect a recession, or you don’t.  For the record, we do not expect a recession in 2019.  Nor do we expect one in 2020.

A chart accompanying the Journal’s article showed that economists’ recession fears spiked in 2011 to 33%, retreated briefly,  jumped again in 2013, dropped back a second time, climbed again in 2016, fell a third time, and  then jumped to 25% in the most recent survey.  We are still waiting for that recession.  So, rest easy.  The economists’ recent renewal of anxiety is just economists being economists and envisioning doom and bloom around every corner.

We would have been happier if the surveyed economists had said that the previously-mentioned fears could result in a somewhat slower than anticipated rate of GDP growth in 2019.  That seems possible, particularly early in the year if consumers become a bit more reluctant to spend and business leaders postpone their investment plans until some of the uncertainty disappears.  That is a realistic alternative scenario.  But to stop the economy dead in its tracks and push it over the cliff into recession has such a minuscule chance of occurring that it is not worth talking about.

It has now been more than three  months since the stock market swoon began and consumer sentiment has barely budged.

Confidence has most likely been supported by the robust, 200 thousand per month pace of jobs creation which is showing no sign of slowing down.

Business confidence has slipped a bit for both manufacturing and non-manufacturing firms as evidenced the the Institute for Supply Management’s monthly surveys.  But, in both cases, the indexes are falling from very high levels and the ISM says that the December level for manufacturing firms is consistent with steamy GDP growth of 3.4% and for non-manufacturing firms it is 3.2%.  Hardly worrisome.

Small business confidence has edged lower in recent months but remains close to its recently-established 35-year high.

Fed Chair Powell and numerous other Fed officials have emphasized recently that they intend to refrain from further rate increases for some time, most likely at least until midyear.

Meanwhile, long-term interest rates have declined in the past couple of months.  The 30-year mortgage rate, for example, has fallen from 4.9% late last year, which was making potential home buyers nervous, to 4.5% which is where mortgage rates were a year ago.  That will provide support to the  housing sector.

We recognize that economists are nervous which has, in turn, made investors nervous.  But we have seen no evidence from any recently-released economic data that the economy has softened.  So, try to shake those lingering fears of recession.  The worst that could happen would be a  temporary slowdown in GDP growth and we see no evidence even that is about to occur.

Stephen Slifer


Charleston, S.C.

Consumer Price Index

January 11, 2019

The CPI fell 0.1% in December after having been unchanged in November.  During the past year the CPI has risen 1.9%.

Food prices rose 0.4% in December after having climbed 0.2% in November.  Food prices have risen 1.6% in the past twelve months.

Energy prices fell 3.5% in December after having declined 2.2% in November.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have declined 0.2%.

The recent drop in energy prices is  partly related to a drop-off in demand outside the U.S., principally in China.  It also reflects a huge jump in U.S. oil production.  As a result, oil prices plunged from $76 per barrel back in October to a low of about $45 billion in early January.  However, a cut in Saudi output announced last week has lifted prices back to about $52 per barrel so the recent slide in  oil prices appears to have come to a halt.

Excluding food and energy the CPI rose  0.2% in October, November, and December.  Over the past year this so-called core rate of inflation has risen 2.2%.  We expect the core CPI will rise 2.3% in 2019.

The most interesting development in the CPI in recent years has been the dichotomy between the prices of goods (excluding the volatile food and energy components) and services.  For example, in the past year prices for goods have risen 0.2% while prices for services have risen 2.9%.

With respect to goods prices, it appears that the internet has played a big role in reducing the prices of many goods.  Shoppers can instantly check the price of any particular item across a wide array of online and brick and mortar stores.  If merchants do not match the lowest price available, they risk losing the sale.  Thus, they are constantly competing with the lowest price available on the internet.  Looking at specific items in the CPI we find that prices have been unchanged for almost every major category in the past year.  New cars have declined 0.2%, televisions have declined 18.6%, audio equipment has dropped 4.2%,  toys have fallen 9.0%, information technology commodities (personal computers, software, and telephones) have declined 4.5%.  Prices for all of these items are widely available on the internet and can be used as bargaining chips with traditional brick and mortar retailers.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 2.9% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.2%.  This undoubtedly reflects the shortages of both rental properties and homeowner occupied housing. Indeed, the vacancy rate for rental property is at a 30-year low. This steady rise in the cost of shelter  will continue for some time to come and, unlike monthly blips in food or energy, it is unlikely to reverse itself any time soon.

The CPI, both overall and the core rate, will have an upward bias  in the months ahead because of what has been happening to shelter prices, gradually rising labor costs, and rising producer prices.  But on the flip side, productivity gains are countering much of the increase in labor costs, and the internet is keeping a lid on the prices of goods.  We look for an increase in the core CPI of 2.3% in 2019.

The Fed’s preferred measure of inflation is not the CPI, but rather the personal consumption expenditures deflator, specifically the PCE deflator excluding the volatile food and energy components which is currently expanding at a 1.9% rate.  We expect it to climb 2.2% in 2019.  The Fed has a 2.0% inflation target.

Why the difference between the CPI and the personal consumption expenditures deflator?  The CPI is a pure measure of inflation.  It measures changes in prices of a fixed basket of goods and services each month.

The personal consumption expenditures deflator is a weighted measure of inflation.  If consumers feel less wealthy in some month and decide to purchase inexpensive margarine instead of pricey butter, a weighted measure of inflation will give more weight to the lower priced good and, all other things being unchanged, will actually register a decline in that month.  Thus, what the deflator measures is a combination of both changes in prices and changes in consumer behavior.

As we see it, inflation is a measure of price change (the CPI).  It is not a mixture of price changes and changes in consumer behavior (the PCE deflator).  The core PCE should increase 2.2% in 2019.  That compares to the Fed’s targeted rate of 2.0%.

Keep in mind that real short-term interest rates are quite low.  With the funds rate today at 2.3% and the year-over-year increase in the CPI at 1.9% the “real” or inflation-adjusted funds rate is 0.4%.  Over the past 57 years that “real” rate has averaged about plus 1.0% which should be regarded as a “neutral” real rate.  Given a likely pickup in GDP growth this year and next and a gradual increase in the inflation rate, a rate that low is inappropriate in today’s world.  The Fed should continue to push rates somewhat higher and gradually run off some of its longer term securities, although the Fed’s anticipated two rate  hikes in 2019 will not occur until the second half of the year.

Stephen Slifer


Charleston, SC

Unemployment vs. Job Openings

January 8, 2019

The  Labor Department reported that job openings fell 3.4% in November to 6,888 thousand after having risen rose 2.5% in October.   It is worth noting that there are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.0 million people unemployed in November.

As shown in the chart below, there are currently 0.8 unemployed workers for every available job.   Think of that — there are more job openings today than there are unemployed workers.  Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

In  this same report the Labor Department indicated that the quit rate in November was  at 2.3 which is just slightly below the September level of 2.4 which was the highest level since January 2001.   This is a measure of the number of people that voluntarily quit their jobs in that  month.  During the height of the recession very few people were voluntarily quitting because jobs were scarce.  So the more this series rises, the more comfortable workers are in leaving their current job to seek another one.  The quit rate today is 2.3.  At the beginning of the recession it was at 2.0 and the record high level for this series was 2.6 back in January 2001.

There is one other point that should be made about this report.  Janet Yellen used to  claim that there were a large number of unemployed workers just waiting for jobs if only the economy were to grow fast enough.  She is assuming that these people have the skills and are qualified for employment.  We tend to disagree.  There are plenty of job openings out there.  What is not happening as quickly is hiring.  Take a look at the chart below.  Job openings (the green line) have been rising rapidly (and are far higher now than they were prior to the recession); hires (the red line) have been rising less rapidly.

Indeed, if one looks at the ratio of openings to hires the reality is that this ratio  has not been higher at any point in time since this series began in 2000.  There are plenty of jobs out there, but employers are having a hard time filling them.  Why is that?

A couple of thoughts come to mind.  First and foremost, many unemployed workers simply do not have the skills required for the jobs available.  If they did, why aren’t they being hired?  Why aren’t some current part time workers stepping into the void for those full time positions? Why haven’t discouraged workers begun to seek employment with so many jobs available?  Why haven’t long-term unemployed workers bothered to go back to school and acquire the skills that are necessary to land a  job?

Or perhaps many of these people flunk the drug tests.  They might not be qualified for employment for a variety of possible reasons.

Perhaps also some people in this group find the combination of unemployment benefits and/or welfare benefits sufficiently attractive that there is little incentive to take a full time job when you can sit at home do nothing and make almost as much.

Jobs are plentiful and the only reason the unemployment rate is not falling faster is because the remaining unemployed/discouraged/part time workers do not have the skills required by employers today, flunk the drug tests, or are unwilling to take the jobs that are available.

Stephen Slifer


Charleston, SC