Saturday, 21 of October of 2017

Economics. Explained.  

Category » NumberNomics Notes

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.

Existing Home Sales

October 20, 2017

Existing home sale rose 0.7% in September to 5,390 thousand after having fallen 1.7% in August.  The August and September data reflect the combined effect of Hurricanes Harvey and Irma.  In fact sales in the South are currently 150 thousand below where they were in July.  Add that back in and existing home sales are less troublesome.  While these sales bounce around a bit from month to month they have  clearly fallen off in recent months.  The March sales pace of 5,700 thousand was the fastest since February 2007. We believe that the recent slide represents a supply constraint rather than a lack of demand.

Lawrence Yun, NAR chief economist  says,  “Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country.  Realtors continue to say the primary impediments stifling sales growth are the same as they have been all year: not enough listings – especially at the lower end of the market – and fast-rising prices that are straining the budgets of prospective buyers.”

The months’ supply of unsold homes was unchanged at 4.2 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

Keep in mind that properties typically stayed on the market 34 days in September which is down 13% from 39 days a year ago.  This is essentially the shortest length of time on the market since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability now stands at about 150.0.  At that level  it means that a household earning the median income has 48.0% more income than is necessary to get a mortgage for a median priced house.  Going into the recession consumers had only 14% more money than was required to purchase that median priced home.  Thus, housing remains quite affordable despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast as mortgage rates are rising.

The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income.  Builders are trying hard to boost production to increase the supply of available homes which should slow the pace of price appreciation. Finally, mortgage lenders should become slightly less restrictive as the economy remains healthy and default rates decline.
Existing home prices declined 3.2% in September to $245,100 after having fallen 1.9% in August.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $255,800..00.  Over the course of the past year existing home prices have risen 4.2% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer


Charleston, SC

Initial Unemployment Claims

October 19, 2017

Initial unemployment claims fell 22 thousand to 222 thousand in the week ending October 14 after having fallen 14 thousand in the previous week.  While this happens to be the lowest level of claims since March 31, 1973, the Labor Department said that “Claims taking procedures continue to be severely disrupted in Puerto Rico and the Virgin Islands as a result of power outages and infrastructure damage caused by Hurricanes Irma and Maria.”  Hence, we should not read to much into the recent declines.   Claims had been averaging about 240 thousand prior to the hurricanes and should return to something close to that level.  The 4-week moving average is at 248 thousand.

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 240 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 190 thousand.  For October we look for an increase of about 350 thousand as a snapback from the decline in employment reported for September.

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 will be forced to offer some of their part time workers full time positions.  This series is still a bit high relative to where it was going into the recession.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the youth unemployment rate today is the lowest it has been in 17 years 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 — roughly in line with where it was going into the recession.

The number of people receiving unemployment benefits fell 16 thousand in the week ending October 7 to 1,888 thousand.  This is the lowest level for insured unemployment since December 29, 1973 when it was 1,805 thousand.  The four week moving average fell 23 thousand to 1,906 thousand which was the lowest level for this 4-week average since January 12, 1974 when it was 1,881.   The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.0%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will continue to decline quite slowly.

Stephen Slifer


Charleston, SC

Gasoline Prices

October 18, 2017

Gasoline prices at the retail level fell $0.01 in the week ending October 16 to $2.49.  Gas prices jumped about $0.30 per gallon in early September  as Hurricane Harvey temporarily shuttered about 20% of the country’s refining capacity.   However, those plants have largely re-opened.  In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.24. The Department of Energy expects national gasoline prices to average $2.39 this year.

Crude oil prices are currently about $52.00.  The Energy Information Agency predicts that crude prices will average $49.69 in 2017.  As crude oil and gas prices have leveled off .underlying inflationary pressures have become more apparent.  While subdued at the moment, wages pressures are apparently beginning to escalate.  At the same time producers — both manufacturing and non-manufacturing firms — are having to pay considerably higher prices for their inputs.  It appears that upward pressure on the inflation rate has finally begin to emerge.

The number of oil rigs in service dropped 79% to 404 thousand  after reaching a peak of 1,931 wells in September 2014.  However, the number of rigs in operation has actually rebounded in recent months to 936 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.

While the number of oil rigs in production has been cut by 79% between late 2015 and the middle of last year, oil production has declined much less than that.  Since that time the rebound in oil prices has encouraged oil firms to step up the pace of production.  Production had been at a 9,530 million barrels per day prior to Hurricanes Harvey and Irma  The storm caused production to temporarily drop to 8,400 thousand barrels.  It should rebound quickly.  We should match the record pace of production of 9.610 barrels per day by early next year.  The Department of Energy expects production to average 9.2 million barrels per day in 2017 and 10.0 million barrels next year.

How can the number of rigs go down but production be relatively steady?  Easy.  Technology in the oil sector is increasing rapidly which allows producers to boost production while simultaneously shutting down wells.  For example, output per oil rig has increased by 25% in the past twelve months.  Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $65 per barrel.  Today that number has declined to about about $48 per barrel.  Six months from now that number will be lower still.  Recent productivity numbers for September aand October have been distorted by the drop-off in production associated with Hurricanes Harvey and Irma but they will rebound in the next month or two.

While oil inventories gradually declined for most of 2016 the increase in production earlier this year caused inventory levels to climb to a record high level in February.  Since that time inventory levels have been steadily shrinking.  We know that OPEC output has been reduced, and that its cutback has been partially offset by a pickup in U.S. production.  But inventories keep falling.  The conclusion is that global demand has picked up sharply.  That is consistent with the upward revisions to GDP growth recently released by the IMF which shows projected growth in 2011 of 3.6% and 3.7% growth in 2018 which would be the fasted growth rate since 2011.

The International Energy Agency produces some estimates of global demand and supply.  Note how demand picked up sharply in the second quarter (the blue line) and is projected to rise further in the second half of the year.  Note also that global demand currently exceeds supply (the blue line compared to the bars). That has not been the case for the past several years.  Furthermore, demand and is projected to continue to exceed supply through the end of this year.  Hence, the recent upward pressure on oil prices.  If they persist, U.S. producers will re-open closed well and, at some point, OPEC will begin to boost its output.  Hence, oil prices are unlikely to rise too much farther.

Stephen Slifer


Charleston, SC

Housing Starts

October 18, 2017

Housing starts fell 4.7% in September to 1,127 thousand after having declined  0.2% in August  This drop obviously reflects the impact of Hurricane Harvey.   The slowdown occurred largely in the South which fell 54 thousand or 9.9.  Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown in blue above).   That 3-month average now stands at 1,165 thousand which has fallen off from the 1,264 thousand peak pace in the cycle which was registered back in February.    It will rebound in coming months as the hurricane effect wears off, but it will still be lower than it was earlier in the year.  So what is happening?  Is it a drop in demand?  Or a constraint on the part of builders?  We  believe it is the latter.

Both new and existing home sales continue to trend upward but they are being constrained by a lack of supply.   Thus, the demand for housing remains robust.

Builders remain enthusiastic in part because they see traffic through the model homes quite steady at a rapid rate.

Mortgage rates are at 3.9% which is quite low by any historical standard.

At the same time employment gains are about 170 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 1.2% pace.  That is not particularly robust, but disposable income does hit slack periods from time to time and then rebounds.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 150.0 the index  indicates that a median-income buyer has 50.0% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of skilled labor.  Construction employment is growing by about 15 thousand per month.  Slow, but steady.

As one might expect there is a fairly tight correlation between home builder confidence and the starts data which probably makes a great deal of sense.   Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.2 million currently.  However,  as noted above, many home builders  report an inability to get the skilled workers they require.   Overcoming the labor shortage on a long-term basis will be challenging.  Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.

Another thing worth noting is that about 1.3 million new households are being formed every year.  Those families all need a place to live, either a single-family home or an apartment.  Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households.  And because housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.2 million by the end of 2017 and 1.4 million in 2018.

What is interesting is that beginning late last year single family starts have begun to climb while multi-family buildings such as apartments have been slowing down.  It appears that many of the millennials who chose to rent for the last decade are getting older, perhaps starting families, and are now choosing to purchase a single family house.  In the past year single family starts have risen 12.2% while multi-family units have declined by 19.4%.

As a result, multi-family construction as a percent of the total has slipped from 36.2% in July of last year to 25%.

Building permits fell 4.5% in September to 1,215 thousand after having jumped 3.5% in August.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,239 thousand which continues to point towards slow but steady improvement in housing.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are currently at 1,239 thousand, housing starts will soon approach the 1.3 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

October 17, 2017

Homebuilder confidence rose 4 points in October to 68 after having declined 3 points in September.  Confidence is bouncing around from month to month at a very high level.    The moderate drop in September appears to reflect builder concerns following Hurricane Harvey and the 4-point jump in October the first step in the recovery process.

NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas said, ““This month’s report shows that home builders are rebounding from the initial shock of the hurricanes.  However, builders need to be mindful of long-term repercussions from the storms, such as intensified material price increases and labor shortages.”

NAHB Chief Economist Robert Dietz said “It is encouraging to see builder confidence return to the high 60’s levels we saw in the spring and summer.  With a tight inventory of existing homes and promising growth in household formation, we can expect the new home market continue to strengthen at a modest rate in the months ahead.”

Traffic through the model homes rose 1 point in October to 48 after having declined by 1 point in August.  The March reading of 53 was the highest reading thus far in the business cycle.

Not surprisingly there is a close correlation between builder confidence and housing starts.  Right now starts are lagging considerably because builders are having some difficulty finding financing, building materials, an adequate supply of finished lots, and skilled labor.  Starts  currently are at a 1.2 million pace.  They should continue to climb gradually in the months ahead and reach 1.35 million by the end of 2018.

Stephen Slifer


Charleston, SC

Industrial Production

October 17, 2017

Industrial production rose 0.3% in September after having declined 0.7% in August.  Clearly, Hurricane Harvey, which devastated Texas from August 25-29 crushed overall production in that month  followed by Irma in mid-September.  It will take another couple of months to determine exactly where the production sector stands after the hurricanes.  Over the past year this series has risen 1.6%.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) rose 0.1% in September after having declined 0.2% in August. During the past year  factory output has risen 1.o% (red line, right scale).  It has clearly hit bottom, but its rebound has been muted.

The manufacturing category has been dragged down by recent cuts in the production of motor vehicles.  However, car and truck sales surged in October because all those vehicles lost during the two hurricanes have to be replaced.  A pickup in production will not be far behind.

Auto output rose 0.1% in September after having jumped 3.6% in August but it has declined 3.2% during the past year.  Industrial production ex motor vehicles has risen 1.9% in the past year.  Thus, factory output has been climbing, but its rate of increase has been curtailed by the first  half of the year  slowdown in the sales and production of motor vehicles.

Mining (14%) output rose 0.4% in September after having fallen 0.2% in August.   Over the past year mining output has risen 9.8%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity , however, oil and gas drilling fell 2.8% in  September after having declined 3.8% in August much of which undoubtedly reflects the impact of Hurricane Harvey on the Gulf Coast.   Output in this category rose in every month from June 2016 through June 2017 — thirteen consecutive months.  Over the course of the past year oil and gas well drilling has risen 76.4%.  The number of  oil rigs in operation continues to climb.

Utilities output  climbed by 1.5% in September after having plunged by 4.9% in August.  The August drop also seems to reflect the inability of utility companies to keep the lights on during Hurricane Harvey  During the past year utility output has fallen 4.1%.

Production of high tech equipment rose 1.7% in September after having climbed by 0.4% in August.  Over the past year high tech has risen 2.3%.   The high tech sector sector appears to have gathered some momentum in recent months. This may be an early indication that the long slide in nonresidential investment may be coming to an end which would, in turn, signal some upturn in productivity growth.

Capacity utilization in the manufacturing sector was unchanged in September at 75.1%.  It is still below the 77.5% that is generally regarded as effective peak capacity.

Stephen Slifer


Charleston, SC

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.

Consumer Sentiment

October 13, 2017

Consumer sentiment for October surged 6.0 points in October after having declined 1.7 points in September.  The September drop clearly reflects a drop-off in consumer expectations following the combination of Hurricanes Harvey and Irma, but sentiment came roaring back in October to the highest level since the start of 2004!

Richard Curtin, the chief economist for the Surveys of Consumers, said “This “as good as it gets” outlook is supported by a moderation in the expected pace of growth in both personal finances and the overall economy, accompanied by a growing sense that, even with this moderation, it would still mean the continuation of good economic times.”  He added that “The data indicate a robust outlook for consumer spending that extends the current expansion to at least mid 2018, which would mark the 2nd longest expansion since the mid 1800’s.”

Given that rebuilding effort combined with an expectation of major changes in policy likely to be implemented between now and yearend, we expect GDP growth for 2017 to be 2.3% and 2.8% in 2018.  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 4.0% in 2017 vs. 3.0% last year. The core inflation rate should be reasonably steady this year at 1.8% thanks to a price war in the cell phone industry and falling prescription good prices caused by intimidation from President Trump.   However prices should rise by 2.3% in 2018.  Such a scenario would keep the Fed on track for the very gradual increases in interest rates that it has noted previously.  Specifically, we expect the funds rate to be 1.25% by the end of 2017 and 2.0% by the end of 2018.

The jump in sentiment was in both the current conditions and expectations components.

Consumer expectations for six months from now rose from 84.4 to 91.3.

Consumers’ assessment of current conditions rose in October from 111.7 to 116.4.

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 the quarters ahead.

Stephen Slifer


Charleston, SC