Tuesday, 26 of September of 2017

Economics. Explained.  

Category » NumberNomics Notes

Industrial Production

September 15, 2017

Industrial production fell 0.9% in August after having risen 0.4% in July and 0.2% in June.  Clearly, Hurricane Harvey, which devastated Texas from August 25-29, crushed overall production in that month.  Over the past year this series has risen 1.5%.  But despite the temporary decline in August, production in general is picking up and prior to the August outcome the 12-month increase in production had been 2.5%, much of which was associated with oil well drilling.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.3% in August after having been unchanged in July and having risen 0.2% in June. During the past year  factory output has risen 1.5% (red line, right scale).  It has clearly hit bottom.

The manufacturing category has been dragged down by recent cuts in the production of motor vehicles.  However, auto output rose 2.2% in August after falling in each of the previous three months.  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 recent slowdown in the sales and production of motor vehicles.

Mining (14%) output fell 0.8% in August after having risen 1.3% in July and 1.2%  in June.   Over the past year mining output has risen 9.7%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity , however, oil and gas drilling plunged 4.8% in August 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 85.8%.  The number of  oil rigs in operation continues to climb.

Utilities output  plunged 5.5% in August after having risen 1.5% in July.  This 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 7.8%.

Production of high tech equipment rose 1.4% in August after having declined 1.2% in July.  Over the past year high tech has risen 3.4%.   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 declined 1.3% in August to 75.3%.  It is still below the 77.5% that is generally regarded as effective peak capacity.

Stephen Slifer


Charleston, SC

Consumer Price Index

September 14, 2017

The CPI rose 0.4% in August after having risen 0.1% in July.  During the past year the CPI has risen 1.9%.  The year-over-year increase climbed to 2.8% in February before settling back in the past six months. .  Excluding food and energy the CPI rose 0.2% after climbing by 0.1% for the four previous months.  Over the past year this so-called core rate of inflation has risen 1.7%.

Food prices rose 0.1% in August after gaining 0.2% in July.  Food prices have risen 1.1% in the past twelve months.

Energy prices jumped 2.8% in august after having declined 0.1% in July.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 6.4%.  Energy prices should decline slightly between now and yearend.

Excluding the volatile food and energy components, the so-called “core” CPI rose 0.2% in August after having risen 0.1% in April, May, June, and July.  The year-over-year increase now stands at 1.7%.  The year-over-year increase in the core CPI had risen to as high as 2.3% in January before retreating.  But a lot of this softening reflects a price war amongst telecommunications firms and thereby distorts the overall run-up.  But that exaggerated price drop appears to have run its course as phone prices have only edged lower in each of the past four months.

The core CPI has also benefited from a sharp slowdown in the rate of increase of prescription drug prices.  That appears to reflect President Trump’s threat to the pharmaceutical industry that he intends to cut the prices of prescription drugs by allowing consumers to purchase such drugs overseas, and by having Medicare negotiate prices directly with the insurance companies.  That caused prescription drug prices to slow markedly late last year and in the first five months of this year.  However, such prices rose 1.0% in June and 1.3% in July and 0.2% in August which works out to a 10.2% annualized rate of increase in the  most recent three months.  Thus, the downward bias to the CPI stemming from a reduced rate of increase in drug prices has run its course.

While the CPI, both overall and the core rate, have been very well contained in the first half of this year we believe that as the year progresses the core rate of inflation will have an upward bias  because of what has been happening to both shelter prices and gradually rising labor costs which reflects the tightness in the labor market as well as rebounding prescription drugs prices and a leveling off of wireless communications services.

Shelter costs jumped 0.5% in August after having risen 0.1% in July.  In the  past year they have climbed 3.3%.  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 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 1.4% rate but is poised to head higher.  The Fed has a 2.0% inflation target.  However, going forward we have to watch out for the steady increases in shelter which, as noted above, is being pushed higher by the shortage of both rental properties and homeowner-occupied housing.   Shelter is a long-lasting problem and given its 33% weighting in the CPI it will introduce an upward bias to inflation for some time to come.  We also have to watch rising medical costs(prescription drug prices in particular) and the impact of higher wages triggered by the shortages of available workers in the labor market.

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 pricy 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 CPI currently is at 1.7%.  However, with the economy growing steadily, rents rising, and the unemployment rate falling, the core inflation rate should pick up during 2017 and rise by 1.9% in 2017 and 2.5% in 2018.  And because the core PCE increases at a rate roughly 0.5% slower than the core CPI, the core PCE should increase  1.6% in 2017 and  1.9% in 2018.  Both rates are trending higher.

Keep in mind that real short-term interest rates are negative.  With the funds rate today at 1.0% and the year-over-year increase in the CPI at 1.7% the “real” or inflation-adjusted funds rate is negative 0.7%.  Over the past 57 years that “real” rate has averaged about 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, we regard a negative real interest rate inappropriate in today’s world.  The Fed should continue to push rates higher and decide to begin running off some of its longer term securities at its meeting later this month on September 19-20.

Stephen Slifer


Charleston, SC

Producer Price Index

September 13, 2017

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 rose 0.2% in August after having fallen 0.1% in July.  During the past year this inflation measure has risen 2.4%.  It has been bouncing around in a range from 2.0-2.5% for the past six months.

Excluding food and energy producer final demand prices rose 0.1% in August after having fallen 0.1% in July.  They have risen 2.0% since July of last year.  This is the largest year-over-year increase since May 2014 .  Some economists are once again beginning to fret about deflation.  Forget about it.  Not going to happen.  This series continues to track near the Fed’s desired 2.0% pace.

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

The PPI for final demand of goods rose 0.5% in August after having fallen 0.1% in July. These prices have now risen 3.1% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.2% in August after having fallen 0.1% in July.  During the past year the core PPI for goods has risen 2.0% (right scale).  It steadily accelerated for more than a year but has leveled off in recent months.

Food prices fell 1.3% in August after having been unchanged in July  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 1.8%.

Energy prices jumped 3.3% in August after having declined 0.3% in July.  Energy prices have risen 8.6% in the past year.  These prices are also very volatile.

The PPI for final demand of services rose 0.1% in August after having fallen 0.2% in July.  This series has risen 2.0% over the course of the past year (left scale).  The 2.1% year-over-year increase for May was the largest 12-month increase in this services index since January 2015.  Changes in this component largely reflect a 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 rose 0.1% in August after having climbed 0.2% in July after having risen 0.3% in June.  It has climbed 2.0% during the past year.  The 2.2% year-over-year increase for June was the largest 12-month increase thus far in the business cycle.  Once again, any concern about deflation in the United States is totally off base.  Not going to happen.

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 4.4%, the labor market is beyond full employment.  As a result, wages pressures are sure to rise, and once that happens firms are almost certain to pass that along to the consumer in the form of higher prices.

Some upward pressure on labor costs, rents, and medicare care will further increase the upward pressure on inflation.  We expect the core CPI to increase 1.9% in  2017 and 2.5% in 2018.

Stephen Slifer


Charleston, SC

Unemployment vs. Job Openings

September 12, 2017

This release in generally rather obscure.  But. Fed Chairwoman Janet Yellen often refers to data from it so its importance has increased in recent years.

The  Labor Department reported that job openings rpoe 0.9% in July to 6, 170 thousand after having surged 7.3% in June.    It is worth noting that there are more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 7.1 million people unemployed in June.

As shown in the chart below, there are currently 1.1 unemployed workers for every available job.   Prior to the recession this ratio stood at 1.7 so the labor market (at least by this measure) is in better shape now than it was prior to the recession.

In  this same report the Labor Department indicated that the quit rate was rose by 0.1 in June to 2.2 after having fallen 0.1 in June.  The highest reading thus far in the business cycle of 2.2 has been attained on several occasions in recent months.  This series has been bouncing around between 2.1 and 2.2 for the  past two years.  This is a measure of the number of people that voluntarily quit their jobs in that  month.  It is another series that Janet Yellen likes to talk about.  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 2.2; at the beginning of the recession it was at 2.0.  Thus, it is not clear exactly how high this series can go.  Probably not a lot higher.

There is one other point that should be made about this report.  Janet Yellen claims that there are 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 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 that 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.

Whatever the case, it appears that the decline in the unemployment rate in the past year is not simply a reflection of workers dropping out of the labor force.  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

Small Business Optimism

September 12, 2017

Small business optimism rose 0.1 point in August to 105.3 after having climbed by 1.6 points in July.  This is slightly lower than the cycle high reading of 105.9 set in January which was the highest level for this index since 2004.  A couple of months ago the NFIB noted that the level of the index during the past six months represents a hot streak not seen since 1983.

NFIB President and CEO Juanita Duggan said, “This is a sign of economic health that we’ve been expecting based on the soaring optimism that began last year. Higher optimism resulted first in higher employment activity, and now we’re seeing more small business owners making capital investments.”

NFIB Chief Economist Bill Dunkelberg added, ““Small firms are now making long-term investments in new machines, equipment, facilities, and technology.”

In our opinion the economy is bouncing along at a respectable pace and should gather momentum in coming months as the new Trump Administration will hopefully produce a number of significant policy changes.  Specifically, we believe that later this year we will see both individual and corporate income tax cuts, and legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 10% rate.  Trump will continue to eliminate all unnecessary, confusing and overlapping federal regulations.  And health care reform of some type is still possible by the end of this year.  These changes should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

Already we see the stock market at a record high level.   Jobs are being created at a reasonably robust pace.  The unemployment rate is below the full employment threshold.  The housing sector is continuing to climb.  And now investment spending should pick up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.0% in 2016 to 2.4% in 2017 and 2.8% in 2018.  The core inflation will  probably slip from 2.2% in 2016 to 1.9% in 2017 but then up to 2.5% in 2018.  The Fed will continue to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to new record high levels.

Stephen Slifer


Charleston, SC

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.

Nonfarm Productivity

September 7, 2017

Upon revision nonfarm productivity rose 1.5% in the second quarter compared to a  previously released 0.9% increase,  after having risen 0.1% in the first quarter.   During the course of the past year productivity has risen 1.3%.  The 1.5% increase in the second quarter consists of a 4.0% increase in output and a 2.4% increase in hours worked.

Clearly, productivity growth has slowed. For example, from 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%.  In the past three years it has been even slower at 0.9%.

Some suggest that productivity is not properly capturing productivity gains in the service sector, particularly with respect to the internet.  For example, apps allow people to book airfares, hotels, and cars from their living room and get directions all at the same time.  But such gains do not appear to be captured anywhere in the productivity data.  The problem with that assertion is that manufacturing productivity  — which can be more accurately measured — has experienced a similar slowdown.  From 2000- 2007 (when the recession began) manufacturing productivity averaged 5.0%.  In the last three years it has risen 0.1%.

Another part of the problem could be that retiring baby boomers could be leaving both their jobs and the labor force, and taking some of their knowledge with them which is adversely impacting the growth rate for productivity.

The basic problem however, in our view, is that businesses have been reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market.  Investment is the primary driving force behind rapid gains in productivity.  Unfortunately, business leaders have been bothered by uncertainty about future tax rates (will the corporate tax rate get cut and, if so, what deductions might be disallowed), the inability to repatriate overseas earnings to the United States, the rising cost of health care which firms with more than 50 employees have to provide,  and an avalanche of onerous, confusing, and sometimes conflicting regulations.  After several years in which nonresidential investment has been essentially unchanged, it had a dramatic  surge to a 7.2% pace in the first quarter of this year followed by an additional 6.9% increase in the second quarter.  These back-to-back gains could be Trump-related.

President Trump appears likely to bring about change to all of these concerns.  Trump hopes to lower the corporate tax rate from 35% to 15%.  He will allow firms to bring overseas earnings back to the U.S. at a favorable 10% tax rate.  He still hopes to revamp health care despite his earlier setback.  And he intends to completely revamp the regulatory environment with the elimination of all unnecessary, overlapping, and confusing regulations.  These major changes in policy should unleash a wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity, the economic speed limit should climb gradually from 1.8% today to 2.8% within a couple of years.  If these regulatory changes actually happen they would represent the most significant economic events that  have occurred in years!

Stephen Slifer


Charleston, SC

Purchasing Managers Index — Nonmanufacturing

September 6, 2017

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index rose 1.6 points in August to 57.5 after having fallen 4.9 points in July.   In August, 15 of 17 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a slightly faster pace than in July.  At its August level the non-manufacturing index equates to GDP growth of 2.5%.

The orders component  rose 2 points in August to 57.1 declined 5.4 points in July.  Orders continued to flow in at a healthy pace in August.

The ISM non-manufacturing index for employment rose 2.6 points in August to 56.2 after having declined 2.2 points in July.  However, this series has been fairly volatile in other recent months with big increases followed by big declines a rather common occurrence.  Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 180 thousand per month.

Finally,  the price component rose 2.2 points in August to 57.9 after having climbed 3.6 points in July to 55.7 after having risen 2.9 points in June.   While volatile on a month to month basis, prices paid by service sector firms are rising at a moderate pace.

Stephen Slifer


Charleston, SC

Trade Deficit

September 6, 2017

The trade deficit for July widened by $0.2 billion to $43.7 billion after having narrowed by $2.8 billion in June.     Exports declined 0.3%.  Imports declined by 0.2%.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit widened by $0.8 billion in July after having narrowed by $2.0 billion in June .

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quintupled from $2.0 billion to $10.0 billion, while real oil imports have fallen from $20.0 billion to $18.0 billion. As a result, the real trade deficit in oil has been cut by about $10.0 billion or 55% in the past several years and is the smallest since the early 1990’s.  Most energy exports believe that by the end of the decade the U.S. will not only surpass Saudi Arabia and Russia  and become the world’s biggest producer of oil, but also become a net exporter of oil.  Very impressive!  And now with U.S. producers allowed to export oil, that could happen even sooner.

Significant strength of weakness in the dollar can impact the trade deficit for any given period of time.  For example, the dramatic 22% rise in the value of the dollar from October 2014 through the end of 2015 subtracted about 0.5% from GDP growth in both 2014 and 2015.  This year we have the opposite thing  happening.  The dollar has fallen 7.5% since the end of last year, principally against the Euro as GDP growth in strengthening in that region.  As a result, we expect the trade component to add 0.2% to GDP growth this year.  At the same time it will raise the inflation rate in the U.S. as the prices of imported goods are now higher.

The non-oil trade gap has been essentially unchanged in the past year with a deficit steady at about $60.0 billion as non-oil exports rose 3.5% while non-oil imports climbed by 4.0%.  Going forward the non-oil trade gap will be essentially unchanged during 2017 while the trade deficit for oil continues to shrink.

Stephen Slifer


Charleston, SC

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.