Wednesday, 20 of June of 2018

Economics. Explained.  

Category » NumberNomics Notes

Purchasing Managers Index — Nonmanufacturing

June 10, 2018

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 2.2 points in May to 61.3 after having declined 1.5 points in April.   In May, 13 of 15 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a relatively high level.  At its May level the non-manufacturing index equates to GDP growth of 3.5%.

The orders component  rose 0.5 point in  May to 60.5 after having climbed 0.5 points in April.  Orders continued to flow in in May at a solid pace.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment rose 0.5 points in May to 54.1 after having fallen 3.0 points in April.   The January level (at 61.6) was by far the highest level thus far in the business cycle.  Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 200 thousand per month.

Finally,  the price component rose 2.5 points in May to 64.3 after having rise 0.3 points in April.   That is the ninth consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.

Stephen Slifer

NumberNomics

Charleston, SC


GDP

June 10, 2018

The first revised estimate for first quarter GDP came in at 2.2% compared to an initial reading of 2.3% and a 2.9% growth rate in the fourth quarter.  For 2017 as a whole GDP rose 2.6%.  We expect GDP growth of 3.0% this year.  What is interesting in this report is that the downward revision was entirely caused by a reduction in the pace of inventory accumulation.

Final sales, which is GDP excluding the change in business inventories rose 2.0% in the first quarter after revision versus a preliminary reading of 1.9% and a solid 3.4%  pace in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories rose $20.0 billion after revision compared to an earlier estimate of $33.1 billion and an increase of $15.6 billion in the fourth quarter.  Thus, inventories  added 0.2% to  GDP growth in the first quarter.  Inventories are expected to rise by roughly $30 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 1.9% in the first quarter upon revision which is stronger than the 1.6% preliminary estimate and a 4.5% growth rate in the fourth quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports narrowed by $3.0 billion which means that the trade component added 0.1% to GDP growth  in the first quarter as exports rose 4.2% while imports climbed by 2.8%.

Consumption spending rose 1.0% in the first quarter but that follows a steamy 4.0% growth rate in the fourth quarter.  We expect the pace of consumer spending to remain steady and  increase 2.5% in 2018.  Solid employment gains should boost  income.  The rising stock market and increase in house prices will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid.

Nonresidential investment jumped by 9.2% in the first quarter which compared to an initial estimate of 6.1% and a 6.8% pace in the fourth quarter.  The upward revision in this category was primarily responsible for the upward revision to final sales.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase 6.8% in 2018 as business regains confidence in the wake of expected corporate tax cuts, relief from an onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment declined 2.0% in the first quarter after having jumped 12.8% in the fourth quarter.   For 2017 as a whole residential investment rose 2.6%    While demand remains strong, builders are having an increasingly difficult time finding qualified workers which curtails growth in this category.   We expect residential investment to  increase 2.1% in 2018.

The foreign sector as measured by the deficit for real net exports narrowed by $3.0 billion in the first quarter to -$650.9 after having widened by $56.4 billion in the fourth quarter.  Exports rose 4.2% in the first quarter while imports climbed 2.8%.  We expect the deficit for net exports to have no impact on  GDP growth at all in 2018.

Federal government spending rose 1.7% in the first quarter after having climbed by 3.2% in the fourth quarter.  Federal government spending is expected to rise 3.7% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

Following GDP growth of  2.6% in 2017 we expect growth of  3.0% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

June 10, 2017

When the economy is slowing down, firms will accumulate unwanted inventories.   Those inventories still show up in GDP, but they are unsold.  Hence, GDP will be biased upwards.  Similarly, in good times businesses will reduce inventory levels to satisfy demand.  In this case, GDP growth will be understated.

To get a sense of the underlying pace of sales, economists will look at final sales which is GDP less the change  in business inventories.  Final sales rose 2.0% in the first quarter after revision versus a preliminary reading of 1.9% and a solid 3.4%  pace in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories rose $20.0 billion after revision compared to an earlier estimate of $33.1 billion and an increase of $15.6 billion in the fourth quarter.  Thus, inventories  added 0.2% to  GDP growth in the first quarter.  Inventories are expected to rise by roughly $30 billion per quarter in the quarters ahead.

We believe that GDP growth will quicken from 2.6% in 2017 to 3.0% this year.  Consumers are confident.  The stock market should continue its rise later this year.  Home prices are rising.  Job growth is increasing.  The unemployment rate continues to decline slowly. Oil prices remain relatively low.  Inventories remain lean.  Corporations are making steady profits.  They have a ton of cash.  Interest rates are going to remain low for another year.  Plus, the economy should receive some stimulus from the individual and corporate income tax cuts and from some repatriation of overseas earnings.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales to Domestic Purchasers

June 10, 2018

It is important to remember that final sales is a measure of how many domestically produced goods are sold each quarter.  But we also sell goods overseas — our exports.   And we purchase goods from other countries — our imports.

In the never-ending process of analyzing the GDP data, there is yet another series called “final sales to domestic purchasers” which measures how much U.S. residents are actually spending.  It starts with final sales, but then subtracts exports (which represents how much foreigners are buying from the U.S.) and adds imports (which represents how much U.S. residents are spending on imports).  The end result is a measure of sales by domestic purchasers.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 1.9% in the first quarter upon revision which is stronger than the 1.6% preliminary estimate and a 4.5% growth rate in the fourth quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports narrowed by $3.0 billion which means that the trade component added 0.1% to GDP growth  in the first quarter as exports rose 4.2% while imports climbed by 2.8%.

Going forward the positive factors are that the stock market should continue its uptrend later this year.  The consumer is confident.  Consumers have record net worth.  Interest rates remain low.  The economy is creating a reasonable number  of new jobs.  The unemployment rate continues to decline slowly,  oil prices remain relatively low, the housing sector is expanding nicely, and income is rising.  Furthermore, corporations are making steady profits, have a ton of cash, and corporate interest rates remain low.  Finally, the economy should receive some  stimulus from the individual and corporate income tax cuts plus some repatriation of overseas earnings.

The economy should expand at a 3.0% rate in 2018 after having risen 2.6% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

June 10, 2018

There are many different deflators that are available.  This one is for gross domestic purchases which measures prices paid by U.S. residents.  It is the one measure of inflation that the Commerce Department talks about when it releases the GDP report.   It is our broadest measure of inflation and contains more than 5,000 goods and services.

The gross domestic purchases deflator rose 2.7% in the first quarter after having climbed by 2.5% in the fourth quarter. Over the past year this index has risen 1.9%.

Excluding the volatile food and energy components this index rose 2.7% in the first quarter after having risen 2.0% in the fourth quarter.

Remember that these deflators are weighted measures of inflation.  That means that when a builder switches from using copper pipe to PVC to save money, it registers as a price decline in these particular inflation measures.  Or when a consumer switches from buying butter to less expensive margarine the result is the same.  Thus, the deflator represents a combination of price changes and changes in consumer and business behavior.

The CPI, however, is a fixed basket of goods and services.  So what it shows are price changes only which, to us, is what inflation is all about.   We believe that the inflation rate is headed higher.  With the unemployment rate at 3.8% the economy is at full employment which should boost wages and, at last, that seems to be happening.  Both manufacturers and non-manufacturing firms are reporting sharply higher prices for their raw materials so commodity prices are also on the rise.  A very short supply of available rental properties is boosting rents.  Hence we expect  the core CPI to climb from 1.8% last year to 2.3% in 2018.  The one thing that is keeping the inflation rate in check is technology.  People are able to search the internet and find the lowest price available from Amazon or some other on-line website.  Thus, sellers of goods have absolutely no pricing power.  Prices of goods have fallen 0.3% in the past year while prices for services have risen 3.0%.

Stephen Slifer

NumberNomics

Charleston, SC


Private Employment

June 10, 2018

Private sector employment for May rose 218 thousand after having risen 162 thousand in April.   Thus, the outlook for employment has not changed much in the wake of this report.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 178 thousand.  That compares to an average increase of 180 thousand in 2017.  Thus, employment continues to chug along.  The labor force is growing by about 110 thousand per month.  For employment gains to be consistently larger than the increase in the labor force implies some people not previously in the labor force are choosing to return (like discouraged workers).

Amongst the various employment categories construction employment rose 25 thousand in May versus 21 thousand in April.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment increased 18 thousand in May after having risen 25 thousand in April.    Factory employment is now rising by about 20 thousand per month.

Mining increased 6 thousand in May after having climbed by 8 thousand in March and April.  After a long period of steady declines mining employment is now rising about 5 thousand per month as rising oil prices are boosting hiring in that  sector.

Elsewhere, health care climbed by 29 thousand.  Professional and business services increased 31 thousand in May.  Retail jobs added 31 thousand.  Transportation and warehousing gained 19 thousand.  Employment in leisure and hospitality establishments increased 21 thousand in May  And jobs in the financial industry climbed by 8 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek for May was unchanged at  34.5 hours.  That is about as long as it gets.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in May after having climbed 0.1% in April.  It continues to climb at a steady pace.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual  income tax cuts should slightly boost spending in 2018.  The stock market is rebounding following a correction and is now just 3% below its previous peak.  Consumer confidence is holding up well.  Remember that consumer spending represents two-thirds of total GDP.

The sector of the economy that had previously been weak was the various production industries.  But that seems to be changing.  As noted earlier, factory employment is rising modestly.  Construction employment has been rising steadily.  And even mining has been rising somewhat after a steady series of declines associated with the drop in oil prices.

Looking ahead the prospect of both individual and corporate income cuts and the repatriation of some overseas earnings currently locked overseas should boost GDP growth from 2.5% in 2017 to 2.8% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

June 10, 2018

Private sector employment for May rose 223 thousand after having risen 159 thousand in April.   Thus, the outlook for employment has not changed much in the wake of this report.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 179 thousand.  That compares to an average increase of 182 thousand in 2017.  Thus, employment continues to chug along.  The labor force is growing by about 110 thousand per month.  For employment gains to be consistently larger than the increase in the labor force implies some people not previously in the labor force are choosing to return (like discouraged workers).

Amongst the various employment categories construction employment rose 25 thousand in May versus 21 thousand in April.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment increased 18 thousand in May after having risen 25 thousand in April.    Factory employment is now rising by about 20 thousand per month.

Mining increased 6 thousand in May after having climbed by 8 thousand in March and April.  After a long period of steady declines mining employment is now rising about 5 thousand per month as rising oil prices are boosting hiring in that  sector.

Elsewhere, health care climbed by 29 thousand.  Professional and business services increased 31 thousand in May.  Retail jobs added 31 thousand.  Transportation and warehousing gained 19 thousand.  Employment in leisure and hospitality establishments increased 21 thousand in May  And jobs in the financial industry climbed by 8 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek for May was unchanged at  34.5 hours.  That is about as long as it gets.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in May after having climbed 0.1% in April.  It continues to climb at a steady pace.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual  income tax cuts should slightly boost spending in 2018.  The stock market is rebounding following a correction and is now just 3% below its previous peak.  Consumer confidence is holding up well.  Remember that consumer spending represents two-thirds of total GDP.

The sector of the economy that had previously been weak was the various production industries.  But that seems to be changing.  As noted earlier, factory employment is rising modestly.  Construction employment has been rising steadily.  And even mining has been rising somewhat after a steady series of declines associated with the drop in oil prices.

Looking ahead the prospect of both individual and corporate income cuts and the repatriation of some overseas earnings currently locked overseas should boost GDP growth from 2.5% in 2017 to 2.8% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

June 10, 2018

The unemployment rate declined another 0.1% in May to 3.8% after having fallen 0.2% in April.    That is the lowest it has been since April 2000.  In May the labor force rose 12 thousand.  Employment rose 293 thousand.  As a result, the number of unemployed workers declined by 281 thousand and the unemployment rate dipped by 0.1%.  While employment used in calculating the unemployment rate rose 293 thousand, payroll employment increased by 223 thousand.  How can this be?  First, the two are figures are derived from separate data streams.  The payroll number is calculated from employment numbers reported by a large number of employers across all industries.  Employment for the unemployment rate calculation is derived from knocking on doors and asking people if they have a job.  It is known as the  household survey.  One conceptual difference is that the household survey includes people who are self-employed which would not be captured in the establishment survey. It could be that self-employed workers declined inApril.  The other reality is that there is just statistical noise between the two surveys.  The trend rate of growth is similar, but with wide variation from month to month — the household survey being the more volatile of the two.

Labor force growth in the past year was 1.1% which is roughly in line with growth in the population which was 1.1%.  Thus, the labor force partition rate did not change during that period of time.  It is now 62.7%.  A year ago it was 62.7%.

At 3.8% the unemployment rate is far below the low end of the 4.5-5.0% level that the Fed considers to be full employment.  However,  the official rate can be misleading because it does not include “underemployed” workers which is true.  There are two types of “underemployed” workers.  First, there are people who have unsuccessfully sought employment for so long that they have given up looking for a job.  Second, are those workers  that currently have a part time position but indicate that they would like full time employment.  The total of these two types of underemployed workers are  “marginally attached” to the labor force.  The number of marginally attached workers has been falling quite steadily and is now roughly in line with where it was going into the recession.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate declined 0.2% in May to 3.6% after having declined 0.2% in April and 0.2% in March. That is lower than where it was going into the recession.  It is hard to argue that there is slack remaining in the labor market.  The broad rate of  7.6% compares to 3.8% for the official rate.

As the economy continues to expand the pace of hiring will remain steady and  both rates are going to fall.  As firms look a bit harder to find the workers they need they may have to turn to other sectors of the labor market rather than just currently unemployed workers.  They may seek younger workers, but they may have a difficult time because our youth unemployment rate is lower  than it was going into the recession.

They may also look at some of their part-time workers who are reliable and have a good work ethic and offer them full-time positions.  Employers may have more success here.  The number of part time workers who say they want full time employment is still slightly higher than it was going into the recession although it is gradually declining.

In short, both rates should continue to fall in the months ahead and are already below their full-employment threshold.  In that world labor shortages are likely to become even more evident in the months ahead.  That will put upward pressure on wage rates which should, in turn, gradually lift the inflation rate.  As a result, the Fed will continue to gradually raise the funds rate in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Workweek

June 10, 2018

Payroll employment for May rose 223 thousand after having risen 159 thousand in April.  Thus, the outlook for employment has not changed much in the wake of this report.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek for February, March, April and May came in at 34.5 hours.  That is about as long as it gets.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in May after having climbed 0.1% in April.  Thus, this series continues to chug along which suggests that the economy is expanding at a steady pace.

The factory workweek fell 0.2 hour in May from 41.0 to 40.8 hours.  This series is still about as high as it gets and will lead to additional factory hiring in the months ahead.  With individual and corporate tax cuts taking effect this year and U.S. firms perhaps being allowed to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector is gathering  momentum.

Overtime hours declined 0.,2 hour to 3.5 hours in May .  This series, too, is about as long as it gets.  The manufacturing sector is trying hard to find the workers its need — hiring as best it can given the shortage of qualified workers, working existing employees longer hours, and asking people on the line to work more overtime hours.

The economy continues to expand at a respectable pace.  We currently expect GDP to quicken from a 2.5% pace in 2017 to 2.8% in 2018 given the prospect of both individual and corporate income tax cuts and repatriation of corporate earnings currently locked overseas.  The economy is currently being supported by robust growth in consumer spending and housing and now manufacturing is coming on strong.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

June 10, 2018

Average  hourly earnings rose 0.3% in May to $26.92 after having gained 0.1% in April.  Hourly earnings are gradually rising.  During the past year hourly earnings have risen 2.7%.  This series would be growing more quickly except for the impact from retiring baby boomers.  When you lose a number of people who have been working for 40 years who are making high wages, and replace them by younger workers who are making much less, this series will have a downward bias.  The Atlanta Fed has a series called “wage tracker” in which it tries to adjust for this bias and it believes that wages are currently rising at a 3.2% pace.  This series has been growing somewhat more quickly than the official hourly earnings data and, therefore, seems more consistent with the apparent tightness in the labor market.

In addition to their hourly wages workers can also work longer hours and overtime hours.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings rose 0.3% in May to $928.74 and 0.1% in April.  Weekly wages have risen 3.0% during the course of the past year.

While there has been a lot of discussion about the lack of growth in wages, they appear to be rising a bit more quickly and are able to support a moderate sustained 2.5% pace of consumer spending.

Stephen Slifer

NumberNomics

Charleston, SC