Sunday, 30 of April of 2017

Economics. Explained.  

Category » Reference Charts (By Category)

Employment Cost Index

April 28, 2017

The employment cost index for civilian workers rose at a 3.1% annual rate in the first quarter after having risen 1.9%rate in fourth quarter.  Over the course of the past year it has risen 2.4%.  Thus, the labor market is slowly beginning to get tighter, and to attract the workers that they want employers are having to work employees longer hours, and offer higher wages and/or more attractive benefits packages.

With the unemployment rate at 4.5% and full employment also presumably at 5.0%, it is not surprising that we are beginning to see a hint of upward pressure on compensation.

Wages climbed at a 3.2% rate in the first quarter versus 1.9% pace in  fourth quarter.  Over the course of the past year wages have been rising  at a 2.4% pace.  Wage pressures are beginning to accelerate gradually.

Benefits climbed at a 2.7% pace in the first quarter versus 1.8%  in the fourth quarter.   As a result, the yearly increase in benefits is now 2.2%.

What happens to labor costs is important, but what we really want to know is how those labor costs compare to the gains in productivity.  If I pay you 5.0% more money but you are 5.0% more productive, I really don’t care.  In that case, unit labor costs were unchanged.

Currently, unit labor costs  have risen 2.0% in the past year as compensation rose 3.0% while productivity increased by 1.0%.   Such an increase in ULC’s is consistent with an inflation rate somewhat higher than the Fed’s desired target rate of 2.0%.    If that is the case, something is clearly different.  Productivity gains are no longer offsetting the increase in labor costs. The Fed should continue to raise interest rates.

Stephen Slifer

NumberNomics

Charleston, SC


GDP

April 28, 2017

The first estimate of first quarter GDP growth came in at 0.7% which was weaker than the 1.5% growth rate that had been expected.  That compares to a 2.1% pace in the fourth quarter.  This is the first look at first quarter growth.  This estimate will be revised twice more at the end of both May and June.

Final sales, which is GDP excluding the change in business inventories grew at a 1.6% pace in the first quarter compared to a 1.1% rate in the fourth quarter .   Over the past year final sales have risen 2.1%.  In the first quarter inventories as rose $10.3 billion compared to an increase of $49.6 billion in the fourth quarter.  Thus, inventories subtracted 1.0% from GDP growth in the first quarter.

Final sales to domestic purchasers excludes both the change in inventories and trade rose 1.5% in the first quarter versus an increase of 2.8% in the fourth quarter.  Over the past year this series has risen at a 2.2% pace.  The deficit for net exports narrowed by $2.3 billion which means that the trade component added 0.1% to GDP growth  in the first  quarter as exports rose 5.8% while imports climbed by 4.1%.

Consumption spending climbed by just 0.3% in the first quarter versus an increase of 3.5% in the fourth quarter.  Consumers took a breather in the first quarter but it is not expected to last.  We expect consumer spending to increase 2.2% pace in 2017.  Solid employment gains should boost  income.  The rising stock market will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid despite the first quarter weakness.

Nonresidential investment jumped 9.4% in the first quarter after having climbed by 0.9% in the fourth quarter.  We expect nonresidential invest to  increase 4.5% in both 2017 and  2018 as business regains confidence in the wake of expected corporate tax cuts, relief from the currently onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment jumped 13.7% in the first quarter after having climbed 9.6% in the fourth quarter.   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 6.4% in 2017.

The foreign sector as measured by the deficit for real net exports narrowed by $2.3 billion in the first quarter after having widened by $82.8 billion in the fourth quarter.  Exports rose 5.8% while imports rose by 4.1%.  We expect the deficit for net exports to widen slightly this year and subtract 0.3% from GDP growth in 2017.

Federal government spending declined by 1.9% in the first quarter after having fallen 1.2% in the fourth quarter.  Government spending is expected to rise 0.7% in 2017 as President Trump increases defense spending while non-defense spending rises slightly.

We expect growth of  2.1% this year, and 2.7% in 2018 given expected individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales

April 28, 2016

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.  In the first quarter final sales rose 1.6% after having risen 1.1% in the fourth quarter.  Given that GDP growth in the first quarter was 0.7%, the change in business inventories subtracted 0.9% from  GDP growth in the first quarter.

We believe that growth will expand at a moderate pace throughout 2017.  Consumers are confident.  The stock market is close to another record high level.  Job growth is increasing.  The unemployment rate continues to decline slowly. Oil prices remain 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 expected individual and corporate income taxes and from some repatriation of overseas earnings.

Given all of this the economy should expand at a moderate  pace of  2.1% in 2017 and 2.7% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Final Sales to Domestic Purchasers

April 28, 2016

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 to domestic purchasers.

Final sales to domestic purchasers rose 1.5% in the first quarter after having climbed 2.8% in the fourth quarter.  The deficit for real net exports narrowed by $2.3 billion in the first quarter as exports rose 5.8% while imports climbed by 4.1% .  The widening of the trade gap means that the trade component added  0.1% to GDP growth in the first quarter.  However, the gradual widening of the trade gap should subtract about 0.3% from GDP growth this year.

Going forward the positive factors are that the stock market remains close to another record high level.  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 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 expected individual and corporate income tax cuts plus some repatriation of overseas earnings.

The economy should expand at a moderate 2.1% in 2017 and 2.7% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Gross Domestic Purchases Deflator

April 28, 2017

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 2.6% in the first quarter after having risen 2.0% in the fourth quarter. Over the past year this index has risen 2.0%.

Excluding the volatile food and energy components this index rose 2.3% in the first quarter after having risen 1.6% 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.   In 2017 we look for the overall CPI to increase 2.4% while the core rate also rises by 2.4%.  Oil prices should increase slightly, rents will continue to climb, medical costs will surge, and with the economy at full employment wages will begin to climb and lead to higher prices.

Stephen Slifer

NumberNomics

Charleston, SC


Pending Home Sales

April 27, 2017

Pending home sales retreated by 0.8% in March after having jumped 5.5% in February.  This series tends to be rather volatile on a  month-to-month basis.

Lawrence Yun, NAR chief economist said, “Sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range.  In most areas, the lower the price of a home for sale, the more competition there is for it. That’s the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall.”

Housing remains quite affordable for middle income buyers.  After peaking at 213.6 in January 2013 the housing affordability index has declined slowly and now stands at 160.6.  What that means is that potential buyers had 60.6% more income than was necessary to buy a median priced home (compared to 14% in 2007).   The  housing affordability index has declined slightly in response to the recent run-up in the 30-year mortgage rate to 4.1% following the election.  However, it has not fallen more sharply because consumer income continues to climb.  Looking forward the extreme shortage of available homes for sale has caused home prices to rise more quickly — and climb more rapidly than the increase in income.  This development seems to have occurred only in the past three months but what it suggests is that this series needs to be monitored closely in the months ahead.

This  series on pending home sales is collected by the National Association of Realtors and represents contracts signed, but not yet closed, on existing home sales.  Thus, it is both a leading indicator of existing home sales and housing market activity in general.   Not all these contracts go to completion.  The buyer may not qualify for a mortgage, the house may not appraise at a sufficiently high value, or the house may fail the buyer’s inspection.  But the series is clearly indicative of changes in housing market activity.

Stephen Slifer

NumberNomics

Charleston, SC


Durable Goods Orders

April 27, 2017

Durable goods orders rose 0.7% in March after having risen 2.3% in February and 2.4% in January.   As always this is a very volatile series.  Over the course of the past year durables have risen 4.5% which is the largest year-over-year increase since mid-2014..

In most  months transportation orders are the biggest category contributing to that month’s change  — both to the upside and downside.  That was certainly the case in recent months.  Transportation orders rose 7.0% in January, 5.5% in February, and 2.4% in March. This means that non-transportation orders rose 0.3% in January, 0.7% in February but fell 0.2% in March.  Over the past year non-transportation orders have risen 4.2% and they seem to be quickening.  In the past six months they have been climbing at a 7.9% pace, and in the past three months at a 6.6% rate.

Economists are also interested in capital goods orders so we can get some sort of a handle on the investment spending portion of GDP.  But even capital goods orders can get blown around from one month to the next if there is a huge defense order or if there is a big airline order.  Orders will rise very sharply one month, only to decline almost as sharply in the subsequent month.  Thus, the focus is typically on non-defense capital goods orders ex air.  These orders rose 0.2% in March, 0.1% in February and 0.1% in January.  Over the course of the past year such orders have risen 3.0% which is the biggest yearly increase since mid-2014.  At long last they certainly seem to be on the rise.

The backlog of orders rose 0.2% in March and 0.1% in February.  If orders begin to climb consistently the backlog will climb as well which will eventually boost production.   We are not looking for a lot of strength from the manufacturing sector this year, but we do expect it to continue its gradual uptrend.

We think the worst is over for the manufacturing sector.   Home prices are rising.  Consumer net worth is at a record high level.  Corporations are making near record profits.  They have a ton of cash to invest.  Interest rates are near historic lows.  And the rate of capacity utilization in the manufacturing sector suggests a need fairly soon to either re-furbish the assembly line and/or invest in new technology.  And with both corporate and consumer tax cuts now in the works the factory sector should get a boost in 2017.  The  underpinnings of the economy remain firm.

We expect investment spending to climb  3.1% in 2017 and 4.8% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Initial Unemployment Claims

April 27, 2017

Initial unemployment claims rose 14 thousand in the week ending April 22 to 257 thousand.  Because these weekly data can be volatile the focus should be on the 4-week moving average of claims (shown above), which is a less volatile measure.  It fell 1 thousand to 242 thousand.  The late February average of 234 thousand was the lowest level for this series since April 14, 1973 — 44 years ago!

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 242 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 170 thousand.

Initial Unemployment Claims vs. Employment

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 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 lower than where it was going into the recession so there may not be too 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.

The number of people receiving unemployment benefits rose 10 thousand in the week ending April 15 to 1988 thousand.  The four week moving average fell 16 thousand to 2,007 thousand. This is the lowest level for this series since June 10, 2000.  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 decline quite slowly.

Stephen Slifer

NumberNomics

Charleston, SC


Gasoline Prices

April 26, 2017

Gasoline prices at the retail level rose $0.01 in the week ending April 24 to $2.45 per gallon.   In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.20. The Department of Energy expects national gasoline prices to average $2.39 this year — almost exactly where they are currently.

As the price of gasoline declined the economy got a tailwind. However,  oil prices today are 13% higher today than they were a year ago.  Hence, the tailwind effect on the economy has run its course but has not yet turned into a headwind.

Crude oil prices are currently about $50.00 mark.  The Energy Information Agency predicts that crude prices will average $52.24 in 2017.  As crude oil and gas prices have leveled off the underlying inflationary pressures have become more apparent.

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 857 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.  The Department of Energy expects production to average 9.0 million barrels per day in 2017.  We seem to be on track for close to that estimate.

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 35% in the past twelve months.  Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $70 per barrel.  Today that number has declined to about about $44 per barrel.  Six months from now that number will be lower still.

While oil inventories gradually declined for most of 2016 the recent increase in production has caused inventory levels to rebound.  While oil prices might remain firm through midyear, the excessive amount of available crude will ultimately push gas prices lower.

In December OPEC agreed to cut production, but it remains to be seen how meaningful the cut will turn out to be.  In the past, various countries would begin to cheat and the whole thing would unravel.  Furthermore, as oil prices rise U.S. producers will return in droves and prices will once again begin to fall.

Stephen Slifer

NumberNomics

Charleston, SC


New Home Sales

April 25, 2017

New home sales rose 5.8% in March to 6212 thousand after having risen 0.3% in February and 6.2% in January.  This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 598 thousand (shown above).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled labor.  If they could find more workers, builders would build and sell more homes.  Also do not forget that new home sales are single family homes and do not include sales of condos.

The supply of available homes for sale rose 4 thousand in March to 268 thousand.  The small increase in inventories combined with the big increase in sales means that there is now a 5.2 month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing is roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 162.0.   That means that consumers have 60.0% more income than is necessary to purchase a median priced home.  Existing homes remain quite affordable despite a post-election increase in mortgage rates to 4.1% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.4% by the end of this year.  We estimate the affordability index at that time will be about 156 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices jumped 7.5% in March to $305,400.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $305,400.  During the course of this past year prices have risen 3.9%.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace, builders will continue to boost production, but prices should rise slowly.  Mortgage rates should end 2017 at 4.4% which is still quite affordable.

Stephen Slifer

NumberNomics

Charleston, SC