Wednesday, 22 of May of 2019

Economics. Explained.  

Category » Reference Charts (By Category)

Existing Home Sales

May 21, 2019

Existing home sales fell  0.4% in April to 5,190 thousand after having declined 4.9% in March to 5,210 thousand after having surged 11.2% in February.  Sales currently are 4.4% below where they were at this time last year.

Lawrence Yun, NAR chief economist is not overly concerned about the slight April decline.  He said,  “First, we are seeing historically low mortgage rates combined with a pent-up demand to buy, so buyers will look to take advantage of these conditions.  Also, job creation is improving, causing wage growth to align with home price growth, which helps affordability and will help spur more home sales.”

With a modest decline in sales  and a moderate increase in the available inventory, the month’s supply of available homes rose from 3.8 to 4.2 months.  Realtors consider a 6.0 month supply as  the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in very short supply.  Yun also noted that “We see that the inventory totals have steadily improved, and will provide more choices for those looking to buy a home,”

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade.  Realtors cannot sell what is not available for sale.  If sales were not being constrained by the limited supply they would almost certainly be at a 5,800 thousand pace rather than the current 5,200 thousand and we would not be talking about weakness in home sales.

Meanwhile, properties stayed on the market for just 24 days in April.  Fifty-three percent of homes that sold in March were on the market less than a month.  The 24-day length of time between listing and sale is the shortest on record.  Back in 2011 homes remained on the market for 100 days.  Thus, the demand for housing still seems to be quite solid.

The National Association of Realtors series on affordability now stands at about 153.  At that level  it means that a household earning the median income has 53.0% 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 and should continue to remain affordable throughout 2019 because sizable job gains are boosting income almost as fast as mortgage rates and home prices have been rising.

Existing home prices rose 2.9% in April to $267,300 after having risen 3.8% in March.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $259,000.  Over the course of the past year existing home prices have risen 3.6% which is lower than the 4.0-5.0% range that we saw throughout 2018 .
At the same time mortgage rates are declining.  they reached a peak of 4.9% a couple of months ago, but with global GDP growth slowing, a slower pace of tightening by the Fed, and some softness in the housing sector, mortgage races have dropped to 4.1%.

   The housing sector will continue to climb in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Home prices have been rising slowly.  And mortgage rates have worked their way lower to 4.1%.
 Stephen Slifer


Charleston, SC

GDP, Inflation, and Interest Rate Forecasts

May 17, 2019

The initial estimate of GDP growth in the first quarter was 3.2% compared to fourth quarter growth of 2.2%.  The increase was considerably larger than the 2.5% growth rate that was expected primarily because of a larger-then-expected increase in inventories.  Thee stock market selloff late last year and the government shutdown early this year almost certainly pulled down both consumer spending and investment spending in the first quarter.  Both of these categories should rebound in the second quarter given that the the stock market is at a record high level and the government shutdown now over, but the bloated level of inventories will shrink considerably in Q2.  As a result, we expect GDP growth in the second quarter of 1.9% after having risen 3.2% in the first.  For the year as a whole we anticipate 2.7% GDP growth after having risen 3.0% in 2018.

Consumer spending slipped to 1.2% in the first quarter because of the stock market drop combined with the government shutdown.  However, stock price are now at a record high level and the shutdown is over.  Thus, we expect consumer spending to jump 3.3% in the second quarter.  Over the longer term the gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Interest rates  should be steady through the end of this year.  For 2019 we anticipate growth in consumer spending of 2.2%.

Investment spending slowed in the first quarter to 2.7% after having risen 5.4% in the fourth quarter of last year.  Growth in this category slowed in the first quarter for the same reasons that consumer spending slowed — the stock market drop and the shutdown.  We expect nonresidential investment to jump 7.3% in the second quarter and increase 5.7% for the year.  Investment spending was essentially unchanged for 2014-2016.  It appears that the corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden are giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% previously to 2.8% or so by the end of this decade.

The trade gap narrowed by $56.4 billion in the first quarter to $899.3 billion.  This means that the trade component added 1.1% to  GDP growth in the first quarter.  We expect trade to add 0.3% to GDP growth in 2019.

Non-farm inventories jumped by $128.4 billion in the first quarter and added 0.7% to GDP growth in that quarter.  Going forward we expect inventories to rise $60.0 billion in the second quarter and climb by about $75 billion per quarter thereafter.

Expect GDP growth of 2.7% in 2019 versus 3.0% last year.

The inflation rate should be fairly steady in 2019.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  That will put upward pressure on the inflation rate.  Also, higher prices from China in the wake of the newly-imposed tariffs will boost inflation.  However, the pickup in inflation will be limited as internet price shopping will keep goods prices steady in 2019.  At the same time, rising productivity growth will offset much of the increase in wages.  As a result, we expect the core CPI to be steady at  2.1% in 2019.

With GDP growth at 2.7% and inflation steady at 2.1%, the Fed will leave rates unchanged at 2.4% through the end of the year.

With no further increase in the funds rate this year and inflation steady at 2.1%, long-term interest rates should rise slightly in 2019 with the 10-year climbing from  2.4% currently to 2.75% by the end of this year.  Mortgage rates should edge upwards from 4.1% currently to 4.5% by the end of 2019.

Stephen Slifer


Charleston, SC


Consumer Sentiment

May 17, 2019

Consumer sentiment for May jumped 5.2 points to 102.4 after having declined 1.2 points in April.  This is the highest level of sentiment since January 2004 when it was 103.8.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “All of the May gain was in the Expectations Index, which also rose to its highest level since 2004, while the Current Conditions Index was virtually unchanged and well below the cyclical peak set in March 2018. Consumers viewed prospects for the overall economy much more favorably, with the economic outlook for the near and longer term reaching their highest levels since 2004. The gains were recorded mostly before the trade negotiations with China collapsed and China responded with their own tariffs.”  He added that, “Even apart from the direct impact of tariffs on prices, rising tariffs could cause a more general loss of confidence which could further diminish the pace of consumer spending.”

Our sense is confidence will maintain a lofty level in the months ahead.  Since the beginning of the year the stock market recovered all of what it lost in the fourth quarter, hit a new record high level, and is currently just 2% below that new record high level.  The Fed has said it intends to leave rates unchanged for the foreseeable future.   And mortgage rates have fallen from 4.9% to 4.1%.

We expect GDP growth of 2.7% in 2019 versus 3.0% last year.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.  We expect worker compensation to increase 3.7% in 2019 vs. 2.6% last year. The core inflation rate (excluding the volatile food and energy components) should be steady at 2.1% in 2019.  Such a scenario would keep the Fed on track for no rate hikes through the end of the year and perhaps for  2020 as well.

The big jump in consumer sentiment in May was entirely attributable to the expectations component.

Consumer expectations for six months from now jumped from 87.4 to 96.0.

Consumers’ assessment of current conditions edged upwards from 112.3 to 112.4.

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 2019.

Stephen Slifer


Charleston, SC

Housing Starts

May 16, 2019

Housing starts jumped 5.7% in April to 1,235 thousand after having risen 1.7% in March. 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 above).   That 3-month average now stands at 1,184 thousand.  Housing starts remain 8.5%  below where they were one year ago.

The April increase was  in both single-family and multi-family construction.   It appears that both categories of starts have leveled off but have not yet begun to turn upwards but we expect that to happen soon.

While the  housing sector has cooled during the past year,  is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is primarily the latter.

Both new and existing home sales have rebounded in recent months which is obviously good.

But sales are being constrained by a dramatic lack of supply.  Realtors simply cannot sell what is not available for sale.

The average home stays on the market for 36 days currently which is down from 100 days a few years ago.  Almost 50% of the homes coming to market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

Monthly  employment gains are about 190 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.3% pace which is  slightly below its long-term average of 2.7%.  That will  provide the fuel for additional spending on housing as the year progresses.

Mortgage rates have recently declined by 0.9% to 4.1% which is the lowest mortgage rate since this time last year.  That should provide some  lift to the housing sector in the months ahead.

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 155.0 the index  indicates that a median-income buyer has 55.0% 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 both skilled and unskilled labor.  Construction employment has been growing by about 20 thousand per month but it will be difficult for it to grow any faster.  At the same time tariffs on lumber, steel and aluminum  are driving up the cost of production.

There are plenty of homes that have already been authorized but construction has not yet begun because of builders inability to find workers, and because the cost of materials has risen so sharply in the wake of tariffs on steel, aluminum, and lumber.  Once supply constraints begin to abate we will see starts climb at a somewhat more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to climb 9.0% this year and reach 1.25 million by the end of 2019.

Building permits rose 0.6% in April to 1,296 thousand after having fallen 0.2% in March.  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 1,292 thousand.   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 at 1,292 thousand, housing starts should be at roughly that same level by yearend.  Thus, our forecast for starts to be 1,250 thousand by yearend may be somewhat too low.  However, keep in mind that builders continue to have difficulty finding enough workers.  The demand for  housing is solid, but can builders get enough workers to push them sharply higher?

Stephen Slifer

Charleston, SC

Initial Unemployment Claims

May 16, 2019

Initial unemployment claims fell 16 thousand in the week ending May 11 to 212 thousand after having declined 2 thousand in the previous week.  The four-week average of claims rose 5 thousand to 225 thousand.  The 4-week average for the week of April 13 of 202 thousand was the lowest for the current business cycle and  the lowest 4-week average level of claims since November, 1969 when it was 200 thousand.  The current low level of claims indicates clearly that the trend rate of increase in employment of about 190 thousand remains intact.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 226 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.

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

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

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

The number of people receiving unemployment benefits declined 8 thousand  in the week ending May 4 to 1,660 thousand.  The 4-week moving average rose 1 thousand to 1,668 thousand.  This series hit a low of 1,654 thousand in late October of last year.

The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.8%; potential growth has probably picked up from 1.8% a couple of years ago to perhaps 2.5% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer


Charleston, SC

Homebuilder Confidence

May 15, 2019

Homebuilder confidence rose 3 points in May to 66 after having edged upwards by 1 point in April.   A level of 66 is indicative of a solid level of confidence going forward although, admittedly, it is below readings of 70-75  at this time last  year.

NAHB Chairman Greg Ugalde said that, “Builders are busy catching up after a wet winter and many characterize sales as solid, driven by improved demand and ongoing low overall supply.  However, affordability challenges persist and remain a big impediment to stronger sales.”

NAHB Chief Economist Robert Dietz said “Mortgage rates are hovering just above 4% following a challenging fourth quarter of 2018 when they peaked near 5%. This lower-interest rate environment, along with ongoing job growth and rising wages is contributing to a gradual improvement in the marketplace.  At the same time, builders continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability.”

The NAHB report also indicated that affordability still remains a key concern for builders. The skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets are among the challenges builders face as they strive to construct homes that can sell at affordable price points.

Traffic through the model homes rose 2 points  in May to 49 after having risen 3 points in March.  The combination of falling home prices and lower mortgage rates should boost traffic in the months ahead.

Reflecting optimism about the future the homebuilders expectations index rose 1 point in May to 72 after having fallen 1 point in April.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Given the rebound in the expectations component it is likely that housing starts will pick up further in the months ahead.  But builders continue to have difficulty finding labor so the upswing in starts will probably be muted.

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

Stephen Slifer


Charleston, SC

Industrial Production

May 15, 2019

Industrial production fell 0.5% in April after having risen 0.2% in March.   This is its third decline in the past four months.  During the past year industrial production has risen 0.9% but one year ago it was climbing at almost a 4.0% pace.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.5% in April after having been unchanged in March.  During the past year  factory output has declined 0.2% (red line, right scale).

To a large extent factory production is being curtailed by the trade sector and the impact of tariffs on both manufacturing firms that import components used in the production process from overseas, as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  In addition, slower production in the manufacturing sector has come from the oil and gas sector.  Over the last year oil and gas well drilling activity has risen 3.1%. But a year ago drilling activity had risen 13.9%.  Two years ago it was growing 55.6%.

Mining (14%) output jumped 1.6% in April after having fallen 0.4% in March.  Over the past year mining production has risen 10.4%.

Utilities output fell 3.5% in April after having risen 2.2% in March.  During the past year utility output has fallen 4.7%.

Production of high tech equipment rose 0.6% in April after having fallen 0.1% in March.  Over the past year high tech has risen 3.2% but obviously its growth rate recently has been slowing down.  It is  likely that the slower growth in this category reflects reduced demand for technological products from outside of the U.S. where economic activity has slowed noticeably.   We need to see renewed vigor in this sector if we are going to see the continuing strength in nonresidential investment that will be required for a sustained pickup in productivity.

Capacity utilization in the manufacturing sector fell 0.4% in April to 76.2% after having declined 0.1% in March.  It remains somewhat below the 77.4% level that is generally regarded as effective peak capacity.  However, factory owners will soon have to spend more money on technology and re-furbishing or expanding their assembly lines to boost output.

Given that the economy remains relatively robust the manufacturing sector should tend to climb in the months ahead, but the higher tariffs are curtailing its rate of growth.  Look for little change in industrial production between now and yearend.

Stephen Slifer


Charleston, SC

Retail Sales

May 15, 2019

Retail sales fell 0.2% in April after having jumped 1.7% in March.  Retail sales have been particularly volatile,in a see-saw up-then-down pattern, for the past six months.  Despite considerable volatility retail sales have risen a solid 3.1% in the  past year .

Sometimes sales can be distorted by changes in autos and gasoline which tend to be quite volatile.  In this particular instance car sales rose 0.1% in April.  Gasoline sales rose by 1.8%.  Changes in gas prices  impact the overall change in sales, but they typically do not reflect any significant change in the volume of gasoline sold.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales fell 0.2% in April after having surged 1.1% in March.   This series has also been volatile in recent months.   In the last year retail sales excluding cars and gasoline have risen a relatively robust 3.2%.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments  the reality is that they need to develop a better business model.  The action these days is in non-store sales which have been growing rapidly. Consumers like the ease of purchasing items on line.  While sales at traditional brick and mortar general merchandise stores have risen 2.7% in the past year, on-line sales have risen 9.2%.  As a result, their share of total sales has been rising steadily and now stands at a record 11.8% of all retail sales.

We expect retail sales to climb slowly in the months ahead.  First, the stock market recovered all of its fourth quarter decline, recently established a record high level, and is currently only 3% below that new peak..

Second, the economy continues to crank out 190 thousand jobs a month,  Those job gains will produce growth in income.

Third, real disposable income (what is left after paying taxes and adjusting for inflation) has been growing at a respectable 2.3% pace.

Fourth, as the Fed tightened steadily for the past couple of years mortgage rates rose to 4.9%, but in the past couple of months as the Fed has pledged to refrain from any further rate increases at least until midyear and as inflation has remained in check, the 30-year mortgage rate has fallen to 4.1%.  That should bolster the housing market as we move into the spring.

Finally, consumers have paid down a ton of debt and debt to income ratios are very low.  That means that consumers have the ability to spend more freely and boost their debt levels if they so choose.

Thus, the pace of consumer spending should rebound in the months ahead.  We continue to expect GDP growth to rise 2.7% in 2019 after having climbed 3.0% last year.

Stephen Slifer


Charleston, SC

Gasoline Prices

May 15, 2019

Gasoline prices at the retail level fell $0.03 in the week ending May 13 to $2.87 per gallon which is the first decline in weekly gas prices since February 4.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.62. The Department of Energy expects national gasoline prices to average $2.73 in 2019, slightly lower than they are currently.

The selloff in the stock market that began in October pushed oil prices lower as investors believed that global GDP growth would slow and, hence, reduce the demand for oil.  Oil prices fell to a low of about $45 per barrel.   But output in Venezuela and Iran has been falling steadily and Saudi Arabia has cut production twice this year.  As a result, oil prices rebounded to $64 but have since fallen slightly to about $62 per barrel.  The Department of Energy expects crude prices to average $62.79 this year.

The  crude oil output in both Venezuela and Iran has declined markedly.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  In fact, the blackouts in Venezuela significantly curtailed production in March.  The Iran sanctions went into effect in early November.  Iranian production has since fallen sharply.  The U.S.’s  goal is to reduce exports (and, hence, production) close to zero.  The contraction in production in these two countries, combined with voluntary production cuts in Saudi Arabia are the primary reasons why oil prices have recently been rising.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 12,100 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s combined with reduced production in Venezuela and Iran has boosted the  price of oil to about $62.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will quickly boost production.  The Saudi’s will not permit the U.S. to steadily increase its market share of the global markets.

The Department of Energy expects U.S. production to climb 14% from 10.9 million barrels last year to 12.4 million barrels this year and 13.1 million barrels per day in 2020.  The U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production combined with reduced production in Venezuela and Iran  appears to have  gotten supply and demand back into better balance..    At 1,118 million barrels crude inventories are  in line with the 5-year average of 1,116 million barrels.

Stephen Slifer


Charleston, SC

Small Business Optimism

May 15, 2019

Small business optimism climbed 1.7 points in April to 103.5 after having risen 0.1 point in March.  The August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.  So while confidence has slipped in the past four months, it has fallen from a record high level and still remains lofty.

NFIB President Juanita Duggan said, “America’s small and independent businesses are rebounding from the first quarter ‘shut down, slow down’ and don’t appear to be looking back. April’s Index is further evidence that when certainty and stability increase, so do optimism and action.”

NFIB Chief Economist added that, “The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs were created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated, and consumers and small businesses are an important part of the improvement in sales,”

In our opinion the economy is expected to expand at a reasonably robust 2.7% pace this year.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

After falling 20% late last year the stock market recovered almost all of the earlier loss and established a new record high level and is currently only about 3% below that new peak level.   Jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  Mortgage rates have fallen in the past couple of months from 4.9% to 4.1%.  And investment spending remains solid.  We expect GDP growth to be 2.7% this year after having risen 3.0% in 2018.  The core inflation should be relatively stable at 2.1% in 2019 after rising 2.2% in 2018.  The Fed will has pledged to keep rates steady through the end of the year.  Moderate GDP growth, low inflation, and low interest rates should continue to bolster the stock market in the months ahead.

Stephen Slifer


Charleston, SC