Sunday, 26 of March of 2017

Economics. Explained.  

Category » Reference Charts (By Category)

Durable Goods Orders

March 24, 2017

Durable Goods Orders -- Change

Durable goods orders rose 1.7% in February after having climbed 2.3% in January.   As always this is a very volatile series.  Over the course of the past year durables have risen 5.0% 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 and a further 4.3% in February. This means that non-transportation orders rose 0.4% in February after having risen 0.2% in January.  Over the past year non-transportation orders have risen 3.8% and they seem to be quickening.  In the past six months they have been climbing at a 7.5% pace, and in the past three months at a 5.6% rate.

Durable Goods Orders -- Ex Transportation

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 fell 0.2% in February after having risen 0.1% in January.  Over the course of the past year such orders have risen 2.7% which is the biggest yearly increase since mid-2014.  At long last they certainly seem to be on the rise.

Durable Goods Orders -- Nondef cap, ex air -- ChangeJPG

The backlog of orders was unchanged in February after having fallen 0.3% in January.  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.

Durable Goods Orders -- Backlog

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


Charleston, SC

New Home Sales

March 23, 2017

New Home Sales Projected

New home sales rose 6.1% in February to 592 thousand after having  climbed by 5.3% 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 560 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 February to 266 thousand.  The small increase in inventories combined with the big increase in sales means that there is now a 5.4 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.

New Home Sales -- Inventory

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 62.0% 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 4.2% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.5% 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.

Housing Affordability

New home prices fell 3.9% in February to $296,200.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $311,400.  During the course of this past year prices have risen 3.6%.

New Home Prices

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 4.5% which is still quite affordable.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

March 23, 2017

Initial Unemployment Claims

Initial unemployment claims rose 15 thousand in the week ending March 19 to 258 thousand after having declined 6 thousand in the previous week.  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 rose 4 thousand to 243 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 265 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.

Unemployment Rate -- Part Time Economic Reasons

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.

Unemployment Rate -- Youth

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.

Unemployment Rate -- Discouraged Workers

The number of people receiving unemployment benefits declined 39 thousand in the week ending March 11 to 2,000 thousand.  The four week moving average fell 16 thousand to 2,043 thousand. The low for the cycle for this series was 2,024 thousand back in November 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 2.0%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will decline quite slowly.

People Receiving Benefits

Stephen Slifer


Charleston, SC

Gasoline Prices

March 22, 2017

Gasoline Prices

Gasoline prices at the retail level were unchanged in the week ending March 20 at $2.32 per gallon.   In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.07. The Department of Energy expects national gasoline prices to average $2.40 this year — almost exactly where they are currently.

As the price of gasoline declined the economy got a tailwind. However,  oil prices today are 16% 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 fell about $5 per gallon a couple of weeks ago to $48.00.  The Energy Information Agency predicts that crude prices will average $53.49 in 2017.  As crude oil and gas prices have leveled off the underlying inflationary pressures have become more apparent.

Gasoline Prices -- Crude

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 789 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.

Gasoline Prices -- Oil Rif Count

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 track close to that estimate.

Gasoline Prices -- Production

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.

Gasoline Prices -- Productivity

While oil inventories gradually declined for most of 2016 the recent increase in production has caused inventory levels to rebound.  Given the record level of inventories the recent drop in the price of crude oil is not surprising.

Gasoline Prices -- Inventory Levels

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, if oil prices rise U.S. producers will return in droves and prices will once again begin to fall.  Oil prices may have risen in the early part of this year, but they appear to have reached their peak for the year.

Stephen Slifer


Charleston, SC

Existing Home Sales

March 22, 2017

Existing Home Sales

Existing home sales declined 3.7% in February to 5,480 thousand after having jumped 3.3% in January.  While these sales bounce around a bit from month to month they clearly continue to trend higher,.  The Janaury sales pace was the fastest since February 2007.

Lawrence Yun, NAR chief economist  says, “”Realtors are reporting stronger foot traffic from a year ago, but low supply in the affordable price range continues to be the pest that’s pushing up price growth and pressuring the budgets of prospective buyers.  Newly listed properties are being snatched up quickly so far this year and leaving behind minimal choices for buyers trying to reach the market.

The months’ supply of unsold homes edged upwards from 3.5 month to 3.8 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

Existing Home Inventory

The National Association of Realtors series on affordability reached a peak of 213.6 in January of 2013.  It now stands at 162.0 in January.  At 162.0 it means that a household earning the median income has 62.0% more income than is necessary to get a mortgage for a median priced house.  Thus, housing remains quite affordable despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast mortgage rates are rising.

Housing Affordability -- Projected
The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income.  Builders are trying hard to boost production to increase the supply of available homes which should slow the pace of price appreciation. Finally, mortgage lenders should become slightly less restrictive as the economy remains healthy and default rates decline.

Existing home prices rose 0.5% in February to $228,400. Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $231,100.  Over the course of the past year existing home prices have risen 7.7% and have generally been bouncing around in a 4.5-8.0% range.

Existing Home Prices

Stephen Slifer


Charleston, SC

Consumer Sentiment

March 17, 2017

Consumer Sentiment

The preliminary reading for consumer sentiment for March rose 1.3 points and came in at 96.3 which is a shade below the 98.5 reading for January which is the highest level of confidence thus far in the business cycle.  But, interesting, consumers’ political affiliation has created an interesting divide between Republicans and Democrats.

Richard Curtin, the chief economist for the Surveys of Consumers, said “While current economic conditions were not affected by partisanship, this was not true for the component about future economic prospects: among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of robust economic growth was ahead.  Overall, the sentiment data has been characterized by rising optimism as well as by rising uncertainty due to the partisan divide.  Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders. This combination will result in uneven spending gains over time and across products.”

Based in part on the expectation of major changes in policy likely to be implemented in the first six months of his regime, we expect GDP growth for 2017 to be 2.4% and 2.7% in 2018.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.We expect worker compensation to increase 4.0% in 2017 vs. 3.0% last year. The core inflation rate should climb modestly in 2017 from 2.2% in 2016 to 2.7% if productivity gains largely counter the faster growth of wages.  Such a scenario would keep the Fed on track for the very gradual increases in interest rates that it has noted previously.  Specifically, we expect the funds rate to be 1.25% by the end of 2017 and 2.0% by the end of 2018.

The high level of  confidence was evident in both the current conditions and expectations components.

Consumer expectations for six months from now rose from 86.5 to 86.7.

Consumers’ assessment of current conditions climbed from 111.5 to a lofty level of 114.5.

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 at a reasonable clip of  about 2.5% in the quarters ahead.

Consumer Sentiment vs. Confidence

Stephen Slifer


Charleston, SC

Industrial Production

March 17, 2017

Industrial Production (pch)

Industrial production was unchanged in February after having declined 0.1% in January.  On the surface that is unimpressive, but it masks a significant rebound in manufacturing activity.  In both months the unseasonably mild winter weather conditions caused utility output to decline about 5.5%.  If utility output had been unchanged in both  months overall industrial production would have risen 0.6% in February after having risen 0.5% in January.  Gains of that magnitude would create an entirely different impression of what is happening in the production sector.  We know that the weather has already returned to normal throughout most of the country, so March and April are likely to see out-sized gains in production of perhaps 1.0% in each month.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) rose 0.5% in both January and February. During the past year  factory output has risen 1.2% (red line, right scale).  It has clearly hit bottom.  While it has risen 1.2% in the past year, it has climbed at a 3.3% pace in the past six months, and an impressive 4.8% pace in the past three months.

Industrial Production -- Mfg

Mining (14%) output jumped 2.7% in February after having climbed 2.2% in January.   Over the past year mining output has risen 1.8%%.  But over the past three months mining production has actually increased at a 14.0% pace.

Most of the recent upturn in mining has been concentrated in oil and gas drilling activity  which rose 7.1% in January after having risen 8.5% in January.  It has now risen for nine consecutive months.  Over the course of the past year oil and gas well drilling has risen 31.0%.  The number of  oil rigs in operation continues to climb.

Industrial Production -- Oil and Gas Well Drilling

Utilities output fell 5.7% in February after having declined 5.7% in January because the weather was far above normal in both months.  However, the weather has returned to normal, or even a bit below normal,in March so we should expect sizable increases in  utility output in each of the next couple of months.

Production of high tech equipment rose 0.2% in February after having declined 0.2% in January.  Over the past year high tech has risen 6.5%.   The high sector sector appears to have gathered some momentum during the past several 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.

Industrial Production -- High Tech

Capacity utilization in the manufacturing sector rose 0.3% in February to 75.6%.  It is still below the 77.5% that is generally regarded as effective peak capacity.  Above that level the factory sector is running too hot and prices begin to rise.  While we are a  ways from that so-called danger level, the reality is that manufacturing capacity is growing by about 0.1% per month while manufacturing output is rising by about 0.4%.  Thus, going forward the utilization rate in the manufacturing sector should rise about 0.3% per month.  At that pace, the utilization rate will hit that so-called “full employment” threshold by late summer or the fall.

Capacity Utilization

Stephen Slifer


Charleston, SC

Housing Starts

March 16, 2017

Housing Starts

Housing starts rose 3.0% in February to 1,288 thousand after having declined 1.9% in January. Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown in blue above).   That 3-month average now stands at 1,288 thousand which is. the fastest pace of construction thus far in the cycle and it should continue to climb slowly.

Both new and existing home sales continue to climb.   Thus, the demand for housing is particularly robust.

New Home Sales

Builders remain enthusiastic in part because they are seeing traffic through the model homes accelerating.

Homebuilder Confidence -- Traffic

Mortgage rates have risen almost 0.75% since the election in early November but at 4.2% they are still quite low by any historical standard.

Interest Rates -- 30 Year Mortgage

At the same time employment gains are about 170 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.0% pace.

Disposable Income -- Real

As a result housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising at almost as quickly, hence affordability has not dropped much.  At 162.8 the index indicates that a median-income buyer has 2.8% more income than is necessary to purchase a median-priced house.

Housing Affordability

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of skilled labor although construction industry jobs have picked up in recent months.

Payroll Employment -- Construction

As one might expect there is a tight correlation between home builder confidence and the starts data which probably makes a great deal of sense.   Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.3 million currently.  However,  as noted above, many home builders  report an inability to get the skilled workers they require.   Overcoming the labor shortage on a long-term basis will be challenging.  Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.

Homebuilder Confidence

The other thing worth noting is that about 1.3 million new households are being formed every year.  Those families all need a place to live, either a single-family home or an apartment.  Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households.  However, the fact that housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.4 million by the end of 2017 and 1.5 million in 2018.

Housing Starts Projected

Building permits fell 6.2% in February to 1,213 thousand after having jumped 5.3% in January.  The February drop was entirely in multi-family permits which is very volatile on a month-to-basis.  It will almost certainly rebound next month.  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 1,245 thousand which continues to point towards slow but steady improvement in housing.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are currently at 1,245 thousand, housing starts will gradually approach the 1.4 million mark.

Building Permits

Stephen Slifer

Charleston, SC

Unemployment vs. Job Openings

March 16, 2017

Unemployment vs. Job Openings

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 rose 1.6% in January to 5,626 after having declined a similar amount in December.    It is worth noting that there are more job openings today than there were prior to the recession.   There were 7.6 million people unemployed in December.

As shown in the chart below, there are currently 1.3 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 as good shape now as it was prior to the recession.

Unemployment vs. Job Openings (Ratio)

In  this same report the Labor Department indicated that the quit rate rose to 2.2 in January  which is the highest reading thus far in the business cycle.  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.

Unemployment vs. Job Openings (Quit Rate)

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 have been rising rapidly (and are considerably higher now than they were prior to the recession); hires have been rising far less rapidly.

Unemployment vs. Job Openings and Hires

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?

Unemployment vs. Job Openings -- Openings to Hires Ratio

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

Trade-Weighted Dollar

March 15, 2017

Trade-weighted dollar

The trade-weighted value of the dollar, which represents the value of the dollar against the currencies of a broad group of U.S. trading partners has risen 4.0% from where it was at this time last year.  But that pattern is a bit skewed.  The dollar’s valued declined in the first few months of 2016, was relatively steady throughout the summer, and then rose sharply since the election in November as potential policy changes advocated by President Trump seem likely to accelerate GDP growth, raise the inflation rate, and cause the Fed to push interest rates steadily higher.  All of those changes are attractive to foreign investors as they seek the relatively higher returns available in the U.S. stock market, and the higher yields of U.S. Treasury securities.

When you try to figure out the impact of currency movements on our trade, you have to weigh the movements depending upon the volume of trade we do with that country.  For example, our largest trading partners are:

With respect to the Chinese yuan the dollar has strengthened about 6.0% over the past year.  A year ago one dollar would buy 6.50 yuan.  Today it buys 6.89 yuan.

Trade-weighted dollar -- China

The U.S. dollar has strengthened 1.2% versus the Canadian dollar during the past year.  For example, a year ago one U.S. dollar would purchase $1.32 Canadian dollars.  Today it will buy $1.34 Canadian dollars.

Trade-weighted dollar -- Canada

And against the Mexican peso the dollar has strengthened by 12.3% during the past year.  A year ago one dollar would buy 17.6 Mexican pesos.  Today it will buy 19.8 pesos.

Trade-weighted dollar -- Mexican Peso

The dollar has strengthened by 1.2% against the yen during the course of the past year.  A year ago one dollar would buy 112 yen.  Today that same one dollar will buy 114 yen.

Trade-weighted dollar -- Yen

The dollar has strengthened by 5.3% against the Euro during the course of the past year.  A year ago one Euro cost $1.11.  Today that same Euro costs $1.05.

Trade-weighted dollar -- Euro

Thus, the dollar has strengthened against every major currency during the course of the year.   That appreciation has been the largest against the Mexican peso (12%), the Chinese yuan (6%) and the Euro (5%) with relatively small 1% increases against the Canadian dollar and the Euro.   As a result, the trade-weighted value of the dollar, as noted earlier, has risen 4.0% during the past year.

Currency changes can affect the economy in several ways.   First, a rising dollar can reduce growth of U.S. exports because U.S. goods are now more expensive for foreign purchasers.  Similarly, a rising dollar can accelerate growth of imports because foreign goods are now cheaper for Americans to buy.  A rising dollar can also lower the rate of inflation in the U.S. because the prices of foreign goods are likely to fall.

From October 2014 to January 2016 the dollar rose 22%.  That is a huge change.  The trade component subtracted about 0.5% from GDP growth in both 2014 and 2015.  We expect the dollar to rise about 10% this year.  If that is the case the trade component of GDP should subtract a relatively modest 0.2% from GDP growth in 2017.  The rising dollar will also help to keep the inflation rate in check this year as the prices of imported goods decline, but this effect will be quite small.

From the European and Japanese vantage points a weaker currency will help to boost GDP growth which is currently anemic.  That is a good thing  Furthermore, both Europe and Japan suffer from too little inflation.  A weaker currently will tend to raise it.  That, too, is a good thing.  So from a European and Asian viewpoint more growth and inflation caused by a weaker currency is a good thing.  If Europe and Japan are successful, stronger growth in those sectors of the world will ultimately help stimulate the U.S. economy.

Stephen Slifer


Charleston, SC