Thursday, 15 of November of 2018

Economics. Explained.  

Category » Reference Charts (By Category)

Small Business Optimism

November 13, 2018

Small business optimism fell 0.5 point in October to 107.4 after having declined 0.9 point in September.  The August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.

NFIB President Juanita Duggan said,  “For two years, small business owners have expressed record levels of optimism and are proving to be a driving force in this rapidly growing economy.  The October optimism index further validates that when small businesses get tax relief and are freed from regulatory shackles, they thrive and the whole economy prospers.”

NFIB Chief Economist added that, “An unburdened small business sector is truly great for employment and the general economy.  October’s report sets the stage for solid economic and employment growth in the fourth quarter, while inflation and interest rates remain historically tame. Small businesses are moving the economy forward.”

In our opinion the economy is expected to expand at a rapid clip in coming months in response to a number of significant policy changes.  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.

The stock market has retreated from its recent record high level.   However, jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  The housing sector is continuing to climb slowly.  And now investment spending has picked up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.5% in 2017 to 3.0% in 2018 and 2.9% in 2019 .  The core inflation will  climb from 1.8% in 2017 to 2.2% in 2018 and 2.4% in 2019.  The Fed will continue to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to new record high levels in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Consumer Sentiment

November 9, 2018

The preliminary reading for consumer sentiment for November was 98.3 versus a final reading of 98.6 in October.  The November level was 3.1 points lower than March’s level of 101.4 was the highest level of sentiment since January 2004.  Thus, sentiment remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “Consumer sentiment remained virtually unchanged in early November from its October reading. Importantly, interviewing went through Wednesday night so there was a one-day overlap after the mid-term election results were known by consumers. Those few cases held expectations that were identical with the data collected earlier in the month, which is not so surprising given that the split between the House and Senate was widely anticipated.”

Given the tax cuts we expect GDP growth to climb from 2.5% in 2017 to 3.0% in 2018 and 2.9% in 2019.  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 3.5% in 2018 vs. 1.8% last year. The core inflation rate (excluding the volatile food and energy components) rose 1.8% in 2017 but should climb by 2.2% in 2018 and 2.4% in 2019.  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 2.2% by the end of 2018 and 3.2% by the end of next year.

The modest September decline was attributable to both the expectations and current conditions components.

Consumer expectations for six months fell from 89.3 to 88.7.

Consumers’ assessment of current conditions edged upwards from 113.1 to 113.2.

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 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Producer Price Index

November 9, 2018

The Producer Price Index for final demand – intermediate demand  includes producer prices for goods, as well as prices for construction, services, government purchases, and exports and covers over 75% of domestic production.

Producer prices for final demand rose 0.6% in October after having risen 0.2% in September and having declined 0.1% in August.  During the past year this inflation measure (the red line) has risen 2.8%.  The PPI has been moving steadily higher for some time but its rate of ascent appears to have slowed.

Excluding food and energy producer final demand prices climbed by 0.5% in October after having risen 0.2% in September and having declined 0.1% in August.  They have risen 2.5% since October of last year (the pink line).  This series has been steadily accelerating for the past two years.  Inflationary pressures are gradually re-surfacing.

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

The PPI for final demand of goods  jumped 0.6% in October after having declined 0.1% in September. These prices have now risen 3.6% in the past year (left scale).  But the October jump was entirely related to the volatile food and energy categories.  Excluding the volatile food and energy categories the PPI for goods was unchanged in October after having risen 0.2% in September.  During the past year the core PPI for goods (the light green line) has risen 2.4% (right scale).

Food prices jumped 1.0% in October after having fallen 0.6% in both August and September.  Food prices are always volatile.  They can fall sharply for a few months, but then reverse direction quickly.  Over the past year food prices have declined 0.8%.

Energy prices jumped 2.7% in October after having declined 0.8% in September.  Energy prices have risen 12.6% in the past year.  But given what has been happening to oil prices lately and their slide below $60 per barrel, it is clear that energy prices will fall sharply in November.  This recent drop is in large part because U.S. oil output is now surging and OPEC has increased its crude oil output.

The PPI for final demand of services jumped 0.7% in October after having risen 0.3% in September after having declined 0.1% in both July and August.  This series has risen 2.5% over the course of the past year (left scale).   The jump in service goods prices in both September and October were caused by a run-up in the trade services category.  These swings largely reflect the change in margins received by wholesalers and retailers (apparel, jewelry, and footwear in particular). .  The PPI for final demand of services excluding trade and transportation (the light blue line) increased 0.2% in October after having risen 0.3% in June, July and August, and September.  It has climbed 2.6% during the past year.  This series, like the overall index, has been gradually accelerating for some time.

The recent increases in producer prices were foreshadowed by the results of the Institute for Supply Management’s series on prices paid by manufacturing firms.  In the case of manufacturing firms the chart looks like the one below.  Price pressure were steadily building for six consecutive months.  Specifically, the price component rose steadily from 64.8 in November of last year to 79.5 in May.  The fact that every month was above 50.0 meant that prices producers were paying increased every single month.  Given that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  However, from June through October this series has actually declined to 71.6  This means that prices continued to climb in those months, but the rate of increase was less than in other recent months.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

Because the PPI measures the cost of materials for manufacturers, it is frequently believed to be a leading indicator of what might happen to consumer prices at a somewhat later date.   However, that connection is very loose.

It is important to remember that labor costs represent about two-thirds of the price of a product while materials account for the remaining one-third.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 3.7% the labor market is beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation should be countered by an increase in productivity.  Nevertheless, the tighter labor market should exert at least moderate upward pressure on the inflation rate.

Some upward pressure on labor costs, rents, and the cost of materials will put upward pressure on inflation.  We expect the core CPI to increase 2.2% in 2018 and 2.4% in 2019 after having risen 1.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC



Initial Unemployment Claims

November 8, 2018

Initial unemployment claims continue to fall to multi-decade lows.  Specifically, claims fell 1 thousand in the week ending November 3 to 214 thousand after  having declined 1 thousand in the previous week.  The 4-week moving average was unchanged at 214 thousand.  The lowest level for this series in the cycle was set back in mid-September at 206 thousand.  It obviously remains close to that level.  That, in turn, was the lowest level since December 6, 1969 when it was 205 thousand.

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 214 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 exactly 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 September level for the youth unemployment rate today was 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 October 27 to 1,623 thousand.  The 4-week moving average declined 8 thousand to 1,633 thousand.  This was the lowest 4-week average since August 11, 1973 when it was 1,627 thousand.  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% previously to perhaps 2.3% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer

NumberNomics

Charleston, SC


Gasoline Prices

November 7, 2018

Gasoline prices at the retail level fell $0.06 in the week ending November 5 to $2.75 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.50. The Department of Energy expects national gasoline prices to average $2.75 this year.  

Spot prices for gasoline have fallen sharply in the past couple of weeks primarily because of the decline in crude prices.  If gasoline prices remain at their current level, pump prices will continue to slide.

The selloff in the stock market in October pushed oil prices back down to $67 per barrel with an expectation that higher short- and long-term interest rates will slow the pace of economic activity and, hence, push oil prices lower.  And now, in the past two weeks,  oil production around the globe has surged and reduced prices further to $62 per barrel.

For example,  U.S. production has surged to 11,600 thousand barrels per day.  Saudi Arabia has also increased its production.

Keep in mind that the Department of Energy expects production to average 10.9 million barrels this year but climb further to 12.1 million barrels in 2019.  This means that the U.S. became the world’s largest oil producer in March of this year and is expected to boost production by almost 10% in 2019 to further widen the gap between U.S. production, Russia, and Saudi Arabia.

There is so much oil currently flooding the market that oil inventories are rising rapidly.    However, at 1,086 million barrels crude inventories are still lower the 5-year average of 1,116 million barrels so one can hardly characterize this as an oil glut.  It is, however, a sign that currently supply is exceeding demand by a fairly significant amount.

The wild cards right now are production levels for Venezuela and Iran.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  Iran is different.  The Iran sanctions are going into effect right now.  Iranian production has not fallen too sharply yet, but the U.S. goal is to reduce exports (and, hence, production) close to zero.  Thus, as we go forward Iranian output could fall sharply and counter much of the recent oversupply.  OPEC claims it has ample reserves to offset any Iranian shortfall, but that surplus equipment is old and has not been used in some time so we will see.

Stephen Slifer

NumberNomics

Charleston, SC*


Unemployment vs. Job Openings

November 6, 2018

The  Labor Department reported that job openings declined 3.9% in September to 7,009 thousand, but that follows an increase of 3.1% in August and 3.7% in July.   It is worth noting that there are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.0 million people unemployed in September.

As shown in the chart below, there are currently 0.8 unemployed workers for every available job.   Think of that — there are more job openings today than there are unemployed workers.  Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

In  this same report the Labor Department indicated that the quit rate in September was  at 2.4 which is the highest level since January 2001.   This is a measure of the number of people that voluntarily quit their jobs in that  month.  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 2.4.  At the beginning of the recession it was at 2.0 and the record high level for this series was 2.6 back in January 2001.

There is one other point that should be made about this report.  Janet Yellen used to  claim that there were a large number of unemployed workers just waiting for jobs if only the economy were to grow fast enough.  She is assuming that these people have the skills and are qualified for employment.  We tend to disagree.  There are plenty of job openings out there.  What is not happening as quickly is hiring.  Take a look at the chart below.  Job openings (the green line) have been rising rapidly (and are far higher now than they were prior to the recession); hires (the red line) have been rising less rapidly.

Indeed, if one looks at the ratio of openings to hires the reality is that this ratio  has not been higher at any point in time since this series began in 2000.  There are plenty of jobs out there, but employers are having a hard time filling them.  Why is that?

A couple of thoughts come to mind.  First and foremost, many unemployed workers simply do not have the skills required for the jobs available.  If they did, why aren’t they being hired?  Why aren’t some current part time workers stepping into the void for those full time positions? Why haven’t discouraged workers begun to seek employment with so many jobs available?  Why haven’t long-term unemployed workers bothered to go back to school and acquire the skills that are necessary to land a  job?

Or perhaps many of these people flunk the drug tests.  They might not be qualified for employment for a variety of possible reasons.

Perhaps also some people in this group find 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 couple of years 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

NumberNomics

Charleston, SC


Purchasing Managers Index — Nonmanufacturing

November 5, 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 decline 2.7 points in October to 62.5 after having jumped 4.5 points in September and 4.2 points in August.   While this index declined slightly in October, it fell from the highest level for this index since January 2004.  In October, 17 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth continues at a relatively high level.  At its October level the non-manufacturing index equates to GDP growth of 4.1%.

The orders component fell 0.1 point in October to 61.5 after having risen 1.2 points in September.  Orders continued to flow in at a solid pace in September.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment declined 2.7 points in October to 59.7 after having surged upwards by 5.7 points in September.   The September level of 62.4 was 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 190 thousand per month.

Finally,  the price component declined 2.7 points in October to 61.7 after having risen 1.4 points in September.   That is the thirteenth  consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.  That will continue to put some upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


Private Employment

November 2, 2018

Private sector employment for October surged by 246 thousand after having climbed by 121 thousand in September.   The October increase was somewhat larger than anticipated which counters the smaller-than-normal increase in September.   In our opinion, the outlook for employment has not changed much in the wake of this report.  The Bureau of Labor Statistics indicated that Hurricane Michael that made landfall in the Florida Panhandle on October 10 had no discernible effect on either the employment or unemployment estimates for October.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 211 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 180 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 30 thousand in October after expanding by 20 thousand in September.    The trend increase in construction employment appears to be about 30 thousand per month.  But what seems to be important is that the monthly gains in this category seem to be gradually getting larger.

Manufacturing employment jumped 32 thousand in October after having risen 18 thousand in September.    Factory employment is now rising by about 25 thousand per month and, like construction employment, the monthly increases seem to be gradually getting larger.  Employers seem to be finding additional workers.

Mining rose 5 thousand in both September and October.  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 and social assistance climbed by 47 thousand.  Professional and business services increased 35 thousand in October.  Transportation and warehousing climbed by 25 thousand.  Employment in leisure and hospitality establishments jumped 42 thousand in October.  Retail jobs rose 2 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 rose 0.1 hour to 34.5 hours in October after a similar-sized decline in September  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 0.5% in October after declining 0.3% in September.  Thus, it rose 1.1% in Q3.

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 2019.  The stock market had a tough month of October but seems to be rebounding and should reach new highs before too much longer.  Consumer confidence is holding up well and has shrugged off the October decline in the stock market.  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 has now turned upwards.  As noted earlier, factory employment is gathering momentum.  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 3.0% this year and 2.9% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

November 2, 2018

Payroll employment for October surged by 250 thousand after having climbed by 118 thousand in September.   The October increase was somewhat larger than anticipated which counters the smaller-than-normal increase in September.   In our opinion, the outlook for employment has not changed much in the wake of this report.  The Bureau of Labor Statistics indicated that Hurricane Michael that made landfall in the Florida Panhandle on October 10 had no discernible effect on either the employment or unemployment estimates for October.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 218 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 180 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 30 thousand in October after expanding by 20 thousand in September.    The trend increase in construction employment appears to be about 30 thousand per month.  But what seems to be important is that the monthly gains in this category seem to be gradually getting larger.

Manufacturing employment jumped 32 thousand in October after having risen 18 thousand in September.    Factory employment is now rising by about 25 thousand per month and, like construction employment, the monthly increases seem to be gradually getting larger.  Employers seem to be finding additional workers.

Mining rose 5 thousand in both September and October.  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 and social assistance climbed by 47 thousand.  Professional and business services increased 35 thousand in October.  Transportation and warehousing climbed by 25 thousand.  Employment in leisure and hospitality establishments jumped 42 thousand in October.  Retail jobs rose 2 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 rose 0.1 hour to 34.5 hours in October after a similar-sized decline in September  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 0.5% in October after declining 0.3% in September.  Thus, it rose 1.1% in Q3.

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 2019.  The stock market had a tough month of October but seems to be rebounding and should reach new highs before too much longer.  Consumer confidence is holding up well and has shrugged off the October decline in the stock market.  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 has now turned upwards.  As noted earlier, factory employment is gathering momentum.  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 3.0% this year and 2.9% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

November 2, 2018

The unemployment rate was unchanged in October at 3.7% after having declined 0.2% in September.    The October level of 3.7% is the lowest level for the unemployment rate in 48 years.  The labor force jumped 711 thousand in October.  Employment surged by 600 thousand.  As a result, the number of unemployed workers rose by  111 thousand but the unemployment rate remained steady at 3.7%.  While employment used in calculating the unemployment rate rose 600 thousand, payroll employment increased by just 250 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 rose sharply in October.  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 1.4% which is slightly more than growth in the population which was 1.1%.  Thus, the labor force partition rate rose slightly during that period of time.  It is now 62.9%.  A year ago it was 62.7%.

At 3.7% the unemployment rate is far below the 4.5% 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 fell 0.1% in October to 7.4% after having risen 0.1% in September.  At 7.4% it 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  7.4% compares to 3.7% 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 the lowest it has been in more than 48 years.

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 a bit 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 steadily declining and getting very close.

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