Tuesday, 22 of January of 2019

Economics. Explained.  

Category » Reference Charts (By Category)

Consumer Sentiment

January 18, 2019

The final reading for consumer sentiment for January fell 7.6 points to 90.7 versus 98.3 in December.  After peaking in March at 101.4 sentiment has gradually declined.  However, at 90.7 sentiment remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.”  Curtin added, “iI does not yet indicate the start of a sustained downturn in economic activity. It is the strength in personal finances that will continue to support consumption expenditures at favorable levels in 2019. Nonetheless, consumers now sense a need to buttress their precautionary savings, which is typically done by reducing their discretionary spending.”

His statements are true, but only if the factors he notes remain negative.  Since the beginning of the year the stock market has rallied sharply.  The U.S. and China seem somewhat close to a trade deal.  Mortgage rates have dropped from 5.0% to 4.5%.  The Fed has said it intends to leave rates unchanged through midyear.   Our sense is that in the months ahead consumer sentiment will rebound as these issues are resolved.

We expect GDP growth of 2.8% in 2019 versus 3.1% 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% this year. The core inflation rate (excluding the volatile food and energy components) should climb by 2.2% in 2018 and 2.3% in 2019.  Such a scenario would keep the Fed on track for no rate hikes through the middle of year and only a couple of increases thereafter.  Specifically, we expect the funds rate to rise 0.5% or so from 2.4% at the end of 2018 to 3.0% by the end of this year.

The modest September decline was attributable to the expectations component.

Consumer expectations for six months from now fell from 87.0 to 78.3.

Consumers’ assessment of current conditions declined from 116.1 to 110.0.

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

Industrial Production

January 18, 2019

Industrial production rose 0.3% in December after having risen 0.4%  in November.   During the past year industrial production has risen 4.0%.  So despite monthly wiggles, production continues to trend upwards.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) jumped 1.1% in December after having climbed 0.1% in November.  The December increase was led by a 4.7% increase in motor vehicle production.  During the past year  factory output has risen 3.2% (red line, right scale).   As 2018 came to a close factory activity seemed upbeat.  Thus far, no hint of a slowdown from this sector of the economy.

Mining (14%) output rose 1.5% in December after having gained 1.1% in November.  Over the past year mining production has risen 13.4%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling fell 0.3% in December after having risen 0.1% in November.     Over the course of the past year oil and gas well drilling has risen 18.2%.

Utilities output plunged 6.3% in December as relatively warm weather trimmed the need for heating.  Utility output rose 1.3% in November.  During the past year utility output has declined 4.3%.

Production of high tech equipment climbed 1.0% in December after having risen 0.5% in November.  Over the past year high tech has risen 5.6%.  Thus, the high tech sector sector appears to be expanding nicely. This is an indication that nonresidential investment is continuing to climb which is, in turn, a signal of renewed growth in productivity.

Capacity utilization in the manufacturing sector rose 0.8% in December to 76.6%.  It remains 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.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

January 17, 2019

Initial unemployment claims declined 3 thousand in the week of January 12 to 213 thousand.  The 4-week moving average declined 1 thousand to 221 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 221 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 200 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 December level for 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 rose 18 thousand  in the week ending January 5 to 1,737  thousand.  The 4-week moving average rose 8 thousand to 1,729 thousand.  This series hit a low of 1,635 thousand in late October.

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


Charleston, SC

Homebuilder Confidence

January 16, 2019

Homebuilder confidence rose 2 points in January after having fallen 4 points in December and having plunged 8 points in November.  It is clear that the stock market decline, slower growth overseas, the Fed continuing to raise interest rates, and the softness in home sales is denting builder’s confidence.  But at a level of 58 builder confidence remains positive, just less positive than it was a couple of months earlier.

NAHB Chairman Randy Noel said, “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment.  Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”

NAHB Chief Economist Robert Dietz said  “Builders need to continue to manage rising construction costs to keep home prices affordable, particularly for young buyers at the entry-level of the market.  Lower interest rates that peaked around 5 percent in mid-November and have since fallen to just below 4.5 percent will help the housing market continue to grow at a modest clip as we enter the new year.”

Traffic through the model homes rose 1 point in January to 44 after having declined 2 points in December and having dropped 8 points in November.  Traffic through model homes has slipped somewhat in recent months as potential homebuyers have become cautious about rising mortgage rates.  The volatility in the stock since early October and fears of slower growth ahead may also be taking a toll on buyer confidence.  However, some of the dramatic stock market volatility has disappeared in the early part of this year.  Mortgage rates have fallen from 5.0% to about 4.5%.  And no economic data are pointing toward any sources of economic weakness.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Confidence took a big hit in November and December while housing starts have been fairly flat for most of this year.

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

Gasoline Prices

January 16, 2019

Gasoline prices at the retail level fell $0.01 in the week ending January 14 to $2.25 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.00. The Department of Energy expects national gasoline prices to average $2.50 in 2019.

Spot prices for gasoline have fallen sharply in recent months primarily because of the decline in crude prices.

The selloff in the stock market that began in October pushed oil prices lower.  Investors believed that higher short- and long-term interest rates would slow the pace of economic activity and, hence, reduce the demand for oil.  At the same time  oil production around the globe surged in response to the higher prices and prices  sank to $45 per barrel.  But Saudi Arabia recently announced it was cutting production by 0.7 million barrels per day to boost prices and, as a result, oil prices have risen to about $52.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 11,900 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s has boosted the  price of oil to about $52.  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 boost production.  The Saudi’s will not permit the U.S. to increase its market share of the global markets.

The Department of Energy expects U.S. production to average 10.9 million barrels this year and climb 10% further to 12.1 million barrels in 2019 and 12.9 million barrels per day in 2020.  As a result, 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 appears to have arrested the recent increase in crude stocks and gotten supply and demand back into better balance..    At 1,086 million barrels crude inventories are  roughly in line with the 5-year average of 1,116 million barrels.

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 went into effect in early November.  Iranian production has not fallen too sharply yet, but the U.S.’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 its surplus equipment is old and has not been used in some time so we will see.

Stephen Slifer


Charleston, SC*

Producer Price Index

January 15, 2019

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 fell 0.2% in December after having risen 0.1% in November.  During the past year this inflation measure (the red line) has risen 2.4%.

Excluding food and energy producer final demand prices fell 0.1% in December after having risen 0.3% in November.  They have risen 2.6% since December of last year (the pink line).  This series was steadily accelerating for a couple of years, but it has leveled off in the past 12 months or so.

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

The PPI for final demand of goods fell 0.4% in both November and December. These prices have now risen 1.7% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods rose 0.1% after having climbed 0.3% in November.  During the past year the core PPI for goods (the light green line) has risen 2.4% (right scale).

Food prices jumped 2.6% in December after having risen 1.3% in November and having climbed by 1.0% in October.  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 risen 3.2%.

Energy prices plunged by 5.4% in December after having fallen 5.0% in November.  Energy prices have declined 2.8% in the past year.   This recent drop is in large part because U.S. oil output is now surging and global demand has been slowing down.  But now OPEC countries appear to have cobbled together an agreement to cut oil production in the months ahead.  This should stabilize oil prices for the time being although OPEC would like them to rise to the $85-90 per barrel mark.  Not going to happen with U.S. output surging.

The PPI for final demand of services fell 0.1% in December after having risen 0.3% in November after having jumped 0.7% in October.  This series has risen 2.6% over the course of the past year (left scale).   The jump in service goods prices in recent months 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) rose 0.1% in both November and December.  It has climbed 2.5% in the past year.

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 December this series has actually declined to 54.9  This means that prices continued to climb in those months, but the rate of increase was considerably 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 3.9% 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  2.3% in 2019 after having risen 2.2% in 2018.

Stephen Slifer


Charleston, SC

Consumer Price Index

January 11, 2019

The CPI fell 0.1% in December after having been unchanged in November.  During the past year the CPI has risen 1.9%.

Food prices rose 0.4% in December after having climbed 0.2% in November.  Food prices have risen 1.6% in the past twelve months.

Energy prices fell 3.5% in December after having declined 2.2% in November.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have declined 0.2%.

The recent drop in energy prices is  partly related to a drop-off in demand outside the U.S., principally in China.  It also reflects a huge jump in U.S. oil production.  As a result, oil prices plunged from $76 per barrel back in October to a low of about $45 billion in early January.  However, a cut in Saudi output announced last week has lifted prices back to about $52 per barrel so the recent slide in  oil prices appears to have come to a halt.

Excluding food and energy the CPI rose  0.2% in October, November, and December.  Over the past year this so-called core rate of inflation has risen 2.2%.  We expect the core CPI will rise 2.3% in 2019.

The most interesting development in the CPI in recent years has been the dichotomy between the prices of goods (excluding the volatile food and energy components) and services.  For example, in the past year prices for goods have risen 0.2% while prices for services have risen 2.9%.

With respect to goods prices, it appears that the internet has played a big role in reducing the prices of many goods.  Shoppers can instantly check the price of any particular item across a wide array of online and brick and mortar stores.  If merchants do not match the lowest price available, they risk losing the sale.  Thus, they are constantly competing with the lowest price available on the internet.  Looking at specific items in the CPI we find that prices have been unchanged for almost every major category in the past year.  New cars have declined 0.2%, televisions have declined 18.6%, audio equipment has dropped 4.2%,  toys have fallen 9.0%, information technology commodities (personal computers, software, and telephones) have declined 4.5%.  Prices for all of these items are widely available on the internet and can be used as bargaining chips with traditional brick and mortar retailers.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 2.9% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.2%.  This undoubtedly reflects the shortages of both rental properties and homeowner occupied housing. Indeed, the vacancy rate for rental property is at a 30-year low. This steady rise in the cost of shelter  will continue for some time to come and, unlike monthly blips in food or energy, it is unlikely to reverse itself any time soon.

The CPI, both overall and the core rate, will have an upward bias  in the months ahead because of what has been happening to shelter prices, gradually rising labor costs, and rising producer prices.  But on the flip side, productivity gains are countering much of the increase in labor costs, and the internet is keeping a lid on the prices of goods.  We look for an increase in the core CPI of 2.3% in 2019.

The Fed’s preferred measure of inflation is not the CPI, but rather the personal consumption expenditures deflator, specifically the PCE deflator excluding the volatile food and energy components which is currently expanding at a 1.9% rate.  We expect it to climb 2.2% in 2019.  The Fed has a 2.0% inflation target.

Why the difference between the CPI and the personal consumption expenditures deflator?  The CPI is a pure measure of inflation.  It measures changes in prices of a fixed basket of goods and services each month.

The personal consumption expenditures deflator is a weighted measure of inflation.  If consumers feel less wealthy in some month and decide to purchase inexpensive margarine instead of pricey butter, a weighted measure of inflation will give more weight to the lower priced good and, all other things being unchanged, will actually register a decline in that month.  Thus, what the deflator measures is a combination of both changes in prices and changes in consumer behavior.

As we see it, inflation is a measure of price change (the CPI).  It is not a mixture of price changes and changes in consumer behavior (the PCE deflator).  The core PCE should increase 2.2% in 2019.  That compares to the Fed’s targeted rate of 2.0%.

Keep in mind that real short-term interest rates are quite low.  With the funds rate today at 2.3% and the year-over-year increase in the CPI at 1.9% the “real” or inflation-adjusted funds rate is 0.4%.  Over the past 57 years that “real” rate has averaged about plus 1.0% which should be regarded as a “neutral” real rate.  Given a likely pickup in GDP growth this year and next and a gradual increase in the inflation rate, a rate that low is inappropriate in today’s world.  The Fed should continue to push rates somewhat higher and gradually run off some of its longer term securities, although the Fed’s anticipated two rate  hikes in 2019 will not occur until the second half of the year.

Stephen Slifer


Charleston, SC

Unemployment vs. Job Openings

January 8, 2019

The  Labor Department reported that job openings fell 3.4% in November to 6,888 thousand after having risen rose 2.5% in October.   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 November.

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 November was  at 2.3 which is just slightly below the September level of 2.4 which was 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 2.3.  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.

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

Small Business Optimism

January 8, 2019

Small business optimism fell 0.4 point in December to 104.4 after having declined 2.6 points in November.  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,  “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects.  Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.”

NFIB Chief Economist added that, “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates.  However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

In our opinion the economy is expected to expand at a reasonably robust 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.

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.  Mortgage rates have fallen in the past couple of months from 4.9% to 4.5%.  And investment spending remains solid.  We expect GDP growth to be 2.8% this year after having risen 3.1% in 2018.  The core inflation should be relatively stable at 2.3% in 2019 after rising 2.2% in 2018.  The Fed will continue to raise short-term interest twice this year but the hikes will not occur until after midyear.  Accelerating GDP growth, low inflation, and low interest rates should re-invigorate the stock market in the months ahead.

Stephen Slifer


Charleston, SC

Purchasing Managers Index — Nonmanufacturing

January 7, 2019

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 fell 5.3 points in December to 59.9 after having risen 2.7 points in November as stock market volatility, tariffs, and weakness overseas (most notably in China) appear to have taken a toll.   However the decline is from the November level of 65.2 which was was the highest level for this index since January 2004.  In December, 16 of 18 service-sector  industries  reported expansion.  Still good, solid, broad-based growth continues at a relatively high level.  At its December level the non-manufacturing index equates to GDP growth of 3.2%.

Typically, large changes in the overall index are led by orders but, in this case, the orders component for December rose 0.2 point to 62.7 after having climbed 1.0 point in November.  Orders continued to flow in at a solid pace in December.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment fell 2.1 points in December to 56.3 after having declined 1.3 points in November.   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 6.7 points in December to 57.6 after having risen 2.6 points in November.   Prices continued to climb in December, but at a slower pace than in other recent  months.

Stephen Slifer


Charleston, SC