Tuesday, 16 of July of 2019

Economics. Explained.  

Category » Reference Charts (By Category)

Producer Price Index

July 12, 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 rose 0.1% in both May and June after having risen 0.2% in April.  During the past year this inflation measure (the red line) has risen 1.6%.

Excluding food and energy producer final demand prices rose 0.3% in June after having risen 0.2% in May and 0.1% in April.  They have risen 2.3% in the past year (the pink line).  This series was steadily accelerating for a couple of years, but it has begun to drift lower 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 June after having declined 0.2% in May after having increased 0.3% in April. These prices have now risen 0.1% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods was unchanged in April, May, and June.  During the past year the core PPI for goods (the light green line) has risen 1.4% (right scale).

Food prices rose 0.6% in June after having fallen 0.3% in May and 0.2% in April.  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 2.2%.

Energy prices fell 3.1% in June after having declined 1.0% in May after having risen 1.8% in April.  Energy prices have fallen 7.0% in the past year.   Output in Venezuela and Iran has been falling steadily and Saudi Arabia recently cut its oil output in an effort to boost prices, but U.S. production has continued to surge to a new record high level of 12.4 million barrels per day and that increase in output has more than countered the OPEC shortfall.  As a result, oil prices declined to about $53 per barrel.  However, the recent attack by Iran on an oil tanker in the Persian Gulf has lifted crude prices to $58.  That increase will be reflected in the data for next month.

The PPI for final demand of services rose 0.4% in June after having risen 0.3% in May and 0.1% in April.  This series has risen 2.5% over the course of the past year (left scale).   The PPI for final demand of services excluding trade and transportation (the light blue line) was unchanged in June after having jumped 0.5% in May after having increased 0.3% in April.  It has climbed 2.2% in the past year.

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 3.6% the labor market is well beyond full employment.  As a result, wages pressures have begun to climb, but the resulting upward pressure on inflation has been countered by an increase in productivity.  Unit labor costs, labor costs adjusted for the increase in productivity, have fallen 0.8% in the past year.  Compensation climbed 1.5% during that period of time but that increase was almost entirely offset by a 2.4% increase in productivity.  No wonder the seemingly tight labor market is not putting upward pressure on inflation — the increase is being entirely offset by an increase in productivity.  That means that firms have no real incentive to raise prices — workers have earned their fatter paychecks.

We expect the core CPI to increase  2.3% in 2019 after having risen 2.2% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC



Consumer Price Index

July 11, 2019

The CPI rose 0.1% in both May and June after having risen 0.3% in April and having risen 0.4% in March.  During the past year the CPI has risen 1.7%.  The overall index levels for May and June were held in check by a decline in energy prices.

Food prices rose 0.1% in June after having risen 0.3% in May.  Food prices have risen 1.9% in the past twelve months.  These prices tend to be lumpy with increases reported for a few months followed by several months of declining prices.

Energy prices declined 2.3% in June after having fallen 0.6% in May.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have fallen 3.4%.

The drop in crude oil prices in the past couple of months reflected a huge jump in U.S. oil production.  Oil output has fallen sharply in both Venezuela and Iran and the Saudis have also curtailed output.  However, a huge pickup in U.S. output has caused prices to decline. But the recent attack by Iran on an oil tanker in the Persian Gulf has ratcheted crude prices higher which will get reflected in the July data.

Excluding food and energy the CPI rose 0.3% in June after having climbed 0.1% in each of the previous four months.  Over the past year this core rate of inflation has risen 2.1%.  We expect the core CPI will increase 2.3% in 2019 as higher prices on goods imported from China will push this index higher in the months ahead.

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 2.8%.

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 or fallen for almost every major category in the past year.  Apparel prices have declined 2.9%, new cars have risen 0.9%, airfares have risen 0.9%, televisions have declined 18.6%, audio equipment has  risen 0.9%, toys have fallen 8.4%, information technology commodities (personal computers, software, and telephones) have declined 6.7%.  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 2.8% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.5%.  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 be relatively steady  in the months ahead.  Steadily rising shelter prices, gradually rising labor costs, and higher prices on goods being imported from China will tend to boost the CPI.  But on the flip side, productivity gains are countering all 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 1.6% rate.  We expect it to climb 1.9% 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 CPI should increase 2.3% in 2019 while the core PCE climbs 1.9%.  That compares to the Fed’s targeted rate of 2.0%.

Given sustained growth in GDP growth this year and the inflation rate being close to target, there is no need for the Fed to alter the level of the funds rate.  However, recent rhetoric from Fed officials suggest that they could choose to lower rates slightly — beginning perhaps at the end of this month — by the end of the year.

Stephen Slifer

NumberNomics

Charleston, SC


Initial Unemployment Claims

July 10, 2019

Initial unemployment claims fell 13 thousand in the week ending July 6 to 209 thousand.  The four-week average of claims declined 4 thousand to 219 thousand.  The 4-week average for the week of April 13 of 202 thousand was the lowest for the current business cycle and  the lowest 4-week average level of claims since November, 1969 when it was 200 thousand.  The current low level of claims indicates clearly that the trend rate of increase in employment of about 180 thousand remains intact.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 219 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 180 thousand.

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

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

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

The number of people receiving unemployment benefits rose 6 thousand  in the week ending June 29 to 1,723 thousand.  The 4-week moving average rose 6 thousand to 1,695 thousand.  This series hit a low of 1,654 thousand in late October of last year.

The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.7%; potential growth has probably picked up from 1.8% a couple of years ago to perhaps 2.5% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer

NumberNomics

Charleston, SC


Gasoline Prices

July 10, 2019

Gasoline prices at the retail level rose $0.03 in the week ending July 8 to $2.74 per gallon.  Gas prices declined for seven consecutive weeks by a total of $0.25 before rising $0.09 in the past two weeks.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.49. The Department of Energy expects national gasoline prices to average $2.64 in 2019, slightly lower than where they are currently.  

As a result of production declines in Venezuela, Iran, and Saudi Arabia, oil prices climbed to $63 a couple of weeks ago before retreating to $52.  But Iran’s firing on oil tankers and escalating tensions in the Mideast have sharply boosted crude prices to $58.00.  The Department of Energy expects crude prices to average $59.58 this year.

Crude oil output in both Venezuela and Iran has declined markedly.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.   The Iranian sanctions went into effect in early November.  Iranian production has since fallen sharply.  The U.S.’s  goal is to reduce exports (and, hence, production) close to zero.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 12,300 thousand barrels per day.  The cut in oil production by the Saudi’s combined with reduced production in Venezuela and Iran have boosted the  price of oil to about $58.  The Saudi’s would like it to climb to $90, or at least $85, per barrel to ensure that their budget deficit remains in balance.  That is not going to happen.  As prices rise U.S. drillers will quickly boost production.  At the moment the impressive increase in U.S. production is countering the cutbacks from Venezuela and Iran.  The Saudi’s share of global production has been falling steadily for the past couple of years.  However, the Saudis cannot allow its market share to continue to slide.

The Department of Energy expects U.S. production to climb 13% from 11.0 million barrels last year to 12.4 million barrels this year and  to 13.3 million barrels per day in 2020.  The U.S. became the world’s largest oil producer in March of last year and the gap between U.S. production and that of Russia, and Saudi Arabia will widen in 2019 and 2020.

The cut in Saudi production combined with reduced production in Venezuela and Iran  appears to have  gotten supply and demand back into better balance.    At 1,104 million barrels crude inventories are  in line with the 5-year average of 1,116 million barrels.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment vs. Job Openings

July 9, 2019

The  Labor Department reported that job openings fell 0.7% in May to 7,323 thousand after declining 1.4% in April, but those back-to-back declines follow an increase of 4.6% in March.  As we see it, job openings seem to be bouncing around from month to month at a very elevated level.  Indeed, there are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 5.9 million people unemployed in May.

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 10 years.

In  this same report the Labor Department indicated that the quit rate in April was  at 2.3 which is the highest level since January 2001.   It has been at that level since June of last year.  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

NumberNomics

Charleston, SC


Small Business Optimism

July 9, 2019

Small business optimism edged lower by 1.7 points in June to 103.3 after having climbed 1.5 points in May.  The August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.  So while confidence slipped slightly in the early part of this year it has fallen from a record high level and still remains very lofty.

Chief Economist William Dunkelberg said,  “As expectations for sales gains and the general business environment faded, uncertainty levels increased.  Still, job openings and plans to create jobs remain historically very strong, and while it’s not as ‘hot’ as May, Main Street is still running strong.”

In our opinion the economy is expected to expand at a reasonably robust 2.6% pace this year.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

After falling 20% late last year the stock market recovered all of the earlier loss and established a new record high level.   Jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  Mortgage rates have fallen in the past couple of months from 4.9% to 3.8%.  And investment spending remains solid.  We expect GDP growth to be 2.6% this year after having risen 3.0% in 2018.  The core inflation should be relatively stable at 2.3% in 2019 after rising 2.2% in 2018.  The Fed will has pledged to keep rates steady through the end of the year and may even lower them.  Moderate GDP growth, low inflation, and low interest rates should continue to bolster the stock market in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Private Employment

July 5, 2019

Private employment for June rose 191 thousand after having climbed a modest 83 thousand in May.   A better reading of what is truly going on is typically represented by the  3-month moving average of private employment which is now 156 thousand.  To us, the pace of hiring has slowed from 215 thousand per month last year, to about 160 in the first  half of this year.  Thus, we are  now seeing employment gains of 160 thousand.  That is exactly what one would expect if the economy is truly at full employment.  There are simply not enough adequately trained workers available to hire.  Labor force growth rose 100 thousand in the past year.  With employment gains continuing to exceed growth in the labor force, the unemployment rate should continue to decline slowly.

Amongst the various employment categories construction employment rose 21 thousand in June after having risen 5 thousand in May.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment climbed by 17 thousand in June after having risen 3 thousand in May .    Factory employment is now rising by about 15 thousand per month.  It is struggling as the recently imposed tariffs take a toll on growth in the goods sector.

Elsewhere, health care  climbed by 35 thousand.  Professional and business services increased 51 thousand in June.   Transportation and warehousing employment rose 24 thousand.  Employment in leisure and hospitality establishments climbed 8 thousand.  Financial services gained 2 thousand workers.  Retail jobs declined 6 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 was unchanged in both May and June at 34.4 hours.  It has been bouncing around between 34.4 and 34.5 hours for the past year.  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 0.2% in June.  This index climbed by 1.8% in the first quarter and now 0.6% in the second quarter, which when combined with a 0.9% projected increase in productivity would produce our projected 1.5% GDP growth rate in that quarter (which follows 3.1% GDP growth in the first quarter).

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.   The stock market had a tough couple of months late last year but has completely recovered and stands at a record  high level.    Consumer confidence fell in the fourth quarter but it, too, has recovered and now stands at a 15-year high.

The sectors of the economy that remains under pressure are the various production industries.  That is climbing but very slowly.  As noted earlier, factory employment is barely increasing.  Construction employment has been rising slowly but steadily.  Mining employment has been rising by about 5 thousand per month.  The service sector, however, is booming.

Looking ahead, steady consumer spending and continued rapid growth rate in investment should cause  GDP to grow 2.6% this year.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

July 5, 2019

Payroll employment for June rose 224 thousand after having climbed a modest 72 thousand in May.   A better reading of what is truly going on is typically represented by the  3-month moving average of private employment which is now 171 thousand.  To us, the pace of hiring has slowed from 215 thousand per month last year, to about 160 in the first  half of this year.  Thus, we are  now seeing employment gains of 160 thousand.  That is exactly what one would expect if the economy is truly at full employment.  There are simply not enough adequately trained workers available to hire.  Labor force growth rose 100 thousand in the past year.  With employment gains continuing to exceed growth in the labor force, the unemployment rate should continue to decline slowly.

Amongst the various employment categories construction employment rose 21 thousand in June after having risen 5 thousand in May.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment climbed by 17 thousand in June after having risen 3 thousand in May .    Factory employment is now rising by about 15 thousand per month.  It is struggling as the recently imposed tariffs take a toll on growth in the goods sector.

Elsewhere, health care  climbed by 35 thousand.  Professional and business services increased 51 thousand in June.   Transportation and warehousing employment rose 24 thousand.  Employment in leisure and hospitality establishments climbed 8 thousand.  Financial services gained 2 thousand workers.  Retail jobs declined 6 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 was unchanged in both May and June at 34.4 hours.  It has been bouncing around between 34.4 and 34.5 hours for the past year.  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 0.2% in June.  This index climbed by 1.8% in the first quarter and now 0.6% in the second quarter, which when combined with a 0.9% projected increase in productivity would produce our projected 1.5% GDP growth rate in that quarter (which follows 3.1% GDP growth in the first quarter).

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.   The stock market had a tough couple of months late last year but has completely recovered and stands at a record  high level.    Consumer confidence fell in the fourth quarter but it, too, has recovered and now stands at a 15-year high.

The sectors of the economy that remains under pressure are the various production industries.  That is climbing but very slowly.  As noted earlier, factory employment is barely increasing.  Construction employment has been rising slowly but steadily.  Mining employment has been rising by about 5 thousand per month.  The service sector, however, is booming.

Looking ahead, steady consumer spending and continued rapid growth rate in investment should cause  GDP to grow 2.6% this year.

Stephen Slifer

NumberNomics


Unemployment Rate

July 5, 2019

The unemployment rate rose 0.1% in June to 3.7% (3.67% to be precise) after having been unchanged in May.   At 3.7% the unemployment remains close to its lowest level since December 1969  — almost 50 years ago.  The labor force rose 335 thousand in June.  The economy created jobs for 247 thousand of them.  As a result, the number of unemployed workers rose 87 thousand in June.  Thus, the unemployment rate edged upwards to 3.7%.  While employment used in calculating the unemployment rate rose 247 thousand, payroll employment increased by 224 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 somewhat in June.  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 is now 0.5% which is identical to growth in the population which was also 0.5%.  Thus, the labor force participation rate was unchanged during that period of time.  It is now 62.9%.  A year ago it was 62.9%.  In 2018 the labor force rose 1.6% in 2018 versus 0.6% in 2017.  It would appear that the relatively rapid pace of GDP growth last year attracted some previously unemployed workers into the labor force, but in the first half of 2019 that process has largely come to a halt.

At 3.7% the unemployment rate is far below the 4.2% 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 is essentially  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 rate rose 0.1% in June to 7.2%.  At 7.2% 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 rose 0.1% in June to 7.2% which 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.  But the number of part time workers who say they want full time employment is roughly in line with where it was going into the recession.

In short, both rates should continue to fall slowly 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.  Thus far the 1.5% increase in wages is being completely offset by a 2.4% increase in productivity such that “unit labor costs” (or labor costs adjusted for the increase in productivity) have declined 0.9% in the past year.  Thus, the seemingly tight labor market is not generating any upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Workweek

July 5, 2019

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  Payroll employment for June rose 224 thousand after having climbed by 72 thousand in May.  These numbers tend to bounce around on a month-to-month basis, especially at this time of the year, as the seasonal workers are hired and then let go.  The 3-month average increase in employment of 171 thousand is probably more representative of the average growth rate for jobs.  That is slower than the 200+ thousand workers hired monthly last year.  But that is also what one would expect when the economy is at full employment.   Qualified workers become very difficult to find.

The nonfarm workweek was unchanged in both May and June at 34.4 hours.  This series has been bouncing around between 34.4 and 34.5 hours for the past year.  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 0.2% in June.  This index rose 1.8% in the first quarter and has now climbed 0.6% in the second quarter which, when combined with a projected 0.9% increase in productivity, should produce a GDP growth rate of 1.5% in the second quarter after having risen 3.1% in the first quarter.  That means that the economy grew at roughly a 2.3% pace in the first half of the year.

The factory workweek rose 0.1 hour in June to 40.7 hours after having been unchanged in May.  This series is a bit lower than it has been, but it remains at a relatively elevated level and will lead to additional factory hiring in the months ahead.  With individual and corporate tax cuts continuing to impact growth this year and U.S. firms able to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector should continue to climb at a moderate pace this year, but the recently imposed tariffs are taking a toll on growth in this sector.

Overtime hours were unchanged in June  at 3.4 hours.  Like the factory workweek this series, too, is relatively long but has slowed somewhat.  The manufacturing sector is still expanding, but at a slower pace than last year because of the impact from tariffs.

The economy continues to expand at a respectable pace.  We currently expect GDP to increase 2.6% this year after having risen 3.0% in 2018 given the continuing impact of individual and corporate income tax cuts and repatriation of corporate earnings currently locked overseas.  The economy is currently being supported by robust growth in consumer spending and continuing rapid growth in investment, but losing momentum in the manufacturing sector.

Stephen Slifer

NumberNomics

Charleston, SC