Monday, 16 of July of 2018

Economics. Explained.  

Category » Reference Charts (By Category)

Consumer Sentiment

July 13, 2018

The preliminary reading for consumer sentiment for July fell 1.1 points to 97.1 after having risen 0.2 point in June.  March’s level of 101.4 was the highest level of sentiment since January 2004.  Thus, it remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, ” So far, the strength in jobs and incomes has overcome higher inflation and interest rates. The darkening cloud on the horizon, however, is due to rising concerns about the potential negative impact of tariffs on the domestic economy.”

Given the tax cuts we expect GDP growth to climb from 2.6% in 2017 to 3.0% in 2018.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.  We expect worker compensation to increase 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.  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.

The June changes in both the current conditions and expectations components were statistically insignificant.

Consumer expectations for six months was essentially unchanged at 86.4.

Consumers’ assessment of current conditions fell 2.6 points from 116.5 to 113.9.

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


Initial Unemployment Claims

July 12, 2018

Initial unemployment claims fell 18 thousand in the week ending July 7 to 214 thousand after  having risen 4 thousand in the previous week.  The 4-week moving average declined 2 thousand to 223 thousand.  The average of 214 thousand on May 12 was the lowest level for this average since December 13, 1969 (when it was 211 thousand).

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 223 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.  This series is a bit higher than it was going into the recession so they might have some 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 April 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 3 thousand in the week ending June 30 to 1,739 thousand.  The 4-week moving average rose 10 thousand to 1,729 thousand.  The June 16 level of 1,720 was the lowest 4-week average since December 8, 1973 when it was 1,716 thousand.  The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.5%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will continue to decline slowly.

Stephen Slifer

NumberNomics

Charleston, SC


Consumer Price Index

July 12, 2018

The CPI rose 0.1% in June after having risen 0.2% in both March and April.  During the past year the CPI has risen 2.8%.

Food prices rose 0.2% in June after having been unchanged in May.  Food prices have risen 1.5% in the past twelve months.

Energy prices fell 0.3% in June after having risen 0.3% in May.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 11.7%.

The recent run-up in energy prices seems to reflect three factors.  First, GDP growth around the world has picked up which is bolstering the demand for both crude oil and gasoline.  Second, oil production in Venezuela has dropped to a multi-decade low level given the chaotic political environment in that country.  And third, the supply situation from Iran is now highly  uncertain given the likely re-imposition of sanctions against that country later this year.  As a result, the International Energy Administration projects that demand will exceed supply by about 0.5 million barrels per day between now and yearend.  As a result, oil prices recently climbed to about $74 per barrel.   However, U.S. production is surging.  It will climb about 15% this year and another 10% in 2019 which will make the U.S. the world’s largest oil-producing country.  At the same time OPEC is talking about gradually increasing its pace of production. A s a result, crude oil prices have dropped from $74 to about $71 per barrel currently and should continue to decline gradually between now and yearend.

Excluding food and energy the CPI rose 0.2% in both May and June .  Over the past year this so-called core rate of inflation has risen 2.2%.  Clearly, inflation is on the upswing.  The question is still one of degree..

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 fallen 0.7% while prices for services have risen 3.0%.

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 fallen for almost every major category in the past year.  New cars have fallen 0.5%, televisions 19.1%, audio equipment 14.5%,  toys 10.2%, information technology commodities (personal computers, software, and telephones) 4.2%.  Prices for all of these items are widely available on the internet and can be used as bargaining chips with a traditional brick and mortar retailers.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 3.0% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.4%.  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.

While 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, the internet is keeping a lid on the prices of goods.  So while the CPI should edge higher in 2018, it is unlikely to explode.

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 2.0% rate but is  likely to head higher.  The Fed has a 2.0% inflation target.  However, going forward we have to watch out for the steady increases in shelter which, as noted above, is being pushed higher by the shortage of both rental properties and homeowner-occupied housing.   Shelter is a long-lasting problem and given its 33% weighting in the CPI it will introduce an upward bias to inflation for some time to come.  We also have to watch rising medical costs(prescription drug prices in particular) and the impact of higher wages triggered by the shortages of available workers in the labor market.

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 pricy 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 currently is at 2.2%. We expect it to continue to climb at a 2.2% rate through yearend.  And because the core PCE increases at a rate roughly 0.5% slower than the core CPI, the core PCE should increase about 2.0% in 2018.  Both rates are beginning to trend higher.

Keep in mind that real short-term interest rates are negative.  With the funds rate today at 1.8% and the year-over-year increase in the CPI at 2.8% the “real” or inflation-adjusted funds rate is negative 1.0%.  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, we regard a negative real interest rate inappropriate in today’s world.  The Fed should continue to push rates higher and gradually run off some of its longer term securities.

Stephen Slifer

NumberNomics

Charleston, SC


Producer Price Index

July 11, 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 0.3% in June after having jumped 0.5% in May as energy prices surged.  During the past year this inflation measure (the red line) has risen 3.3%.  The PPI has been moving steadily higher.

Excluding food and energy producer final demand prices rose 0.3% in both May and June.  They have risen 2.8% since April 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 rose 0.1% in June after having jumped jumped 1.0% in May. These prices have now risen 4.3% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods has risen 0.3% in each of the past four months.  During the past year the core PPI for goods (the light green line) has risen 2.7% (right scale).

Food prices fell 1.1% in June after having risen 0.1% in May.  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 0.9%.

Energy prices rose 0.8% in June after having surged 4.6% in May.  Energy prices have risen 17.0% in the past year.  These prices are also very volatile but the recent upswing seems to reflect a significant quickening of GDP growth around the globe, the cutback in global supply by OPEC, and a state of complete chaos for oil production in Venezuela.  However, U.S. oil output is now surging and OPEC is talking about an increase in its crude oil output.  Our sense is that the recent surge in energy prices will be at least be partially reversed between now and yearend.

The PPI for final demand of services rose 0.4% in June after having climbed 0.3% in May.  This series has risen 2.7% over the course of the past year (left scale).   Changes in this component largely reflect a 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 0.3% in June after having been unchanged in May.  It has climbed 2.3% 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 both manufacturing and non-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.  The fact that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  In June this series actually declined from 79.5 in May to 76.8 in June.  This means that prices continued to climb in June, but that the rate of increase was a shade less than in other recent months.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

And for non-manufacturing firms it looks like this.  The conclusion is largely the same.

In both cases, the run-up in prices was widespread.  It was not just energy prices.  Once again, we believe this escalation in the prices that producers are having to pay reflects stronger GDP growth around the globe.

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 4.0%, 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 2018 after having risen 1.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC



Gasoline Prices

July 11, 2018

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Gasoline prices at the retail level rose $0.02 in the week ending July 9 to 2.86 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.61. The Department of Energy expects national gasoline prices to average $2.76 this year.  They are projected to peak right about now and then decline to $2.65 by the end of the year. 

Spot prices for gasoline have been on a steady upswing for the past several  months.  However, talk about OPEC increasing its crude oil output caused gasoline prices to decline about 9.5% since reaching a peak of $2.20 in late May.   But now, just days after the OPEC announcement the State Department sent both crude and gas prices, soaring by announcing it aims to eliminate most of Iran’s oil exports by the end of this year.

Crude oil prices recently jumped to $74 per gallon.  The recent run-up occurred instantly after Trump announced sanctions on Iranian oil exports.  The Energy Information Agency predicts that crude prices will average $64.53 in 2018.  If that is the case, oil prices should decline gradually in the second half of the year.

The number of oil rigs in service  However, the number of rigs in operation has  rebounded sharply in recent months to 1,059 thousand.  Thus,  higher crude oil prices are encouraging drillers to accelerate the pace of production.  If crude prices remain above $60 per barrel this year or higher, we should expect the number of oil rigs in operation, and production, to continue to climb.

Production has surged to 10,900 thousand barrels per day.  The Department of Energy expects production to average 10.8 million barrels this year but climb further to 11.8 million barrels in 2019.

To put those production levels in perspective, keep in mind that if U.S. crude oil production picks up as expected the U.S. will become the world’s largest oil producer by the end of this year.

How can the number of rigs rise slowly but production surge?  Easy.  Technology in the oil sector is increasing which allows producers to boost production while simultaneously shutting down wells.  A few years ago some frackers could not drill profitably unless crude oil prices were about $65 per barrel.  Today that number has declined to about $35 per barrel.  Six months from now that number will be lower still.

Oil inventories fell quickly for most of last year.    OPEC output was reduced at the same time that global demand picked up sharply.  While crude inventories have been sliding for a year, at 1,076 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,055 million barrels.  However, with demand continuing to slightly exceed supply for the next several months, stocks may well decline slightly further in the near term.

The International Energy Agency in Paris (IEA) produces some estimates of global demand and supply.  A couple of months ago its estimate had supply and demand relatively in balance between now and yearend.  But now,as shown in the chart below, demand picked up somewhat in recent months and while supply edged lower as production constraints have restrained output.  As a result the IEA now estimates that demand will exceed supply by about 0.2 million barrels per day between now and yearend. The IEA noted “chronic mismanagement” in Venezuela has cut production there to a multi-decade low,and Iranian production could slip further as a result of the U.S. sanctions.  And now there is the prospect of further curtailment in global oil supply by yearend stemming from curtailment of Iranian oil exports.

OPEC has chosen to boost output somewhat to counter the shortfall from Venezuela and Iran.  That would put demand in supply roughly in balance between now and yearend and allow the price of crude oil to decline somewhat.

Stephen Slifer

NumberNomics

Charleston, SC*


Unemployment vs. Job Openings

July 10, 2018

This release is generally rather obscure.  But Former Fed Chairwoman Janet Yellen often referred to data from it so its importance has increased in recent years.

The  Labor Department reported that job openings fell 3.0% in May to 6,638 thousand from a record high level of 6,840 thousand in April.  It is worth noting that there are more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.1 million people unemployed in May.

As shown in the chart below, there are currently 0.9 unemployed workers for every available job.   Prior to the recession this ratio stood at 1.7 so the labor market (at least by this measure) is in far better shape now than it was prior to the recession.

In  this same report the Labor Department indicated that the quit rate in May rose 0.1 to 2.4 which is the highest reading thus far in the business cycle.   This is a measure of the number of people that voluntarily quit their jobs in that  month.  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


Small Business Optimism

July 10, 2018

 

Small business optimism declined 0.6 point in June to 107.2 but the May level of  107.8 was the record high level for this series.

NFIB President Juanita Duggan said,  “Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits.  The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow.”  Buried in the details of the report were such milestones as compensation hitting a 45-year high record in May, positive earnings trends reached a survey high, positive sales trends are the highest since 1995, and expansion plans are the most robust in survey history.  It does not get any better than that.

NFIB Chief Economist added that, “Small business owners are already seeing their bottom lines grow due to strong sales and regulatory relief and the new tax law is expected to push profits higher as the year progresses.”

In our opinion the economy is expected to gather momentum 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 experienced a correction in the past several months but has rebounded but has rebounded and is now only 3% below its record high level.    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.  And now investment spending has picked up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.6% in 2017 to 3.0% in 2018.  The core inflation will  climb from 1.8% in 2017 to 2.4% in 2018.  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 prior to yearend.

Stephen Slifer

NumberNomics

Charleston, SC


Private Employment

July 6, 2018

Private sector employment for June rose 239 thousand after having risen 239  thousand in May.   Thus, the outlook for employment has not changed much in the wake of this report.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 217 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 150 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 13 thousand in June after having climbed 29 thousand in May.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment climbed by 36 thousand in June after having increased 19 thousand in May.    Factory employment is now rising by about 25 thousand per month.

Mining increased 5 thousand in June after having risen 6 thousand in May.  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 climbed by 35 thousand.  Professional and business services increased 50 thousand in June.  Transportation and warehousing gained 15 thousand.  Employment in leisure and hospitality establishments increased 25 thousand in June.  And jobs in the financial industry climbed by 8 thousand.  On the flip side, retail jobs declined 22 thousand in June.

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 for June was unchanged at  34.5 hours.  That is the fifth straight month at that level and it 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 0.2% in both May and June after having climbed 0.1% in April.  Thus, it rose 2.3% in for the second quarter as a whole and continues to climb at a steady pace.  If second quarter GDP growth turns out to be between 3.5-4.0%, then productivity growth for the quarter should be between 1.2-1.7%.

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 2018.  The stock market is rebounding following a correction and is now just 3% below its previous peak.  Consumer confidence is holding up well.  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 seems to be changing.  As noted earlier, factory employment is rising modestly.  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 2.6% in 2017 to 3.0% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

July 6, 2018

Payroll employment for June rose 213 thousand after having risen 244  thousand in May.   Thus, the outlook for employment has not changed much in the wake of this report.

A better reading of what is truly going on is represented by the  3-month moving average of 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 150 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 13 thousand in June after having climbed 29 thousand in May.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment climbed by 36 thousand in June after having increased 19 thousand in May.    Factory employment is now rising by about 25 thousand per month.

Mining increased 5 thousand in June after having risen 6 thousand in May.  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 climbed by 35 thousand.  Professional and business services increased 50 thousand in June.  Transportation and warehousing gained 15 thousand.  Employment in leisure and hospitality establishments increased 25 thousand in June.  And jobs in the financial industry climbed by 8 thousand.  On the flip side, retail jobs declined 22 thousand in June.

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 for June was unchanged at  34.5 hours.  That is the fifth straight month at that level and it 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 0.2% in both May and June after having climbed 0.1% in April.  Thus, it rose 2.3% in for the second quarter as a whole and continues to climb at a steady pace.  If second quarter GDP growth turns out to be between 3.5-4.0%, then productivity growth for the quarter should be between 1.2-1.7%.

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 2018.  The stock market is rebounding following a correction and is now just 3% below its previous peak.  Consumer confidence is holding up well.  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 seems to be changing.  As noted earlier, factory employment is rising modestly.  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 2.6% in 2017 to 3.0% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

July 6, 2018

The unemployment rate rose 0.2% in June to 4.0% after having declined 0.1% in May and 0.2% in April.    But the unemployment rate increased because the labor force swelled in June by 601 thousand. It is tempting to say that this reflects discouraged workers now believing that they can actually get a job and are beginning to look for a job.  That may be true to some extent, but the labor force also declined sharply in March and April and was essentially unchanged in June.  It obviously bounces around considerably from month to month.   Employment in June rose  thousand 102 thousand.  As a result, the number of unemployed workers rose by 499 thousand and the unemployment rate rose 0.2% to 4.0%.  While employment used in calculating the unemployment rate rose 102 thousand, payroll employment increased by 213 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 declined 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 was 1.2% which is roughly in line with growth in the population which was 1.1%.  Thus, the labor force partition rate rose 0.1% during that period of time.  It is now 62.9%.  A year ago it was 62.8%.

At 4.0% the unemployment rate is far below the low end of the 4.5-5.0% 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 rate rose 0.2% in June to 7.8% after having declined 0.2% per month in March, April, and May.  At 7.8% 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  7.8% compares to 4.0% 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 lower  than it was going into the recession.

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.

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