Monday, 25 of March of 2019

Economics. Explained.  

Category » Reference Charts (By Category)

Existing Home Sales

March 22, 2019

Existing home sales came roaring back to life with an 11.8% increase in February to an annual rate of 5,510 thousand after having fallen 1.4% in January.  Sales currently are now just 1.8% below where they were at this time last year.

Lawrence Yun, NAR chief economist said,   “A powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence is driving the sales rebound.”

With sales surging in February and a small increase in the available inventory, the month’s supply of available homes fell from 3.9 to 3.5 months.  Realtors consider a 6.0 month supply as  the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in very short supply.

If one looks at the actual number of homes available for sale, it has been steadily declining for a decade.  Realtors cannot sell what is not available for sale.  If sales were not being constrained by the limited supply they would almost certainly be at a 5,800 thousand pace rather than the current 5,500 thousand and we would not be talking about weakness in home sales.

Meanwhile, properties stayed on the market for just 44 days in February.  More than 41% of homes that sold in February were on the market less than a month.  The 44-day length of time between listing and sale is still a very short period of time.  Back in 2011 homes remained on the market for 100 days.  Thus, the demand for housing still seems to be quite solid.

The National Association of Realtors series on affordability now stands at about 155.  At that level  it means that a household earning the median income has 55.0% more income than is necessary to get a mortgage for a median priced house.  Going into the recession consumers had only 14% more money than was required to purchase that median priced home.  Thus, housing remains quite affordable and should continue to remain affordable throughout 2019 because sizable job gains are boosting income almost as fast as mortgage rates and home prices have been rising.

Existing home prices rose 0.1% in February to $249,500 after have fallen 2.1% in January.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $251,200.  Over the course of the past year existing home prices have risen 3.6% which is lower than the 4.0-5.% range that we saw throughout 2018 .  However, in the past six months prices have actually declined at a 12.2% annual rate.  Thus, the slower pace of sales seems to be pushing prices lower.
At the same time mortgage rates are declining.  they reached a peak of 4.9% a couple of months ago, but with global GDP growth slowing, a slower pace of tightening by the Fed, and some softness in the housing sector, mortgage races have dropped to 4.4%.
 The housing sector will rebound in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income. Home prices have begun to fall.  And mortgage rates have worked their way lower to 4.4%.
 Stephen Slifer


Charleston, SC

Homeownership Rates

March 22, 2019

Home ownership continued to climb in the fourth quarter.  It rose 0.4% in that quarter after having  climbed 0.1% in the third quarter.  It hit a low of 62.9% in the second quarter of 2016 but has been climbing steadily for the past 2-1/2 years.

The upswing in home ownership in the past two years  has been most pronounced amongst younger borrowers, i.e., those under the age of 45.  That is where most of the earlier decline occurred.  These younger people are now getting somewhat older and raising families.  As this occurs, they find home ownership increasingly attractive.  Thus, demographics now seems to be working in favor of a significant rebound in housing in the quarters ahead.

Home prices had been rising by 6.0-6.5%, but the softness in sales last year has caused home prices to slow.  They have now risen 3.7% in the past year.

Meanwhile, mortgage rates have fallen 0.5% in the past several months from 4.9% to 4.4%.

As a result, housing affordability has one again begun to rise..  The National Association of Realtors index of housing affordability stands at about 155.   At a level of 155 it means that consumers have 555 more income than is required to purchase a median-priced home.  Back at the peak of the housing boom in 2007  consumers had just 14% more income than required.  Thus, despite higher home prices and rising mortgage rates, housing remains affordable for most because of the steady growth in consumer income.

Also, the very limited supply of homes available to purchase means that some potential home buyers simply cannot find a suitable property to purchase.

Many former homeowners and some younger people have turned to renting, but vacancy rates for rental properties have been falling fast and at 7.1% are the lowest they have been since the mid-1980’s.  There continues to be a significant housing shortage in the United States.  This implies that home sales and prices will continue to climb.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

March 21, 2019

Initial unemployment claims declined 9 thousand in the week of March 16 to 221 thousand.  The January 19 level of 200 thousand was the lowest since November 15, 1969.  The four-week average of claims rose 1 thousand to 225 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 225 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 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 fell 27 thousand  in the week ending March 9 to 1,750  thousand.  The 4-week moving average rose 6 thousand to 1,773 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 2.6%; 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

Gasoline Prices

March 20, 2019

Gasoline prices at the retail level rose $0.08 in the week ending March 18 to $2.55 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.30. The Department of Energy expects national gasoline prices to average $2.50 in 2019, not far from where they are currently.

The selloff in the stock market that began in October pushed oil prices lower as investors believed that global GDP growth would slow and, hence, reduce the demand for oil.  Oil prices fell to a low of about $45 per barrel.  But Saudi Arabia has cut production twice this year and, as a result, oil prices have rebounded to about $58.  The Department of Energy expects crude prices to average $56.13 this year.

Meanwhile, U.S. production  has surged from 10,900 thousand barrels to 12,100 thousand barrels per day.  As noted above, the cut in oil production by the Saudi’s has boosted the  price of oil to about $55.  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 climb 11% from 10.9 million barrels last year to 12.3 million barrels this year and 13.0 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 appears to have arrested the recent decline in crude stocks and gotten supply and demand back into better balance..    At 1,098 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 push crude prices higher.

Stephen Slifer


Charleston, SC

Homebuilder Confidence

March 18, 2019

Homebuilder confidence was unchanged in March at 62 after having risen 4 points in February.  Most economists had expected a slightly higher number so a level of 62 was slightly disappointing.  However, a level of 62 is indicative of a solid level of confidence going forward although, admittedly, it is below readings of 70-75  at this time last  year.

NAHB Chairman Greg Ugalde said that, “Builders report the market is stabilizing following the slowdown at the end of 2018 and they anticipate a solid spring home buying season.”

NAHB Chief Economist Robert Dietz said  “In a healthy sign for the housing market, more builders are saying that lower price points are selling well, and this was reflected in the government’s new home sales report released last week.  Increased inventory of affordably priced homes – in markets where government policies support such construction – will enable more entry-level buyers to enter the market.”

The NAHB report also indicated that affordability still remains a key concern for builders. The skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets are among the challenges builders face as they strive to construct homes that can sell at affordable price points.

Traffic through the model homes fell 4 points in March after having risen 4 points in February.  However, the combination of falling home prices and lower mortgage rates should boost traffic in the months ahead.

Reflecting optimism about the future the homebuilders expectations index jumped 3 points in March to a solid 71.

Not surprisingly there is a fairly close correlation between builder confidence and housing starts.  Given the rebound in the expectations component it is likely that housing starts will pick up further in the months ahead.  But builders continue to have difficulty finding labor so the upswing in starts will probably be muted.

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

S&P 500 Stock Prices

March 15, 2019

The S&P fell 20% in the fourth quarter of last year.   The market appeared to be concerned about a variety of factors.  The expansion is approaching its tenth anniversary which is geriatric, so some economists fear that,for that reason alone, the end of the expansion must be close.  It was seeing growth weakening overseas, particularly in China which is the world’s second largest economy.  It feared a trade war could weaken growth further.  The Fed indicated that intended to raise rates twice in 2019.  And it saw the housing market fall steadily for most of last year.

But heading into 2019 growth the view has changed.  Growth overseas appears to have stabilized.  The Fed has said that it intends to leave rates unchanged for the foreseeable future.  Mortgage rates have fallen 0.5% since the end of last year and  home prices are declining.  These two factors should re-invigorate the housing sector in the months ahead.  Thus, the economic fundamentals in our view remain solid.  That change in outlook has allowed the stock market to rebound and erase nearly all of the fourth quarter drop.  Indeed, it is currently within 3.5% of an all-time record high level.

Given the positive combination of moderate GDP growth, low and still stable inflation, and the likelihood of no further rate hikes, we fully expect the stock market to reach another record high level, probably by midyear.


Stephen Slifer


Charleston, SC

Consumer Sentiment

March 15, 2019

The final estimate of consumer sentiment for March jumped 4.0 points to 97.8 after having risen 2.6 points in February.  The peak for sentiment was in September of last year which came in at 100.1.  The March level is clearly close.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “All income groups voiced more positive prospects for growth in the overall economy during the year ahead.”   He added that, “The data indicate that real consumption will grow by 2.6% in 2019 and that the expansion will set a new record length by mid year.”

Our sense is confidence will continue to climb . in the months ahead.  Since the beginning of the year the stock market has recovered almost all of what it lost in the fourth quarter.  The Fed has said it intends to leave rates unchanged for the foreseeable future.   The government shutdown has ended.  And mortgage rates have fallen from 4.9% to 4.4%.

We expect GDP growth of 2.6% 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% last year. The core inflation rate (excluding the volatile food and energy components) should climb from 2.2% in 2018 to 2.3% in 2019.  Such a scenario would keep the Fed on track for no rate hikes at least through the middle of year and perhaps longer.

The February rebound was attributable to a moderate increase in both the current conditions and expectations components.

Consumer expectations for six months from now rose from 84.4 to 89.2.

Consumers’ assessment of current conditions climbed from 108.5 to 111.2.

Trends in the Conference Board measure of consumer confidence and the University of Michigan series on sentiment move in tandem, but there are often month-to-month fluctuations.  Both series remain at levels that are consistent with steady growth in consumer spending at a reasonable clip of about 2.5% in 2019.

Stephen Slifer


Charleston, SC

Industrial Production

March 15, 2019

Industrial production rose 0.1% in February after having declined 0.4% in January.   During the past year industrial production has risen 3.5%.  Despite monthly wiggles, production continues to trend upwards slowly.  However, it also appears that its factory production is being curtailed by the trade sector and the impact of tariffs on both firms that import goods from overseas as well as firms that export goods to other countries because of their tit-for-tat increase in tariffs.  Slower growth in exports will not have a major impact on GDP growth in this country, but it is becoming more and more noticeable.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) fell 0.4% in February after having declined 0.5% in January.  Some of the drop in January and February is attributable to a falloff in motor vehicle production which should be reversed in the months ahead.  During the past year  factory output has risen 1.0% (red line, right scale).   Factory activity in January and February hit a speed bump, but given that it occurred in the wake of a 20% selloff in the stock market, a Fed rate hike in that month, and the beginning of a government shutdown, it should perhaps not be too surprising.  But because the stock market has already recovered most of what it lost in the fourth quarter, the Fed has promised to refrain from further rate hikes for the foreseeable future, and the shutdown has finally come to an end, manufacturing activity should rebound in the months ahead.  However, the slower growth attributable to tariffs and the trade sector will be longer-lasting, but moderate.

Mining (14%) output rose 0.3% in both January and February.  Over the past year mining production has risen 12.5%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling which jumped 2.8% after having fallen 0.9% in January.     Over the course of the past year oil and gas well drilling has risen 11.1%.

Utilities output jumped 3.7% in February after having declined 0.9% in January and having plunged 5.2% in December as relatively warm weather trimmed the need for heating.  During the past year utility output has risen 9.0%.

Production of high tech equipment was unchanged in February after having declined in each of the previous five months.  Over the past year high tech has risen 3.7% but obviously its growth rate recently has been slowing down.  It is possible that the slower growth in this category reflects reduced demand for technological products from outside of the U.S. where economic activity has slowed noticeably.   We need to see renewed vigor in this sector if we are going to see the continuing strength in nonresidential investment that will be required for a sustained pickup in productivity.

Capacity utilization in the manufacturing sector fell 0.4% in February to 75.4% after having declined 0.4% in December.  It remains somewhat 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

Unemployment vs. Job Openings

March 15, 2019

The  Labor Department reported that job openings rose 1.4% in January to 7,581 thousand after having declined 1.9% in December.   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 6.5 million people unemployed in January.

As shown in the chart below, there are currently 0.9 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 December was  at 2.3 which is the highest level since January 2001.   This is a measure of the number of people that voluntarily quit their jobs in that  month.  During the height of the recession very few people were voluntarily quitting because jobs were scarce.  So the more this series rises, the more comfortable workers are in leaving their current job to seek another one.  The quit rate today is 2.3.  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

New Home Sales

March 14, 2019

The headlines was that new home sales fell 6.9% in January to an annual rate of 607 thousand.  However, the headline never bothered to point out that sales for November and December were revised upwards sharply.  As a result, the 3-month average pace of new home sales which had been 590 thousand in December is now 629 thousand in January.  That presents an entirely different picture of the market for home sales.  It is true that the pace of sales is 4.1% below what it was a year ago.   Thus, the housing sector has softened, but not nearly as dramatically as the earlier data suggested.

The National Association of Realtors publishes a series on housing affordability for existing homes which stood at about 150.0 in December.   However, since that time mortgage rates have fallen about 0.5%.  which means that in this index is headed higher.  We estimate that in the first few months of this year affordability has jumped to 155.  That means that consumers have 55.0% more income than is necessary to purchase a median priced existing home.  Thus, existing homes were affordable late last year and are more affordable now than they were just a few months ago.  It is important to remember that consumer income continues to climb.  Jobs are being created at a pace of about 190 thousand per month and hourly earnings are accelerating.  Those two factors boost income.  Thus, consumer paychecks are getting fatter and they can more easily afford a new home today that they were just a couple of months ago.  We believe strongly that housing is affordable and should continue to be affordable for some time to come.

New home prices fell 0.6% in January to $317,200 after having risen 4.1% in December after having fallen 6.6% in November.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $314,300.  During the course of this past year prices have fallen 7.2%.  Lower prices will provide some stimulus to the pace of home sales in the months ahead.

At the same time mortgage rates have fallen from almost 5.0% to 4.4%.  That, too, should help sales rebound.

Having said all that, builders  are having a hard time finding an adequate supply of both skilled and unskilled workers.  Construction employment is rising by about 20 thousand per month.  Builders would like to step up the pace of construction, but it is difficult for them to do so given the scarcity of workers.

Between lower prices and lower mortgage rates, we believe new home sales should climb in the months ahead.  Thus, we believe the housing sector will continue to do reasonably well in 2019.  We expect the sales pace to rise 10.0% this year to 675 thousand.  Mortgage rates should  climb to 4.8% by the end of 2019 which is still quite affordable.  But that mortgage rate forecast includes two more rate hikes by the Fed in the second half of this year.  However, inflation expectations remain well in check and as a result the yield on the 10-year note has fallen to 2.65% which is only 0.25% higher than the funds rate.  That means the yield curve — the difference between long-term and short-term interest rates — has flattened to 0.25%.  We will see how the year progresses, but if the yield on the 10-year note remains close to its current level the Fed will have a hard time raising the funds rate later this year without causing the yield curve to flatten to 0% or possibly even invert.  We have noted that an inverted yield curve is one indicator of an upcoming recession.  The Fed is well aware of that and, hence, the two rates hikes in our current forecast are becoming increasingly unlikely.  But we still expect the economy to rebound as the year progresses, which could push long-term  interest rates higher and permit the Fed to raise rates a couple of times as the year progresses.  We will see.

Stephen Slifer


Charleston, SC