Monday, 11 of December of 2017

Economics. Explained.  

Category » Reference Charts (By Category)

Consumer Sentiment

December 8, 2017

C.consumer sentiment fell 1.7 points in December to 96.8 after having declined 2.2 points in November.   Both months are somewhat below the 100.7 reading for October which was the highest level of sentiment since January 2004.

Richard Curtin, the chief economist for the Surveys of Consumers, said “Consumer sentiment has remained quite favorable although it continued to slowly recede in early December from its October cyclical peak. Most of the recent decline was concentrated in the long-term prospects for the economy, while consumers thought current economic conditions have continued to improve.”

Given the rebuilding effort following hurricanes Harvey and Irma and an expectation of major changes in policy likely to be implemented between now and yearend, we expect GDP growth for 2017 to be 2.6% and 2.9% 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. 1.4% this year. The core inflation rate should slow somewhat this year to 1.8% thanks to a price war in the cell phone industry and falling prescription good prices caused by intimidation from President Trump.   However prices should rise by 2.3% 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 1.25% by the end of 2017 and 2.0% by the end of 2018.

The drop in sentiment was only in the expectations component.

Consumer expectations for six months from now fell 88.9 to 84.6.

Consumers’ assessment of current conditions rose from 113.5 to 115.9.

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 2.6% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Private Employment

December 8, 2017

Private sector employment for November rose 221 thousand after having risen 247 thousand in October.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 173 thousand.  That compares to an average increase of 170 thousand last year.  Thus, employment continues to chug along.  The labor force is growing by about 100 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 24 thousand in November after having risen 10 thousand in October.   The trend increase in construction employment appears to be about 15 thousand per month.

Manufacturing employment jumped 31 thousand in November after having risen 23 thousand in October    Factory employment is now rising and seems to be accelerating.  We think the trend increase is currently about 15 thousand per month.

Mining rose by 5 thousand in November after having risen 2 thousand in October.  After a long period of steady declines mining employment is now rising about 5 thousand per month.

Elsewhere, health care climbed by 30 thousand.  Professional and business services continued to trend higher and increased 46 thousand in November.  Retail jobs increased by 19 thousand.  Employment in leisure and hospitality establishments rose 14 thousand in November.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In November the nonfarm workweek rose 6 minutes or 0.1 hour to 34.5 hours.  That is about as long as it gets.  The elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.5% in November after having risen 0.3% in the previous month.  Assuming a further moderate increase in December this index should increase 3.0% in the fourth quarter.  Assuming a modest increase in productivity (which is now rising), it appears that fourth quarter GDP growth should be at least 3.5% which would be the third consecutive quarter with GDP growth in excess of the 3.0% mark.  That has not happened since prior to the recession.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual  income tax cuts are likely later this year or in 2018.  The stock market is at a record high level.  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 its 2016 pace of 2.2% to 2.6% in 2017 and 2.9% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

December 8, 2017

Payroll employment for November rose 228 thousand after having risen 244 thousand in October.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 170 thousand.  That compares to an average increase of 187 thousand last year.  Thus, employment continues to chug along.  The labor force is growing by about 100 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 24 thousand in November after having risen 10 thousand in October.   The trend increase in construction employment appears to be about 15 thousand per month.

Manufacturing employment jumped 31 thousand in November after having risen 23 thousand in October    Factory employment is now rising and seems to be accelerating.  We think the trend increase is currently about 15 thousand per month.

Mining rose by 5 thousand in November after having risen 2 thousand in October.  After a long period of steady declines mining employment is now rising about 5 thousand per month.

Elsewhere, health care climbed by 30 thousand.  Professional and business services continued to trend higher and increased 46 thousand in November.  Retail jobs increased by 19 thousand.  Employment in leisure and hospitality establishments rose 14 thousand in November.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In November the nonfarm workweek rose 6 minutes or 0.1 hour to 34.5 hours.  That is about as long as it gets.  The elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.5% in November after having risen 0.3% in the previous month.  Assuming a further moderate increase in December this index should increase 3.0% in the fourth quarter.  Assuming a modest increase in productivity (which is now rising), it appears that fourth quarter GDP growth should be at least 3.5% which would be the third consecutive quarter with GDP growth in excess of the 3.0% mark.  That has not happened since prior to the recession.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual  income tax cuts are likely later this year or in 2018.  The stock market is at a record high level.  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 its 2016 pace of 2.2% to 2.6% in 2017 and 2.9% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

December 8, 2017

The unemployment rate was unchanged in November at 4.1% after having declined 0.1% in October    In November the labor force rose 148 thousand.  Employment climbed by 57 thousand.  As a result, the number of unemployed workers rose by 90 thousand.

Labor force growth in the past year was 0.7% which is only 0.1% faster than growth in the population which was 0.6%.

At 4.1% the unemployment rate is below the low end of the 4.5-5.0% level that the Fed considers to be full employment.  However, some have suggested that the official rate is 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.

Fed Chairwoman Yellen has told us we should be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate rose 0.1% in November to 8.0% after having declined 0.4% in October. That puts it almost exactly 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  8.0% compares to 4.1% 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.  It did rise somewhat in November but that probably reflects seasonal adjustment difficulties caused by hiring of temporary workers during the Christmas season.

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 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 gradually 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 could, 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


Nonfarm Workweek

December 8, 2017

Payroll employment for November rose 228 thousand after  having jumped 244 thousand in October.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In November the nonfarm workweek rose 6 minutes or 0.1 hour to 34.5 hours which is about as long as it gets.  Because employers are having a hard time finding an adequate number of workers, they are choosing to work their existing employees longer hours to boost production enough to satisfy demand.

The increase in employment combined with the workweek produces the aggregate  hours index which is a proxy for how many goods and services were produced in that month.  It rose 0.5% in November after having risen 0.3% in October.  Assuming a further modest increase in December this index should increase by about 3.0% in the fourth quarter.  If productivity rises by a moderate amount (it is now increasing), GDP growth in the fourth quarter should be about 3.5%.  If correct, that would be the third consecutive quarter that GDP growth has exceeded the 3.0% mark.  That has not happened since before the recession.

The factory workweek was unchanged in November at 40.9 hours after having risen 0.1 hour in October   This is about as high as it gets and will lead to additional factory hiring in the months ahead.  With the prospect of both individual and corporate tax cuts likely later this year or in 2018, and U.S. firms perhaps being allowed to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector is gathering  momentum.

Overtime hours were unchanged in November at 3.5 hours after having risen 0.2 hour in October.  This series, too, is about as long as it gets.

The economy continues to expand at a respectable pace.  We currently expect GDP to quicken from 2.2% last year to a 2.6% pace in 2017 and 2.9% in 2018 given the prospect of both 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 housing and now manufacturing has begun to show signs of life.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

December 8, 2017

Average  hourly earnings rose 0.2% in November after having declined 0.1% in October.  After a long period of time during which hourly earnings were stuck around the 2.0% mark, they have gradually begun to rise.  During the past year hourly earnings have risen 2.5%.  Hourly wages appear to be  gradually accelerating.  This series would be growing more quickly except for the impact from retiring baby boomers.  When you lose a number of people who have been working for 40 years who are making high wages, and replace them by younger workers who are making much less, this series will have a downward bias.  The Atlanta Fed has a series called “wage tracker” in which it tries to adjust for this bias and it believes that wages are currently rising at a 3.4% pace which seems to make more sense given the apparent tightness in the labor market..

In addition to their hourly wages workers can also work longer hours or overtime hours.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings jumped 0.5% in November after having declined 0.1% in October.  Weekly wages have risen 3.1 during the course of the past year.

While there has been a lot of discussion about the lack of growth in wages, they appear to be rising a bit more quickly and are able to support a moderate sustained 2.5% pace of consumer spending.

Stephen Slifer

NumberNomics

Charleston, SC

 

 


Average Duration of Unemployment

December 8, 2017

The average duration of unemployment fell 0.6 week in November to 25.4 weeks after having declined 0.8 week in October.

While the unemployment rate has fallen by 5.9% since reaching a peak of 10.0% in October 2009, the average duration of unemployment has declined far more slowly.  It is clear that  few of the new hires have been from the ranks of the long-term unemployed.  There is a mismatch between the skills that employers need, and the skill set that these long-term unemployed workers seem to have.  Employers in today’s world demand their new hires to be tech savvy, and these long-term unemployed workers tend not to have that ability.

The Bureau of Labor Statistics indicates that 1.58 million workers have been jobless for 27 weeks or longer, and that represents 23.8% of all unemployed workers.

The average duration of unemployment should continue to decline slowly in the months ahead as the labor market gets progressively tighter.  Firms will have to look just a bit harder to find the workers that they need, and that includes looking at long term unemployed workers and perhaps offering them some sort of training program to improve their skills.

Stephen Slifer

NumberNomics

Charleston, SC


Initial Unemployment Claims

December 7, 2017

Initial unemployment claims declined 2 thousand in the week ending December 2 to 236 thousand after having fallen 2 thousand in the previous week.  The 4-week moving average is at 242 thousand.  Thus, claims remain close to the lowest level in this cycle which was 231 thousand back in early November which, in turn, was the lowest average since March 31, 1973 when it was 228 thousand.

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 242 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 will be forced to offer some of their part time workers full time positions.  This series is still a bit high relative to where it was going into the recession.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the youth unemployment rate today is the lowest it has been in 17 years 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 — roughly in line with where it was going into the recession.

The number of people receiving unemployment benefits declined 52 thousand in the week ending November 25 to 1,908 thousand.  The four week moving average rose 1 thousand to 1,913 thousand which is close to the lowest level for this 4-week average since January 12, 1974 when it was 1,881.   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


Gasoline Prices

December 6, 2017

Gasoline prices at the retail level fell $0.03 in the week ending December 4 to $2.50.  In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.25. The Department of Energy expects national gasoline prices to average $2.45 next year.

Crude oil prices are currently about $57.00.  The Energy Information Agency predicts that crude prices will average $51.04 in 2018.  As crude oil and gas prices have leveled off underlying inflationary pressures have become more apparent.  Wage pressures are beginning to escalate.  At the same time producers — both manufacturing and non-manufacturing firms — are having to pay considerably higher prices for their inputs.  It appears that some modest upward pressure on the inflation rate has finally begin to emerge.

The number of oil rigs in service dropped 79% to 404 thousand  after reaching a peak of 1,931 wells in September 2014.  However, the number of rigs in operation has actually rebounded in recent months to 929 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.

While the number of oil rigs in production was cut by 79% between late 2015 and the middle of last year, oil production has declined much less than that.  Since that time the rebound in oil prices has encouraged oil firms to step up the pace of production.  Production this past week jumped to 9,707 thousand barrels per day which surpasses the previous record pace of production of 9,610 barrels per day set in 1970.  The Department of Energy expects production to average 9.2 million barrels per day in 2017 and 10.0 million barrels next year.

How can the number of rigs go down but production be relatively steady?  Easy.  Technology in the oil sector is increasing rapidly which allows producers to boost production while simultaneously shutting down wells.  Two years ago some frackers could not drill profitably unless crude oil prices were about $65 per barrel.  Today that number has declined to about about $48 per barrel.  Six months from now that number will be lower still.  Recent productivity numbers for September and October have been distorted by the drop-off in production associated with Hurricanes Harvey and Irma but they will rebound in the next month or two.

Oil inventories have been falling quickly for most of this year.    We know that OPEC output has been reduced but its cutback has been partially offset by a pickup in U.S. production.  But inventories keep falling.  The conclusion is that global demand has picked up sharply.  That is consistent with the upward revisions to GDP growth recently released by the IMF which shows projected growth in 2011 of 3.6% and 3.7% growth in 2018 which would be the fasted growth rates since 2011.

The International Energy Agency produces some estimates of global demand and supply.  Note how demand picked up sharply in the second quarter (the blue line) and is projected to rise further in the second half of the year.  Note also that global demand currently exceeds supply (the blue line compared to the bars). That has not been the case for the past several years.  Furthermore, demand and is projected to continue to exceed supply through the end of this year.  Hence, the recent upward pressure on oil prices.  If they persist, U.S. producers will re-open closed wells and, at some point, OPEC will begin to boost its output.  Hence, oil prices are unlikely to rise too much farther.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Productivity

December 6, 2017

Upon revision nonfarm productivity rose 2.9% in the third quarter after having climbed by 1.5% in the second quarter.   That is the  biggest single quarter advance in three years.  Something seems to be happening.  During the course of the past year productivity has risen 1.5%.  The 2.9% increase in the third quarter consists of a 4.1% increase in output and a 1.1% increase in hours worked.

Clearly, productivity growth slowed in the past 15 years. From 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%.  In the past three years it has slipped to 0.7%.

Some suggest that productivity is not properly capturing productivity gains in the service sector, particularly with respect to the internet.  For example, apps allow people to book airfares, hotels, and cars from their living room and get directions all at the same time.  But such gains do not appear to be captured anywhere in the productivity data.  The problem with that assertion is that manufacturing productivity  — which can be more accurately measured — has experienced a similar slowdown.  From 2000- 2007 (when the recession began) manufacturing productivity averaged 5.0%.  In the last three years it has fallen 0.3%.

Another part of the problem could be that retiring baby boomers could be leaving both their jobs and the labor force, and taking some of their knowledge with them which is adversely impacting the growth rate for productivity.

The basic problem however, in our view, is that businesses have been reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market because they have been bothered by uncertainty about future tax rates, the inability to repatriate overseas earnings to the United States, the rising cost of health care which firms with more than 50 employees have to provide,  and an avalanche of onerous, confusing, and sometimes conflicting regulations.  But productivity growth is largely determined by the  pace of investment spending.  After several years in which nonresidential investment was essentially unchanged, it had a dramatic  surge to a 7.2% pace in the first quarter of this year, followed by an additional 6.7% increase in the second quarter, and 3.9% in the third.  This turnaround in corporate willingness to invest clearly reflects the prospect of imminent cuts in the corporate tax rate, the ability to repatriate earnings at a favorable tax rate, and general confidence about economic conditions both in the U.S. and abroad.

These major changes in policy should unleash a continuous wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity,productivity growth will climb from 1.0% or so today to 2.0%.  That, in turn, will boost the economic speed limit from 1.8% today to 2.8% within a couple of years.  If these changes actually happen they would represent the most significant economic events that  have occurred in years!

Stephen Slifer

NumberNomics

Charleston, SC