Sunday, 25 of June of 2017

Economics. Explained.  

Category » Reference Charts (By Category)

New Home Sales

June 23, 2017

New home sales rose 2.9% in May to 610 thousand after having fallen 7.0% in April.  This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 616 thousand (shown above) which is within an eyelash of being the fastest sales pace thus far in the cycle (peak was 616 thousand in March).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled labor.  If they could find more workers, builders would build and sell more homes.  Also do not forget that new home sales are single family homes and do not include sales of condos.

The supply of available homes for sale rose 4 thousand in May to 268 thousand.  The small increase in inventories combined with a similar-sized increase in sales means that there continues to be a 5.3 month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing are roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 156.2.   That means that consumers have 56.2% more income than is necessary to purchase a median priced home.  Existing homes remain quite affordable despite a post-election increase in mortgage rates to 4.0% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.3% by the end of this year.  We estimate the affordability index at that time will be about 151 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices jumped 11.5% in May to $345,800 after having fallen 3.1% in April.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $325,400.  During the course of this past year prices have risen 5.1%.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace of perhaps 640 thousand by yearend, builders will continue to boost production, and prices should rise slowly.  Mortgage rates should end 2017 at 4.3% which is still quite affordable.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

June 22, 2017

Initial unemployment claims rose 3 thousand in the week ending June 17 to 241 thousand.  Because these weekly data can be volatile the focus should be on the 4-week moving average of claims (shown above), which is a less volatile measure.  It rose 2 thousand to 245 thousand.  The late February average of 234 thousand was the lowest level for this series since April 14, 1973 — 44 years ago!

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 245 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 170 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 20 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 — toughly in line with where it was going into the recession.

The number of people receiving unemployment benefits rose 8 thousand in the week ending June 10 to 1,944 thousand.  The four week moving average rose 5 thousand to 1,932 thousand. In mid-May the 4-week average came in 1,916 which was the lowest level for this 4-week average since January 12, 1974 when it was 1881.   The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.0%; potential growth is  projected to be about 1.8%.  Thus, going forward  the unemployment rate will decline quite slowly.

Stephen Slifer


Charleston, SC

Gasoline Prices

June 21, 2017

Gasoline prices at the retail level fell $0.05 in the week ending June 19 to $2.32 per gallon.   In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.07. The Department of Energy expects national gasoline prices to average $2.39 this year — almost exactly where they are currently.

As the price of gasoline declined the economy got a tailwind. However,  oil prices today are 1.5% lower today than they were a year ago.  Hence, the tailwind effect on the economy has run its course but has not yet turned into a headwind.

Crude oil prices are currently about $44.00 mark.  The Energy Information Agency predicts that crude prices will average $50.68 in 2017.  As crude oil and gas prices have leveled off the underlying inflationary pressures have become more apparent.

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 933 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 has been 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 and at 9350 million barrels it is now only about 3% lower than its June 2015 peak pace of production which was 9,610 thousand barrels.  The Department of Energy expects production to average 9.3 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.  For example, output per oil rig has increased by 27% in the past twelve months.  Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $70 per barrel.  Today that number has declined to about about $44 per barrel.  Six months from now that number will be lower still.

While oil inventories gradually declined for most of 2016 the increase in production earlier this year caused inventory levels to climb to a record high level in February.  Since that time inventory levels have been shrinking.  We know that OPEC output has been reduced, but its cutback has been partially offset by a significant pickup in U.S. production.  The other thing thing that could reduce inventory levels is strong demand which, in this case, seems consistent with an apparent quickening of GDP growth not only in the U.S. but around the world.

Stephen Slifer


Charleston, SC

Existing Home Sales

June 21, 2017

Existing home sales rose 1.1% in May to 5,260 thousand after having fallen 2.3% in April.  While these sales bounce around a bit from month to month they clearly continue to trend higher.  The March sales pace of 5,700 thousand was the fastest since February 2007.

Lawrence Yun, NAR chief economist  says, “The job market in most of the country is healthy and the recent downward trend in mortgage rates continues to keep buyer interest at a robust level,”

The months’ supply of unsold homes rose slightly to 4.2 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

Keep in mind that properties typically stayed on the market for just 27 days in May which is down from 29 days in April and 32 days a year ago.  This is the shortest time frame since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability reached a peak of 213.6 in January of 2013.  It now stands at 156.2 in April.  At 156.2  it means that a household earning the median income has 56.2% 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 despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast mortgage rates are rising.

The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income.  Builders are trying hard to boost production to increase the supply of available homes which should slow the pace of price appreciation. Finally, mortgage lenders should become slightly less restrictive as the economy remains healthy and default rates decline.
Existing home prices rose 3,2% in May to $252,800 after climbing 3.6% and 3.7% in March. Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $236,400.  Over the course of the past year existing home prices have risen 5.8% and have generally been bouncing around in a 4.5-8.0% range.

Stephen Slifer


Charleston, SC

Consumer Sentiment

June 16, 2017

The final estimate of consumer sentiment for June fell 2.6 points from 97.1 to 94.5. The 98.5 reading for January was the highest level of confidence thus far in the business cycle.  But consumers’ political affiliation has created an interesting divide between Republicans and Democrats.

Richard Curtin, the chief economist for the Surveys of Consumers, said “The modest early June drop of 2.6 points in the Sentiment Index masks a much larger decline since June 8th. Prior to that date the Sentiment Index had averaged 97.7, but since June 8th, the Index fell to 86.7, a decline of 11.0 points. While this break corresponds with James Comey’s testimony, only a few consumers spontaneously referred to him or his testimony when asked to explain their views. Importantly, the decline was observed across all political parties, but the loss in confidence among self-identified Republicans since June 8th was larger than among Democrats.”

Based in part on the expectation of major changes in policy likely to be implemented by the end of the summer, we expect GDP growth for 2017 to be 2.4% and 2.8% 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 4.0% in 2017 vs. 3.0% last year. The core inflation rate should climb modestly in 2017 from 2.2% in 2016 to 2.4% this year and 2.7% 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 high level of  confidence was evident in both the current conditions and expectations components.

Consumer expectations for six months from now climbed from 87.7 to 84.7.

Consumers’ assessment of current conditions declined  in May from 111.7 to 109.6.

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 the quarters ahead.

Stephen Slifer


Charleston, SC

Housing Starts

June 16, 2017

Housing starts declined 5.5% in May to 1,092 thousand after having fallen 2.8% in April and 7.7% in March. This is the third consecutive decline in starts and the fourth in the past five months.  Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown in blue above).   That 3-month average now stands at 1,146 thousand which has fallen off from the 1,264 thousand peak pace in the cycle which was registered back in February.    So what is happening?  Is it a drop in demand?  Or a constraint on the part of builders?  We  believe it is the latter.

Both new and existing home sales continue to climb.   Thus, the demand for housing remains robust.

Builders remain enthusiastic in part because they see traffic through the model homes accelerating.

Mortgage rates are at 4.0% which is quite low by any historical standard.

At the same time employment gains are about 170 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 2.0% pace.

H housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising at almost as quickly, hence affordability has not dropped much.  At 158.2 the index  indicates that a median-income buyer has 58.2% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of skilled labor.

As one might expect there is a tight correlation between home builder confidence and the starts data which probably makes a great deal of sense.   Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.1 million currently.  However,  as noted above, many home builders  report an inability to get the skilled workers they require.   Overcoming the labor shortage on a long-term basis will be challenging.  Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.

The other thing worth noting is that about 1.3 million new households are being formed every year.  Those families all need a place to live, either a single-family home or an apartment.  Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households.  And because housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.3 million by the end of 2017 and 1.5 million in 2018.

Building permits declined 4.9% in April to 1,168 thousand after having fallen 2.5% in April.  Because  permits are another volatile  indicator it is best to look at a 3-month average (which is shown below).  That 3-month moving average now stands at 1,219 thousand which continues to point towards slow but steady improvement in housing.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are currently at 1,219 thousand, housing starts will gradually approach the 1.35 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

June 15, 2017

Homebuilder confidence declined 2 points in June to 67 after having risen 1 point in May.  Confidence is bouncing around from month to month at a very high level.    Clearly, builders believe that the housing market will perform well in 2017.

Robert Dietz, Chief Economist for the home builders association said, “As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and build-able lots that is impeding stronger growth in the single-family sector,”

“Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market”  said NAHB Chairman Granger MacDonald.

Traffic through the model homes edged lower by 2 points in June to 49.  The March reading of 53 was the highest reading thus far in the business cycle.

Not surprisingly there is a close correlation between builder confidence and housing starts.  Right now starts are lagging considerably because builders are having some difficulty finding financing, building materials, an adequate supply of finished lots, and skilled labor.  Starts  currently are at a 1.3 million pace.  They should continue to climb gradually in the months ahead and reach 1.4 million by the end of 2017.

Stephen Slifer


Charleston, SC

Industrial Production

June 15, 2017

Industrial production was unchanged in May after having jumped 1.1% in April.  Over the past year this series has risen 2.2% and is clearly on the upswing.

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 May after having surged by 1.0% in April. During the past year  factory output has risen 1.4% (red line, right scale).  It has clearly hit bottom.

Mining (14%) output rose 1.6% in May after having climbed by 1.5% in April.   Over the past year mining output has risen 8.3%.

Most of the recent upturn in mining has been concentrated in oil and gas drilling activity  which rose 3.8% in May after having increase 9.0% in April.  It has now risen for twelve consecutive months.  Over the course of the past year oil and gas well drilling has risen 100.5%.  The number of  oil rigs in operation continues to climb.

Utilities output  rose 0.4% in May after having risen 0.7% in April.

Production of high tech equipment was unchanged in May after having climbed by 1.3% in April.  Over the past year high tech has risen 7.0%.   The high tech sector sector appears to have gathered some momentum during the past several months. This may be an early indication that the long slide in nonresidential investment may be coming to an end which would, in turn, signal some upturn in productivity growth.

Capacity utilization in the manufacturing sector declined 0.3% in May to 75.5 after having jumped 0.8% in April.  It is still below the 77.5% that is generally regarded as effective peak capacity but it is beginning to close the gap.  Above that level the factory sector is running too hot and prices begin to rise.  While we are a  ways from that so-called danger level, the reality is that manufacturing capacity is growing by about 0.1% per month while manufacturing output is rising by about 0.4%.

Stephen Slifer


Charleston, SC

Retail Sales

June 14, 2017

Retail sales declined 0.3% in May after having risen 0.4% in April.   The May gain was smaller than expected.  During the course of the past year sales have risen 3.9%.

Sometimes sales can be distorted by changes in autos which tend to be quite volatile.  In this particular instance the unit selling rate for car sales slipped during May and, as a result, the car sales component of retail sales declined 0.2%.

Fluctuations in gasoline prices can also distort the underlying pace of retail sales.  If gas prices rise, consumer spending on gasoline can increase even if the amount of gasoline purchased does not change.  Gasoline sales declined a sharp 2.4% in May.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales were unchanged in May after having risen 0.5% in April and 0.4% in March.   In the last year retail sales excluding cars and gasoline have risen 3.6%.  No evidence of a slowdown in this series.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments (like Macy’s, Sears, K-Mart, and Limited) the reality is that they need to develop a better business model.  The action these days is in non-store sales which have been growing rapidly. Consumers like the ease of purchasing items on line.  While sales at traditional brick and mortar general merchandise sales have risen 1.4% in the past year, on-line sales have risen a steamy 10.9%.  As a result, their share of total sales has been rising steadily and now stands at 10.9% of all general merchandise sales.  That percentage has risen from 10.3% at this time last year.

We do not believe the recent softness in retail sales represents a change in trend for a variety of reasons.  First of all,  existing home sales are selling at the fastest rate thus far in the cycle.  Consumers do not purchase homes and cars — the two biggest ticket items in their budget — unless they are feeling confident about their job and the future pace of economic activity.  If home sales are holding up well, car sales should  rebound in the months ahead.  As noted earlier, car sales are a particularly volatile category.

Second, the stock market is near a record high level.  That increase in stock prices boosts consumer net worth.

Third, all measures of consumer confidence are at their highest level thus far in the business cycle.

Fourth, cuts in individual income tax rates are likely later this  year.

Finally, the economy is cranking out 170 new jobs every month which boosts consumer income.  Consumers have paid down a ton of debt and debt to income ratios are the lowest they have been in 20 years.  That means that consumers have the ability to spend more freely and boost their debt levels if they so choose.

Thus, in our view, the first quarter weakness is sales is not a harbinger of a consistently slower pace of spending in the months ahead.  We continue to expect GDP growth to quicken to 2.4% in 2017 and 2.8% next year.

Stephen Slifer


Charleston, SC


June 13, 2017

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 was unchanged in May after having jumped 0.5% in April.  During the past year this inflation measure has risen 2.4%.  It is close to the 2.5% year-over-year increase registered in April which was the largest 12-month increase since February 2012.

Excluding food and energy producer prices rose 0.3% in May after having climbed 0.4% in April.  They have risen 2.1% since March of last year.  This series has not climbed above the 2.0% mark since April 2014.

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

The PPI for final demand of goods fell 0.5% in May after having risen 0.5% in April. These prices have now risen 2.8% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.1% in May after having risen 0.3% in April.  During the past year the core PPI for goods has risen 2.2% (right scale).  It has been steadily accelerating for more than a year.

Food prices declined 0.2% in May after having jumped 0.9% in both March and 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 1.0%.

Energy prices fell 3.0% in May after having increased 0.8% in April.  Energy prices have risen 7.5% in the past year.  These prices are also very volatile.

The PPI for final demand of services rose 0.3% in May after having risen 0.4% in April .  This series has risen 2.1% over the course of the past year (left scale).  This is the largest 12-month increase in this services index since January 2015.  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 declined 0.1% in May after having surged upwards by 0.8% in April .  It has climbed 2.1% during 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 4.3%, the labor market is beyond full employment.  As a result, wages pressures are sure to rise, and once that happens firms are almost certain to pass that along to the consumer in the form of higher prices.

Some upward pressure on labor costs, rents, and medicare care will further increase the upward pressure on inflation.  We expect the core CPI to increase 2.0% in  2017 and 2.2% in 2018.

Stephen Slifer


Charleston, SC