Monday, 24 of September of 2018

Economics. Explained.  

Category » Reference Charts (By Category)

Consumer Net Worth

September 21, 2017

Consumer net worth rose $2.2 trillion in the second quarter.  That works out to an annualized rate of increase of 8.4%.  Over the past year consumer net worth has increased 8.2%.

The growth in net worth reflects both the steady increase in stock prices during the course of the past several years, and the growth in home prices.

This high and climbing level of  net worth should encourage consumers to spend at  roughly a 2.5% pace in both 2018 and 2019.

Stephen Slifer


Charleston, SC

Corporate Cash

September 21, 2018

Corporate cash holdings  declined $2 billion in the second quarter to $2.67 trillion (above).  They continue to be  in line with their long-run average of 9.4% of non-financial assets (below).  The problem with this series is that every time the Fed adds data for a new quarter, the history of the series going back for years will also change, and the relationship between corporate cash and financial assets will get revised.  For example, previous data showed the ratio of cash/assets for the first quarter to be 10.2%.  Upon revision it was reduced to 9.5%.  It is hard to make any meaningful analysis when a series is subject to sizable revisions.

Stephen Slifer


Charleston, SC

Existing Home Sales

September 20, 2018

Existing home sales were unchanged in August at 5,340 thousand after having fallen 0.7% in July.  Sales currently at 0.2% lower than they were at this time last year.

Lawrence Yun, NAR chief economist said,  “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum.  With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

With both sales and the inventory of homes available unchanged in August, the month’s supply of homes available for sale was steady in August at 4.3 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 short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.  Having said that, to sustain the current pace of sales with inventory in such short supply builders will have to substantially boost their rate of production.

Keep in mind that properties typically stayed on the market 29 days in August which is down 3.3% from 30 days a year ago.  More than 53% of homes that went on the market sold within a month.  This is one of the shortest lengths of time between listing and sale  since the NAR began tracking these data in May 2011.

The National Association of Realtors series on affordability now stands at about 140.0.  At that level  it means that a household earning the median income has 40.0% 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 2018 and 2019 despite the backup in mortgage rates because sizable job gains are boosting income almost as fast as mortgage rates and home prices 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 fell 1.7% in August to $264,800 after having declined 1.6% in July.  Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $271,700.  Over the course of the past year existing home prices have risen 4.6% and have generally been bouncing around in a 4.5-8.0% range.
 Stephen Slifer


Charleston, SC

Initial Unemployment Claims

September 20, 2018

Initial unemployment claims continue to fall to multi-decade lows.  Specifically, claims fell 3 thousand in the week ending September 15 to 201 thousand after  having  fallen 1 thousand in the previous week.  The 4-week moving average fell 2 thousand to 206 thousand which is the lowest level for this average since December 6, 1969 (when it was 205 thousand).

Ordinarily, with initial unemployment claims (the red line on the chart below, using the inverted scale on the right) at 206 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 fell 55 thousand in the week ending September 8 to 1,645 thousand.  The 4-week moving average declined 20 thousand to 1,692 thousand.  This was the lowest 4-week average since November 17, 1973 when it was 1,686 thousand.  The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.8%; 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

Housing Starts

September 19,  2018

Housing starts jumped 9.2% in August to 1,282 thousand after having fallen 0.3% in July. 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 above).   That 3-month average now stands at 1,211 thousand.  Starts have cooled somewhat in recent months, but is that because demand has declined?  Or are constraints on production like a labor shortage and rising costs of materials the more likely cause?  We believe it is the latter.

Both new and existing home sales continue to trend upward but they are being constrained by a lack of supply.   Thus, the demand for housing remains robust.

The average home stays on the market for 26 days currently which is down from 100 days a few years ago.  One-half of the homes coming on the market sell within one month.  This statistic provides compelling evidence that the demand for housing remains robust.

Monthly  employment gains are about 190 thousand per month which is boosting income.  As a result, real disposable income (what is left after inflation and taxes) is growing at a 3.1% pace which is  somewhat above its long-term average of 2.7%.

Mortgage rates are at 4.5% which is quite low by any historical standard.

Housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising almost as quickly, hence affordability has not dropped much.  At 140.0 the index  indicates that a median-income buyer has 40.0% 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 both skilled and unskilled labor.  Construction employment has been growing by about 30 thousand per month but will be difficult for it to grow any faster.

There are plenty of homes that have already been authorized but construction has not yet begun because of builders inability to find workers, and because the cost of materials has risen so sharply in the wake of tariffs on steel, aluminum, and lumber.  Once supply constraints begin to abate we will see starts climb at a more robust pace as builders begin construction on these previously authorized houses.

Given the continuing strength in demand we expect starts to reach 1.3 million by the end of 2018 and continue upwards next year.

Building permits fell 5.7% in August to 1,229 thousand after having risen 0.9% in July.  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 1,275  thousand which is somewhat below the fastest pace thus far in the business cycle (1,355 thousand) and continues to point towards 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 at 1,275 thousand, housing starts should easily rebound to the 1.3 million mark by yearend.

Stephen Slifer

Charleston, SC

Gasoline Prices

September 19, 2018

Gasoline prices at the retail level rose $0.01 in the week ending September 17 $2.84 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.59. The Department of Energy expects national gasoline prices to average $2.76 this year.  

Spot prices for gasoline have been bouncing around for the past several  months and are likely to be roughly unchanged between now and yearend..

Crude prices recently have been bouncing around in a range from roughly $67-72 per barrel.   The Energy Information Agency predicts that crude prices will average $67.03 in 2018 but that may be too low.

The number of oil rigs in  operation has  been fairly steady in recent months at about 1,050 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 11,000thousand barrels per day.  The Department of Energy expects production to average 10.7 million barrels this year but climb further to 11.5 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 1,054 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,055 million barrels.  However, with demand likely to slightly exceed supply through the end of this year, 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.  The agency reports that demand picked up somewhat in recent months and supply edged lower as production constraints have restrained output.  As a result the IEA now estimates that demand will exceed supply by about 0.5 million barrels per day between now and yearend. The IEA noted that Venezuela has cut production there to a multi-decade low, and now there is the prospect of further a reduction in global oil supply by yearend stemming from curtailment of Iranian oil exports.  If the IEA estimates of supply and demand are correct not only will inventory levels edge lower between now and yearend, prices could climb somewhat.

Stephen Slifer


Charleston, SC*

Homebuilder Confidence

September 18, 2018

Homebuilder confidence was unchanged in September at 67 after having fallen fell 1 point in August.  The December level of 74 was the highest for this series since July 1999 — over 18 years ago — and current confidence levels are somewhat below the lofty December level.

NAHB Chief Economist Robert Dietz said  “Despite rising affordability concerns, builders continue to report firm demand for housing, especially as millennials and other newcomers enter the market. The recent decline in lumber prices from record-high levels earlier this summer is also welcome relief, although builders still need to manage construction costs to keep homes competitively priced. Wages and subcontractor payments continue to rise as the labor market for residential construction sector remains tight.”

Traffic through the model homes was unchanged in September was unchanged at 49 after having fallen fell 3 points in August.  The December level of  58 was by far the highest level thus far in the business cycle.  Traffic volume remains high and an index level of 49 indicates that the number of people going through model homes was slightly lower in September than in August.

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 1.25 million pace.  They should continue to climb gradually in the months ahead and reach 1.30 million by the end of 2018 and 1.35 million by the end of next year.

Stephen Slifer


Charleston, SC

Consumer Sentiment

September 14, 2018

The final estimate for consumer sentiment for September jumped 4.6 points to 100.8 after having declined 1.7 points in July.   The September level was 0.6 point lower than March’s level of 101.4 was the highest level of sentiment since January 2004.  Thus, sentiment remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “Consumer sentiment posted a robust rise in early September, reaching 100.8, the second highest level since 2004-only behind the March 2018 reading of 101.4. Importantly, the gains were widespread across all major socioeconomic subgroups. The Expectations Index reached its highest level since July 2004, largely due to more favorable prospects for jobs and incomes. Despite a lessening of expected gains in nominal incomes in September, inflation expectations also declined, acting to offset concerns about declining living standards. Consumers anticipated continued growth in the economy that would produce more jobs and an even lower unemployment rate during the year ahead. While consumers were somewhat more likely to anticipate that the economic expansion would continue uninterrupted over the next five years, nearly as many expected another downturn sometime in the next five years. The largest problem cited on the economic horizon involved the anticipated negative impact from tariffs.”

Given the tax cuts we expect GDP growth to climb from 2.5% in 2017 to 3.1% 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 2.3% 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 2.2% by the end of 2018.

The August increase was attributable to both the expectations and current conditions components.

Consumer expectations for six months jumped 4.0 points from  87.1 to 91.1.

Consumers’ assessment of current conditions jumped 5.8 points from 110.3 to 116.1.

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


Charleston, SC

Industrial Production

September 14, 2018

Industrial production rose 0.4% in both July and August.   During the past year industrial production has risen 4.9%.  A growth rate of that magnitude was last seen in early 2012.  So despite monthly wiggles, production continues to trend upwards.

Breaking industrial production down into its three major sub-components,  the Fed indicated that manufacturing production (which represents 75% of the index) rose 0.2% in August after having risen 0.3% in July.  During the past year  factory output has risen 3.1% (red line, right scale).    The factory sector is clearly gathering momentum.

Mining (14%) output rose 0.7% in both July and August.  Over the past year mining output has risen 14.1%.  Most of the recent upturn in mining has been concentrated in oil and gas drilling activity.  Oil and gas drilling fell 0.5% in August after having fallen 4.3% in July.     Over the course of the past year oil and gas well drilling has risen 12.2%.

Utilities output rose 1.2% in August after having risen 0.1% in July .  During the past year utility output has risen 4.8%.

Production of high tech equipment rose 0.4% in August after having declined 0.2% in July.  Over the past year high tech has risen 7.4  Thus, the high tech sector sector appears to be expanding nicely. This is an indication that the long slide in nonresidential investment has come to an end which would, in turn, signal an upturn in productivity growth.

Capacity utilization in the manufacturing sector rose 0.1% in August to 76.4%.  It remains 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

Retail Sales

September 14, 2018

Retail sales rose 0.1% in August after having risen 0.7% in July.  The trend rate seems to be edging upwards.  In the past year sales (the blue line) have risen 6.7% which is the fastest 12-month growth rate since February 2012.

Sometimes sales can be distorted by changes in autos and gasoline which tend to be quite volatile.  In this particular instance car sales declined 0.8% in August, but gasoline sales jumped 1.7%.  Higher gas prices boost the overall increase in sales, they typically do not reflect an actual increase in the volume of gasoline sold.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales rose 0.2% in August after having jumped 0.9% in July.   In the last year retail sales excluding cars and gasoline have risen a solid 5.8% and are showing no signs of abating.

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 stores have risen 3.6% in the past year, on-line sales have risen 10.4%.  As a result, their share of total sales has been rising steadily and now stands at a record 11.3% of all retail sales.

We believe that retail sales will continue to chug along at a 2.5% pace for some time to come.   First, all measures of consumer confidence are at their highest levels in a decade.

One of the reasons consumers are feeling so positive is that the stock market is at a record high.  That increase in stock prices boosts consumer net worth.

As long as the economy continues to crank out 200 thousand jobs a month, consumer income will continue to climb.

Real disposable income is currently climbing at a solid 2.9% pace which is somewhat higher than its 25-year average growth of 2.7%.

If the Fed keeps raising rates very slowly consumers will be able to continue to borrow at a reasonable rate.  At 4.5% mortgage rates are well below the 6.25% average over the past 25 years.


In addition, consumers have paid down a ton of debt and debt to income ratios are very low.  That means that consumers have the ability to spend more freely and boost their debt levels if they so choose.

Thus, the pace of consumer spending seems steady.  We continue to expect GDP growth to quicken from 2.5% last year to 3.1% this year.

Stephen Slifer


Charleston, SC