Saturday, 21 of October of 2017

Economics. Explained.  

Retail Sales

October 13, 2017

Retail sales jumped 1.6% in September after having fallen 0.1% in August.  The August drop reflects the downward bias to sales in the wake of Hurricane Harvey which clobbered Texas between August 25 and August 29.  The September surge in sales reflects the beginning of the rebuilding effort in both Texas and Florida.  During the course of the past year sales have risen a solid 4.3%.  Consumer spending continues to chug along despite the hurricane-induced distortions.

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 surged in September as cars lost during the two hurricanes must be replaced.

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 rose 5.8% in September after  having risen 4.1% in August.  Clearly, higher gas prices are boosting the overall increase in sales, but 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  0.1% in August and then 0.5% in September.   In the last year retail sales excluding cars and gasoline have risen 3.8%.  No slowdown evident from looking at these sales data despite the hurricane-affected August and September distortions.

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 3.4% in the past year, on-line sales have risen a steamy 9.6%.  As a result, their share of total sales has been rising steadily and now stands at 10.8% of all retail sales.  That percentage has risen from 10.3% at this time last year.

We believe that retail sales will continue to chug along at a 2.5% pace for some time to come..  First of all,  existing home sales are selling at a rapid clip and would be selling at a faster pace if there were more homes available for sales.  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  remain solid in the months ahead.

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

Third, all measures of consumer confidence are close to their highest level thus far in the business cycle, and consumer sentiment from the University of Michigan is at its highest level since the early part of 2004.

 

Fourth, cuts in individual income tax rates are likely later this  year or in 2018.

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, the pace of consumer spending seems steady.  We continue to expect GDP growth to quicken to 2.3% in 2017 and 2.8% next year.

Stephen Slifer

NumberNomics

Charleston, SC


Consumer Price Index

October 13, 2017

The CPI rose 0.5% in September after having climbed by 0.4% in August.  During the past year the CPI has risen 2.2%.  The year-over-year increase climbed to 2.8% in February before settling back in the past six months. .  Excluding food and energy the CPI rose 0.1% in September after having risen 0.2% in August.  Over the past year this so-called core rate of inflation has risen 1.7%.

Food prices rose 0.1% in both August and September.  Food prices have risen 1.2% in the past twelve months.

Energy prices jumped 6.1% in September after having gained 2.8% in August .  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 10.2%.  The recent run-up in energy prices seems to reflect strengthening GDP growth around the world which is bolstering the demand for both crude oil and gasoline.  Hence, it is unlikely that energy prices will retreat by any significant amount in the months ahead.  On the flip side, should prices rise much beyond $50 per barrel, U.S. producers was well as oil exporters around the globe will boost production which should cap the increase in prices.

Excluding the volatile food and energy components, the so-called “core” CPI rose 0.1% in September after having risen 0.2% in August.  The year-over-year increase now stands at 1.7%.  The year-over-year increase in the core CPI had risen to as high as 2.3% in January before retreating.  But a lot of this softening reflects a price war amongst telecommunications firms and thereby distorts the overall run-up.  But that exaggerated price drop appears to have run its course as phone prices fell only 0.1% in August and then rose 0.4% in September.  The CPI will lose this downward  bias from this component in the months ahead.

The core CPI has also benefited from a sharp slowdown in the rate of increase of prescription drug prices.  That appears to reflect President Trump’s threat to the pharmaceutical industry that he intends to cut the prices of prescription drugs by allowing consumers to purchase such drugs overseas, and by having Medicare negotiate prices directly with the insurance companies.  That caused prescription drug prices to slow markedly late last year and in the first five months of this year.  But one wonders the extent to which price increases associated with the yearend increase in health care premiums will boost medical care prices in the months ahead.

While the CPI, both overall and the core rate, have been very well contained in the first half of this year we believe that as the year progresses the core rate of inflation will have an upward bias  because of what has been happening to both shelter prices and gradually rising labor costs which reflects the tightness in the labor market as well as rebounding prescription drugs prices and a leveling off of wireless communications services.  And now, for the first time, producer prices are beginning to rise.

Shelter costs rose 0.3% in September after having jumped 0.5% in August.  In the  past year they have climbed 3.2%.  This undoubtedly reflects the shortages of both rental properties and homeowner occupied housing. Indeed, the vacancy rate for rental property is at a 30-year low. This steady rise in the cost of shelter  will continue for some time to come and, unlike monthly blips in food or energy, it is unlikely to reverse itself any time soon.

vacancy-rate-rental

The Fed’s preferred measure of inflation is not the CPI, but rather the personal consumption expenditures deflator, specifically the PCE deflator excluding the volatile food and energy components which is currently expanding at a 1.3% rate but is poised to head higher.  The Fed has a 2.0% inflation target.  However, going forward we have to watch out for the steady increases in shelter which, as noted above, is being pushed higher by the shortage of both rental properties and homeowner-occupied housing.   Shelter is a long-lasting problem and given its 33% weighting in the CPI it will introduce an upward bias to inflation for some time to come.  We also have to watch rising medical costs(prescription drug prices in particular) and the impact of higher wages triggered by the shortages of available workers in the labor market.

Why the difference between the CPI and the personal consumption expenditures deflator?  The CPI is a pure measure of inflation.  It measures changes in prices of a fixed basket of goods and services each month.

The personal consumption expenditures deflator is a weighted measure of inflation.  If consumers feel less wealthy in some month and decide to purchase inexpensive margarine instead of pricy butter, a weighted measure of inflation will give more weight to the lower priced good and, all other things being unchanged, will actually register a decline in that month.  Thus, what the deflator measures is a combination of both changes in prices and changes in consumer behavior.

As we see it, inflation is a measure of price change (the CPI).  It is not a mixture of price changes and changes in consumer behavior (the PCE deflator).  The core CPI currently is at 1.7%.  However, with the economy growing steadily, rents rising, and the unemployment rate falling, the core inflation rate should pick up during 2017 and rise by 1.9% in 2017 and 2.5% in 2018.  And because the core PCE increases at a rate roughly 0.5% slower than the core CPI, the core PCE should increase  1.6% in 2017 and  1.9% in 2018.  Both rates are trending higher.

Keep in mind that real short-term interest rates are negative.  With the funds rate today at 1.1% and the year-over-year increase in the CPI at 1.7% the “real” or inflation-adjusted funds rate is negative 0.6%.  Over the past 57 years that “real” rate has averaged about 1.0% which should be regarded as a “neutral” real rate.  Given a likely pickup in GDP growth this year and next and a gradual increase in the inflation rate, we regard a negative real interest rate inappropriate in today’s world.  The Fed should continue to push rates higher and gradually run off some of its longer term securities.

Stephen Slifer

NumberNomics

Charleston, SC


Producer Price Index

October 12, 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 rose 0.4% in September after having risen 0.2% in August.  During the past year this inflation measure has risen 2.5%.  It has been bouncing around in a range from 2.0-2.5% for the past six months but appears to be breaking out of that range to the upside.

Excluding food and energy producer final demand prices jumped 0.4% in September after having risen 0.1% in August.  They have risen 2.2% since July of last year.  This is the largest year-over-year increase since May 2012 .  This series has been quietly accelerating for the past two years.  Inflationary pressures are re-surfacing.

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

The PPI for final demand of goods jumped 0.7% in September after having risen 0.5% in August. These prices have now risen 3.3% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.3% in September after having climbed 0.2% in August.  During the past year the core PPI for goods has risen 2.2% (right scale).  It steadily accelerated for more than a year but has leveled off in recent months.

Food prices were unchanged in September after having declined 1.3% in August.  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 1.2%.

Energy prices jumped 3.4% in September after having risen 3.3% in August.  Energy prices have risen 10.6% in the past year.  These prices are also very volatile but the recent upswing seems to reflect a significant quickening of GDP growth around the globe.  Hence, we should not expect energy prices to fall substantially any time soon.  But by the same token they should not rise too much further.  Should they do so, U.S. producers as well as oil exporting nations around the world will begin to open the spigots and thereby cap the increase.

The PPI for final demand of services rose 0.4% in September after having risen 0.1% in August.  This series has risen 2.1% over the course of the past year (left scale).  With the sole exception of May of this year the 2.1% year-over-year increase 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 rose 0.1% in both August and September.  It has climbed 1.9% during the past year.  The 2.2% year-over-year increase for June was the largest 12-month increase thus far in the business cycle.

The recent increases in producer prices was foreshadowed by the results of the Institute for Supply Management’s series on prices paid by both manufacturing and non-manufacturing firms.  In the case of manufacturing firms the chart looks like this:

And for non-manufacturing firms it looks like this:

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

Because the PPI measures the cost of materials for manufacturers, it is frequently believed to be a leading indicator of what might happen to consumer prices at a somewhat later date.   However, that connection is very loose.

It is important to remember that labor costs represent about two-thirds of the price of a product while materials account for the remaining one-third.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 4.2%, 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 1.9% in  2017 and 2.5% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC



Unemployment vs. Job Openings

October 11, 2017

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

The  Labor Department reported that job openings declined 0.9% in August to 6,082 thousand after having risen 0.4% in July.    It is worth noting that there are more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 7.1 million people unemployed in August.

As shown in the chart below, there are currently 1.1 unemployed workers for every available job.   Prior to the recession this ratio stood at 1.7 so the labor market (at least by this measure) is in better shape now than it was prior to the recession.

In  this same report the Labor Department indicated that the quit rate fell by 0.1 in August to 2.1 after having risen 0.1 in July.  The highest reading thus far in the business cycle of 2.2 has been attained on several occasions in recent months.  This series has been bouncing around between 2.1 and 2.2 for the  past two years.  This is a measure of the number of people that voluntarily quit their jobs in that  month.  It is another series that Janet Yellen likes to talk about.  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 2.1; at the beginning of the recession it was at 2.0.  Thus, it is not clear exactly how high this series can go.  Probably not a lot higher.

There is one other point that should be made about this report.  Janet Yellen claims that there are 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 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 that the combination of unemployment benefits and/or welfare benefits sufficiently attractive that there is little incentive to take a full time job when you can sit at home do nothing and make almost as much.

Whatever the case, it appears that the decline in the unemployment rate in the past year is not simply a reflection of workers dropping out of the labor force.  Jobs are plentiful and the only reason the unemployment rate is not falling faster is because the remaining unemployed/discouraged/part time workers do not have the skills required by employers today, flunk the drug tests, or are unwilling to take the jobs that are available.

Stephen Slifer

NumberNomics

Charleston, SC


Small Business Optimism

October 10, 2017

Small business optimism fell 2.3 points in September to 103.0 after having risen 0.1 point in August.  This is slightly lower than the cycle high reading of 105.9 set in January which was the highest level for this index since 2004.  A couple of months ago the NFIB noted that the level of the index during the past six months represents a hot streak not seen since 1983.

The decline in September is not simply a hurricane-related event.  NFIB President and CEO Juanita Duggan said, “Small business owners across the country were measurably less enthusiastic last month.””

NFIB Chief Economist Bill Dunkelberg added, “The Index remains very high by historical standards.  Small business owners still expect policy changes from Washington on health care and taxes, and while they don’t know what those changes will look like, they expect them to be an improvement. But the frothy expectations they’ve had in the previous few months clearly slipped in September.”

In our opinion the economy is bouncing along at a respectable pace and should gather momentum in coming months if the new Trump Administration produces a number of significant policy changes.  Specifically, we believe that later this year or in 2018 we will see both individual and corporate income tax cuts, and legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 10% rate.  Trump will continue to eliminate all unnecessary, confusing and overlapping federal regulations.  And health care reform of some type is still at least possible.  These changes should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

Already we see the stock market at a record high level.   Jobs are being created at a reasonably robust pace.  The unemployment rate is below the full employment threshold.  The housing sector is continuing to climb.  And now investment spending should pick up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.0% in 2016 to 2.3% in 2017 and 2.8% in 2018.  The core inflation will  probably slip from 2.2% in 2016 to 1.9% in 2017 but then up to 2.5% in 2018.  The Fed will continue to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to new record high levels.

Stephen Slifer

NumberNomics

Charleston, SC


Hurricanes Blew Out Jobs in September- Or Did They?

October 6, 2017

The employment report for September had, in our opinion, four significant takeaways.

  1. The official report for hiring said that the economy lost 33 thousand jobs in September as the combined impact from Hurricanes Harvey and Irma took their toll.
  2. But the household survey, from which the unemployment rate is derived, said that jobs rose by 906 thousand in September. So which is it?  Up by a lot?  Or a decline?
  3. Average hourly earnings have finally begun to climb. The yearly increase is now 2.9% which is the largest 12-month increase since June 2009.
  4. The increase in wages portends a pickup in the inflation rate. The Fed has been wondering why inflation has not begun to climb.  It will not accelerate the pace of rate hikes that it has previously described, but the wage and forthcoming inflation data will keep the funds rate on a steadily upwards growth trajectory.

The Bureau of Labor Statistics reported that hiring declined 33 thousand in September and it noted that the combined effect of Hurricanes Harvey and Irma produced that result.  This is the first drop in employment since September 2010, but it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  But those workers will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  For what it is worth the hiring decline occurred almost exclusively in the food services and drinking places category where employment contracted by 105 thousand.  Despite the September drop American consumers have not stopped eating out or given up drinking.

At the same time that BLS reported that payroll employment declined by 33 thousand in September, it then said that household employment, from which the unemployment rate is determined, jumped by 906 thousand in September.  Huh?  That is a pretty wide discrepancy.  What are we supposed to believe? Did employment increase?  Or decline?   In this case, it is important to understand that in the household survey people are counted as being employed even if they miss work for the entire survey period.  As noted, household employment actually increased 906 thousand in September but that follows a decline of 74 thousand in August.  This series is always volatile.  Over the two months combined the average increase in household employment was 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  No sign of any softening in the household employment data.  Thus, it is hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

The third important takeaway from the September employment report is that average hourly earnings are beginning to rise.  Upward pressure on wages has been conspicuously absent thus far, but that seems to be changing.  Hourly earnings rose 0.5% in September after rising 0.2% in August and 0.5% in July.  In the past year wages have climbed 2.9%.  With the sole exception of December 2016 that is the largest increase in hourly earnings since June 2009.  And, note also, that in the past three months wages have climbed at an even speedier 4.3% pace.  It seems like upward pressure on wages has finally arrived.

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.  Any way you slice it, wages pressure are finally beginning to quicken.

Given that labor costs represent about two-third of an employer’s total costs, it stands to reason that if wages are on the rise, there will be a tendency for firms to raise prices as well.  Hence, a likely increase in the inflation rate.

At the same time manufacturing and non-manufacturing firms are paying higher prices for the raw materials they use in production.  The chart below reflects prices pressures reported by manufacturing firms.  All 18 industries reported paying higher prices in that month.  And the price gains were widespread from metals like steel and aluminum to food ingredients, electronic components, lumber and wood products, chemicals, and plastics.

The price increases for non-manufacturing firms are equally impressive – both dramatic and widespread.  These higher prices will boost the PPI data for September and October and, presumably, begin to push the CPI higher by yearend.

For the Fed’s Open Market Committee members the missing ingredient has always been the lack of upward pressure on the inflation rate.  But all of that seems to be changing.  Wages pressures are mounting.  Commodity prices are on the rise.  The Fed has indicated that it is willing to live with an inflation rate higher than its 2.0% target for a period of time because it has run below target for so long.  However, these recent developments will also suggest that it needs to keep gradually raising the funds rate back towards its presumed neutral level of 2.7-3.0%.  They plan one more rate hike later this year, presumably in December.  They anticipate three more rate hikes in 2018 which would boost the funds rate to the 2.0% mark by the end of next year, and further increases to the presumed neutral level by the spring of 2020.

So despite the modest decline in payroll employment, the September employment report is, in our opinion, not nearly as benign as that particular figure might suggest.  The labor market continues to add jobs to the tune of about 180 thousand per month, and wages pressure are beginning to intensify.  Further, but gradual, increases in the funds rate are in store.

Stephen Slifer

NumberNomics

Charleston, S.C.


Private Employment

October 6, 2017

Private sector employment for September declined 40 thousand after having risen 164 thousand in August as the combo of Hurricanes Harvey and Irma took their toll.  This is the first decline in employment since September 2010.  However, it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  They will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  The household survey, from which the unemployment rate is determined, counts those people as being employed even if they miss work for the entire survey period.  Household employment actually increased 906 thousand in September after a decline of 74 thousand in August.  Over the two months combined the average increase in household employment is 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  It is kind of hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 146 thousand but even that average is biased downwards by the September decline.  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 8 thousand in September after rising 19 thousand August.   The trend increase in construction employment appears to be about 15 thousand  per  month.

Manufacturing employment fell 1 thousand in September after having jumped by 41 thousand in August.   Factory employment is now rising and seems to be accelerating.  We think the trend increase is currently about 10 thousand per month.

Mining rose by 2 thousand in September after having climbed by 6 thousand in August .  After a long period of steady declines mining employment is now rising about 5 thousand per month.

Elsewhere, health care climbed by 23 thousand.  Professional and business services continued to trend upward and rose 13 thousand in September while financial activities hiring increased 10 thousand.  On the flip side, leisure and hospitality plunged by 105 thousand in September.  This was obviously the primary source of the overall drop in payroll employment in September.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In September the nonfarm workweek was unchanged to 34.4 hours.  The workweek remains elevated and implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

This increases in  employment and hours worked are reflected in the aggregate hours index which declined 0.1% in September after having risen 0.2% in August.  For the third quarter as a whole the AHI rose a meager 0.6% as the hurricane combo took its toll.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual income tax cuts still seem possible 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 2.0% pace to 2.3% in 2017 and 2.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

October 6, 2017

Payroll employment for September declined 33 thousand after having risen 169 thousand in August as the combo of Hurricanes Harvey and Irma took their toll.  This is the first decline in employment since September 2010.  However, it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  They will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  The household survey, from which the unemployment rate is determined, counts those people as being employed even if they miss work for the entire survey period.  Household employment actually increased 906 thousand in September after a decline of 74 thousand in August.  Over the two months combined the average increase in household employment is 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  It is kind of hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

A better reading of what is truly going on is represented by the  3-month moving average of payroll employment which is now 146 thousand but even that average is biased downwards by the September decline.  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 8 thousand in September after rising 19 thousand August.   The trend increase in construction employment appears to be about 15 thousand  per  month.

Manufacturing employment fell 1 thousand in September after having jumped by 41 thousand in August.   Factory employment is now rising and seems to be accelerating.  We think the trend increase is currently about 10 thousand per month.

Mining rose by 2 thousand in September after having climbed by 6 thousand in August .  After a long period of steady declines mining employment is now rising about 5 thousand per month.

Elsewhere, health care climbed by 23 thousand.  Professional and business services continued to trend upward and rose 13 thousand in September while financial activities hiring increased 10 thousand.  On the flip side, leisure and hospitality plunged by 105 thousand in September.  This was obviously the primary source of the overall drop in payroll employment in September.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In September the nonfarm workweek was unchanged to 34.4 hours.  The workweek remains elevated and implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

This increases in  employment and hours worked are reflected in the aggregate hours index which declined 0.1% in September after having risen 0.2% in August.  For the third quarter as a whole the AHI rose a meager 0.6% as the hurricane combo took its toll.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual income tax cuts still seem possible 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 2.0% pace to 2.3% in 2017 and 2.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

October 6 2017

The unemployment rate declined 0.2% in September to 4.2% after having risen by 0.1% in August and having fallen  by 0.1% in July.    In September the labor force climbed by 575 thousand.  Employment surged by an even larger 906 thousand.  As a result, the number of unemployed workers declined by 331 thousand.  Payroll employment, which is measured by a different survey, declined by 33 thousand.  Huh?  That makes no sense.  Why did one series decline and the other surged by 906 thousand?

Payroll employment for September declined 33 thousand after having risen 169 thousand in August as the combo of Hurricanes Harvey and Irma took their toll.  This is the first decline in employment since September 2010.  However, it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  They will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  The household survey, from which the unemployment rate is determined, counts those people as being employed even if they miss work for the entire survey period.  Household employment actually increased 906 thousand in September after a decline of 74 thousand in August.  Over the two months combined the average increase in household employment is 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  It is kind of hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

Labor force growth has picked up slightly from about 0.5% in 2015 to 0.8% as the faster pace of economic activity appears to have enticed some people who had given up looking for a job back into the labor force.

At 4.2% the unemployment rate is below the low end of the 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 declined 0.3% in September to 8.3%. 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 8.6% compares to 4.2% for the official rate.

As the economy continues to expand the pace of hiring will remain steady and  both rates are going to fall.  As firms look a bit harder to find the workers they need they may have to turn to other sectors of the labor market rather than just currently unemployed workers.  They may seek younger workers, but they may have a difficult time because our youth unemployment rate is lower than it was going into the recession.

They may also look at some of their part-time workers who are reliable and have a good work ethic and offer them full-time positions.  Employers may have 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 will, in turn, 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

October 6, 2017

Payroll employment for September declined 33 thousand after having risen 169 thousand in August as the combo of Hurricanes Harvey and Irma took their toll.  This is the first decline in employment since September 2010.  However, it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  They will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  The household survey, from which the unemployment rate is determined, counts those people as being employed even if they miss work for the entire survey period.  Household employment actually increased 906 thousand in September after a decline of 74 thousand in August.  Over the two months combined the average increase in household employment is 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  It is kind of hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In September the nonfarm workweek was unchanged at 34.4 hours which is still relatively long.

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 fell 0.1% in September after having risen 0.2% in August.  For the quarter as a whole it rose a meager 0.6% as the hurricane combo took its toll.

The factory workweek was unchanged in September at 40.7 hours.  As shown below this series has been fluctuating  between 40.6 and 40.8 hours since the middle of last year.  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 has begin a gradual ascent.

Overtime hours were unchanged in September at 3.3 hours.

The economy continues to expand at a respectable pace.  We currently expect GDP to quicken from 2.0% last year to a 2.3% pace in 2017 and 2.8% 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