Tuesday, 16 of July of 2019

Economics. Explained.  

Payroll Employment

July 5, 2019

Payroll employment for June rose 224 thousand after having climbed a modest 72 thousand in May.   A better reading of what is truly going on is typically represented by the  3-month moving average of private employment which is now 171 thousand.  To us, the pace of hiring has slowed from 215 thousand per month last year, to about 160 in the first  half of this year.  Thus, we are  now seeing employment gains of 160 thousand.  That is exactly what one would expect if the economy is truly at full employment.  There are simply not enough adequately trained workers available to hire.  Labor force growth rose 100 thousand in the past year.  With employment gains continuing to exceed growth in the labor force, the unemployment rate should continue to decline slowly.

Amongst the various employment categories construction employment rose 21 thousand in June after having risen 5 thousand in May.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment climbed by 17 thousand in June after having risen 3 thousand in May .    Factory employment is now rising by about 15 thousand per month.  It is struggling as the recently imposed tariffs take a toll on growth in the goods sector.

Elsewhere, health care  climbed by 35 thousand.  Professional and business services increased 51 thousand in June.   Transportation and warehousing employment rose 24 thousand.  Employment in leisure and hospitality establishments climbed 8 thousand.  Financial services gained 2 thousand workers.  Retail jobs declined 6 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek was unchanged in both May and June at 34.4 hours.  It has been bouncing around between 34.4 and 34.5 hours for the past year.  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 0.2% in June.  This index climbed by 1.8% in the first quarter and now 0.6% in the second quarter, which when combined with a 0.9% projected increase in productivity would produce our projected 1.5% GDP growth rate in that quarter (which follows 3.1% GDP growth in the first quarter).

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.   The stock market had a tough couple of months late last year but has completely recovered and stands at a record  high level.    Consumer confidence fell in the fourth quarter but it, too, has recovered and now stands at a 15-year high.

The sectors of the economy that remains under pressure are the various production industries.  That is climbing but very slowly.  As noted earlier, factory employment is barely increasing.  Construction employment has been rising slowly but steadily.  Mining employment has been rising by about 5 thousand per month.  The service sector, however, is booming.

Looking ahead, steady consumer spending and continued rapid growth rate in investment should cause  GDP to grow 2.6% this year.

Stephen Slifer

NumberNomics


Unemployment Rate

July 5, 2019

The unemployment rate rose 0.1% in June to 3.7% (3.67% to be precise) after having been unchanged in May.   At 3.7% the unemployment remains close to its lowest level since December 1969  — almost 50 years ago.  The labor force rose 335 thousand in June.  The economy created jobs for 247 thousand of them.  As a result, the number of unemployed workers rose 87 thousand in June.  Thus, the unemployment rate edged upwards to 3.7%.  While employment used in calculating the unemployment rate rose 247 thousand, payroll employment increased by 224 thousand.  How can this be?  First, the two are figures are derived from separate data streams.  The payroll number is calculated from employment numbers reported by a large number of employers across all industries.  Employment for the unemployment rate calculation is derived from knocking on doors and asking people if they have a job.  It is known as the  household survey.  One conceptual difference is that the household survey includes people who are self-employed which would not be captured in the establishment survey. It could be that self-employed workers rose somewhat in June.  The other reality is that there is just statistical noise between the two surveys.  The trend rate of growth is similar, but with wide variation from month to month — the household survey being the more volatile of the two.

Labor force growth in the past year is now 0.5% which is identical to growth in the population which was also 0.5%.  Thus, the labor force participation rate was unchanged during that period of time.  It is now 62.9%.  A year ago it was 62.9%.  In 2018 the labor force rose 1.6% in 2018 versus 0.6% in 2017.  It would appear that the relatively rapid pace of GDP growth last year attracted some previously unemployed workers into the labor force, but in the first half of 2019 that process has largely come to a halt.

At 3.7% the unemployment rate is far below the 4.2% level that the Fed considers to be full employment.  However,  the official rate can be 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 is essentially  where it was going into the recession.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate rose 0.1% in June to 7.2%.  At 7.2% it is lower than where it was going into the recession.  It is hard to argue that there is slack remaining in the labor market.  The broad rate rose 0.1% in June to 7.2% which compares to 3.7% 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 the lowest it has been in more than 48 years.

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.  But the number of part time workers who say they want full time employment is roughly in line with where it was going into the recession.

In short, both rates should continue to fall slowly 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.  Thus far the 1.5% increase in wages is being completely offset by a 2.4% increase in productivity such that “unit labor costs” (or labor costs adjusted for the increase in productivity) have declined 0.9% in the past year.  Thus, the seemingly tight labor market is not generating any upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Workweek

July 5, 2019

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  Payroll employment for June rose 224 thousand after having climbed by 72 thousand in May.  These numbers tend to bounce around on a month-to-month basis, especially at this time of the year, as the seasonal workers are hired and then let go.  The 3-month average increase in employment of 171 thousand is probably more representative of the average growth rate for jobs.  That is slower than the 200+ thousand workers hired monthly last year.  But that is also what one would expect when the economy is at full employment.   Qualified workers become very difficult to find.

The nonfarm workweek was unchanged in both May and June at 34.4 hours.  This series has been bouncing around between 34.4 and 34.5 hours for the past year.  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 0.2% in June.  This index rose 1.8% in the first quarter and has now climbed 0.6% in the second quarter which, when combined with a projected 0.9% increase in productivity, should produce a GDP growth rate of 1.5% in the second quarter after having risen 3.1% in the first quarter.  That means that the economy grew at roughly a 2.3% pace in the first half of the year.

The factory workweek rose 0.1 hour in June to 40.7 hours after having been unchanged in May.  This series is a bit lower than it has been, but it remains at a relatively elevated level and will lead to additional factory hiring in the months ahead.  With individual and corporate tax cuts continuing to impact growth this year and U.S. firms able to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector should continue to climb at a moderate pace this year, but the recently imposed tariffs are taking a toll on growth in this sector.

Overtime hours were unchanged in June  at 3.4 hours.  Like the factory workweek this series, too, is relatively long but has slowed somewhat.  The manufacturing sector is still expanding, but at a slower pace than last year because of the impact from tariffs.

The economy continues to expand at a respectable pace.  We currently expect GDP to increase 2.6% this year after having risen 3.0% in 2018 given the continuing impact of 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 continuing rapid growth in investment, but losing momentum in the manufacturing sector.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

July 5, 2018

Average  hourly earnings rose 0.2%in June to $27.90 after having risen 0.3% in May.  Hourly earnings are gradually accelerating.  During the past year hourly earnings have risen 3.1%.  This almost matches the fastest 12-month increase in a decade and it 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 3.7% pace.  This series has been growing somewhat more quickly than the official hourly earnings data for some time and, therefore, seems more consistent with the apparent tightness in the labor market.

In addition to their hourly wages workers can also work longer hours and/or overtime.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings rose 0.2% in June to $959.76 after  having climbed 0.3% in May.  Average weekly earnings have risen 2.8% during the course of the past year.  Wages  appear to be rising at a moderate pace consistent with a sustained 2.5% pace of consumer spending.

The potential impact on inflation from the tight labor market is best demonstrated by looking at unit labor costs which are labor costs adjusted for the changes in productivity.  In the past year these unit labor costs have fallen 0.9% with a 1.5% increase in compensation more than offset by a 2.4% increase in productivity.  Keep in mind that the Fed has a 2.0% inflation target.  If labor costs adjusted for productivity — which account for about two-thirds of a firms overall costs —  are declining, the tight labor market is clearly not putting upward pressure on the inflation rate and, perhaps, could be pushing it lower.  All of the increase in wages is being offset by an increase in productivity.

Stephen Slifer

NumberNomics

Charleston, SC

 

 


Average Duration of Unemployment

July 5, 2019

The average duration of unemployment fell 1.9 weeks in June to 22.2 after having risen 1.2 weeks in May.  This series bounces around from month to month, but it does seem to have flattened out in the past couple of months.  The January level of 20.5 was the shortest average length of time workers remain unemployed since February 2009.

While the unemployment rate has fallen by 6.3% 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 1.41 million workers have been jobless for 27 weeks or longer, and that represents 23.7% of all unemployed workers.

The average duration of unemployment should 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


Trade Deficit

July 5, 2019

The trade deficit for April widened by $4.3 billion in May to $55.5 billion after having narrowed by $0.7 billion April.  The $887 million trade deficit in goods for 2018 was a record high level.

If we ultimately get renewed deals with Canada, Mexico, the E.U., the U.K., and China (perhaps among others),  those agreements will call for those countries to open their markets, reduce tariffs, and import more goods from the U.S.   Thus, the trade gap may well shrink over time as exports climb.  But we are not there yet.

We certainly support the notion of free trade.  Through trade American consumers have access to a much wider variety of goods and services at lower prices than they would otherwise.  But there are a couple of important points.  First, free traders (like us) assume that there is also fair trade.  That is the rub.  The Chinese in particular, and others, do not play by the same rules as everybody else.  Second, the yawning trade gap perhaps indicates that current trade agreements like NAFTA, as well trade agreements with Europe and Japan, were not well negotiated and allowed other countries to take advantage of the U.S.    One can make a case that the U.S. has been subsiding growth in other countries at its own expense for years.  Trump has decided that is true and has chosen to impose across-the-board tariffs.

Personally, we think the focus on the magnitude of the trade deficit is misplaced.  A $900 billion trade gap simply means that we bought more from foreigners than they bought from us.  As a result, foreigners accumulated $900 billion of dollars that will be re-invested in the U.S.   Those people might establishes businesses here in the U.S., hire American workers, or invest in our stock and bond markets.  It is not the magnitude of the trade deficit that bothers us.  But, as shown below one-half of that trade gap is with one country — China.  We do not have yawning trade gaps with Canada, Mexico, Europe, Japan, or OPEC.  If Trump is truly concerned about the magnitude of the trade deficit, he should have targeted those countries where it was the largest, namely China.  But he didn’t.  He chose to impose tariffs across the board which impacted our neighbors, friends and allies alike.  Not surprisingly, the imposition of U.S. tariffs generated retaliation by many other countries and it appeared that a trade war was underway.

But as the trade war got started investors around the globe tried to figure out which countries might fare best in a trade war.  Answer:  U.S.  Why?  Because trade is only 10% of the U.S. economy.  It is about 50% of everybody else’s economy.    Everybody loses in a trade war, but the U.S. may lose far less than others.

As other countries began to believe that the U.S. could withstand a trade war better than anybody else,  foreign investors flooded into the U.S. stock and bond markets.  The dollar soared.  That money would be used to create new businesses in the U.S., hire more American workers, and boost our stock market.  Elsewhere, the opposite was occurring.  Currencies were weakening, stock markets were falling, growth was slowing.  The U.S. was winning, the rest of the world was losing.  The question quickly became, how long could these countries withstand the pain?  The answer is apparently, not long.  A new agreement has already been reached with Mexico and Canada.  We are negotiating with Europe.  A deal with China may not be far off.   The pressure is clearly on both China and the U.S. to find a solution to their trade difficulties.  Growth is being hit in both countries by the standoff, but particularly so in the case of China.

This has been a painful and perhaps scary process to see in action but, in the end, we may end up with both freer and fairer trade than we had initially.

Frequently exports and imports can be shifted around by price changes rather than the volume of exports and imports.  Thus, what is really important is the trade deficit in real terms because that is what goes into the GDP data.  The “real” trade deficit widened by $4.8 billion in May to $87.0 billion after  having narrowed by $0.6 billion in April.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have quintupled from $4.0 billion to $21.0 billion, while real oil imports have fallen from $42.0 billion to $29.0 billion. As a result, the real trade deficit in oil has been cut by about $30.0 billion or 75% in the past several years and is the smallest since the early 1990’s.

In March of last year the U.S. surpassed Saudi Arabia and Russia  and become the world’s biggest producer of oil.  By the end of the decade it should also become a net exporter of oil.  Very impressive!

The non-oil trade gap has widened by about $6.0 billion  in the past year to about $69.0 billion as non-oil exports fell 2.1% while non-oil imports rose by 4.0%.

Stephen Slifer

NumberNomics

Charleston, SC


Car and Truck Sales

July 3, 2019

Unit car and truck sales edged lower by 0.6% in June to a 17.3 million pace after having jumped 6.3% in May.  Sales have been volatile in recent months but during the last year car sales have rise 0.4%.  But the softness in car sales is not the result of an inability of consumers to afford cars.

Consumer confidence got hit late last year but it has recovered all of what it lost and stands at a lofty level which is consistent with consumer spending at about a 2.5% pace this year.

Confidence will remain solid simply because the economy continues to crank out 180 thousand jobs per month.  Steady growth in jobs means continuing growth in income.  At 3.6% the unemployment rate is at a 50-year low so almost everyone who wants a job has one.

Driven by the steady jobs gains, real disposable consumer income (what is left after taxes and inflation) is rising at a solid 2.3% pace.

Meanwhile, consumers have paid down tons of debt and are now in a position to spend.  At the same time, mortgage rates have fallen  1.1% to 3.8% in the past couple of months.  For all of these reasons we look for  2.6% GDP growth in 2019 after a 3.0% increase in 2018.  Thus, the consumer is in good shape to continue to spend at a brisk pace in 2019.

However, the reality is that many Americans, particularly younger Americans, are less enamored with owning a car than their parents.  Ones who live in larger cities have chosen not to own a car but to use ride-sharing services like Uber or Lyft.  At the same time Americans preferences have shifted away from sedans to SUV’s of varying sizes.  The car manufacturers are only now beginning to adjust production towards the different mix of cars being sold.  Thus, we expect car sales to remain fairly steady at roughly their current pace in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Managers Index — Nonmanufacturing

July 3, 2019

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index fell 3.0 points in June to 58.2 after having risen 1.7 points in May.  The February level of 64.7 was the highest level for this index since January 2004.      In June 16 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth.  At its June level the non-manufacturing index equates to GDP growth of 2.3%.

Typically, large changes in the overall index are led by orders which, in this case, fell 2.8 points to 55.8 after having risen 0.5 point to 58.6 after having declined 0.9 point in April.   At 55.8 this series solid growth in services in the months ahead.

 

The ISM non-manufacturing index for employment declined 3.1 points in June to 55.0 after having jumped 4.4 points in May.  Comments from respondents include: “Filling open positions” and “We added a few more employees to fill outstanding needs, as well as “Downsizing due to closing brick-and-mortar stores.”   Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 170 thousand per month.

Finally,  the price component jumped 3.5 points in June to 58.9 after having declined 0.3 points in May.   Fourteen non-manufacturing industries reported an increase in prices paid during the month.  At its current level of 55.4, prices are rising at a moderate pace.

Stephen Slifer

NumberNomics

Charleston, SC


ADP Employment

July 3, 2019

As shown above the ADP survey shows an impressive correlation with the private sector portion of the payroll employment data to be released a couple of days later.  And well it should.  ADP, or Automatic Data Processing, Inc. is a provider of payroll-related services. Currently, ADP processes over 500,000 payrolls, for approximately 430,000 separate business entities, covering over 23 million employees.  The survey has been in existence since January 2001, and its average error has been 65 thousand.  So while it is not perfect, it does have a respectable track record.

The ADP survey said that employment rose 102 thousand in June after having risen 41 thousand in May and 255  thousand in April  In the most recent 3-month period employment has risen 152 thousand.   On Friday we expect the BLS to report that private sector employment rose  about 150 thousand in May.  Clearly, the May increase in ADP employment was the smallest gain since the expansion began.  But just keep in mind that it followed a much-larger-than-expected increase for April of 271 thousand.  The 3-month moving average of ADP employment stands at 133 thousand so the employment gains could be slowing somewhat, but it is largely because workers are so hard to find — not because the economy is weakening.

Jobs in goods-producing industries  fell 15 thousand in June after declined 24 thousand in May   —  construction employment fell 18 thousand, mining fell by 4 thousand,  and manufacturing rose 7 thousand.   Service providers boosted payrolls by 117 thousand in June after rising 65 thousand in May.  The June increase was led by an increase of 16 thousand in professional services,  39 thousand in health care,  12 thousand in administration and support, an increase of 16 in education, an increase of 3 thousand jobs in leisure and hospitality, an increase of 23 thousand in trade, transportation, and utility workers, and a 7 thousand increase in financial services.

With the labor force rising very slowly, employment gains of 180 thousand or so will continue to slowly push the unemployment rate lower.  The unemployment rate currently is 3.6% at a 50-year low and well below the full employment threshold.  As a result we are beginning to see more and more shortages of available workers.  However, at this point most of the upward pressure on wages is being countered by a corresponding increase in productivity.   Over the past year unit labor costs, or labor costs adjusted for the increase in productivity fell 0.8%.  Despite the seemingly tight labor market there is no upward pressure on the inflation rate.

The stock market has rebounded, set a new record high level.   Interest rates will remain steady of even decline through the end of the year.  Consumers remain confident.  Corporate earnings are solid.  The economy is still receiving some stimulus in the form of both individual and corporate income taxes.  Thus, our conclusion is that the economy will expand by  2.6% in 2019 after having risen 3.0% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Construction Spending

July 1, 2019

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Construction spending (the green bars above) declined 0.8% in May after having risen 0.4% in April .  Over the past year it has fallen 2.3%.  Not only is this a very volatile series with large swings from month to month, even the previously released data can revise substantially.  Furthermore, the series can be distorted by big swings in public construction spending.  Construction spending came to a halt last year driven largely by a drop in residential construction, single-family homes in particular.  However, with lower mortgage rates our expectation is that construction spending in general, the residential spending category in particularly, will begin to climb again in the second half of this year.

Private construction fell 0.7% in May after having declined 1.0% in April.  Over the past year private construction spending has fallen 6.3% which reflects a 0.1% decline in private non-residential construction and an 11.2% decline in the private residential category.

Within the private construction spending category, residential spending fell 0.6% in both April and May.   Over the course of the past year private residential construction has fallen 11.2%.  However, home sales have rebounded sharply in the past couple of months which should lead to a pickup in this category in the months ahead.  Furthermore, shortages of both single family homes available for sale and apartments will push this series higher in the months ahead.  The problem is that the scarce availability of labor will limit its rise.  Construction of private single family homes has declined 7.6% in the past year, multifamily construction has risen 9.3%.

The Census Bureau tells us that on average 2.2 million new households are now being formed every year.  Those families need a place to live.  It could be a home.  It could be an apartment.  Replacement demand should add about 0.5 million unit to that for a total demand of 2.7 million or so units per year.  Currently, builders are starting about 1.2 million units per year.  But keep in mind that housing starts have fallen way short of demand for the past nine years. Thus, the demand for housing will remain strong for the foreseeable future which will keep construction workers fully employed for some time to come.

Private nonresidential construction fell 0.9% in May after having fallen 1.4% in April.   During the past 12 months nonresidential construction has declined 0.1%.  To get sustained growth in the investment spending component of GDP  this component needs to turn more sharply upwards.

Public sector construction declined 0.9% in May after having jumped 4.5% in April after having risen 0.6% in March, 3.9% in February and 5.8% in January.  While this category can be quite volatile on a month-to-month basis it has been flying since the beginning of the year.  Over the past year such spending has risen 10.8%.   We expect it to rise about 7.0% this year — and it still may — but given its behavior in the first four  months of the year it may well turn out to be considerably stronger than anticipated.

Stephen Slifer

NumberNomics

Charleston, SC