Sunday, 30 of April of 2017

Economics. Explained.  

Gasoline Prices

April 26, 2017

Gasoline prices at the retail level rose $0.01 in the week ending April 24 to $2.45 per gallon.   In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.20. The Department of Energy expects national gasoline prices to average $2.39 this year — almost exactly where they are currently.

As the price of gasoline declined the economy got a tailwind. However,  oil prices today are 13% higher today than they were a year ago.  Hence, the tailwind effect on the economy has run its course but has not yet turned into a headwind.

Crude oil prices are currently about $50.00 mark.  The Energy Information Agency predicts that crude prices will average $52.24 in 2017.  As crude oil and gas prices have leveled off the underlying inflationary pressures have become more apparent.

The number of oil rigs in service dropped 79% to 404 thousand  after reaching a peak of 1,931 wells in September 2014.  However, the number of rigs in operation has actually rebounded in recent months to 857 thousand.  Thus,  higher crude oil prices are encouraging some drillers to step up slightly the pace of production.

While the number of oil rigs in production has been cut by 79% between late 2015 and the middle of last year, oil production has declined much less than that.  The Department of Energy expects production to average 9.0 million barrels per day in 2017.  We seem to be on track for close to that estimate.

How can the number of rigs go down but production be relatively steady?  Easy.  Technology in the oil sector is increasing rapidly which allows producers to boost production while simultaneously shutting down wells.  For example, output per oil rig has increased by 35% in the past twelve months.  Put another way, a year ago some frackers could not drill profitably unless crude oil prices were about $70 per barrel.  Today that number has declined to about about $44 per barrel.  Six months from now that number will be lower still.

While oil inventories gradually declined for most of 2016 the recent increase in production has caused inventory levels to rebound.  While oil prices might remain firm through midyear, the excessive amount of available crude will ultimately push gas prices lower.

In December OPEC agreed to cut production, but it remains to be seen how meaningful the cut will turn out to be.  In the past, various countries would begin to cheat and the whole thing would unravel.  Furthermore, as oil prices rise U.S. producers will return in droves and prices will once again begin to fall.

Stephen Slifer


Charleston, SC

New Home Sales

April 25, 2017

New home sales rose 5.8% in March to 6212 thousand after having risen 0.3% in February and 6.2% in January.  This is typically an extremely volatile series.  A much better representation of the pace of home sales is the 3-month average which stands at 598 thousand (shown above).   Keep in mind that builders are still having difficulty finding an adequate supply of skilled labor.  If they could find more workers, builders would build and sell more homes.  Also do not forget that new home sales are single family homes and do not include sales of condos.

The supply of available homes for sale rose 4 thousand in March to 268 thousand.  The small increase in inventories combined with the big increase in sales means that there is now a 5.2 month supply of new homes available for sale.  Realtors suggest that a 6.0 months supply is that point at which the demand for and supply of housing is roughly in balance.

The National Association of Realtors series on housing affordability for existing homes peaked at 214 in January 2013.  It has since slipped from that lofty level and now stands at 162.0.   That means that consumers have 60.0% more income than is necessary to purchase a median priced home.  Existing homes remain quite affordable despite a post-election increase in mortgage rates to 4.1% We have made an attempt to estimate affordability if 30-year mortgage rates  climb to 4.4% by the end of this year.  We estimate the affordability index at that time will be about 156 — still very affordable.  The reason affordability has not been hit harder by the increase in mortgage rates is because consumer income continues to climb.

New home prices jumped 7.5% in March to $305,400.   Because this is an inherently volatile series we tend to focus on a 3-month moving average of prices (shown below) which is $305,400.  During the course of this past year prices have risen 3.9%.

Given that the demand for housing far exceeds supply the housing sector will continue to do well in 2017.  Sales will be at a reasonably robust pace, builders will continue to boost production, but prices should rise slowly.  Mortgage rates should end 2017 at 4.4% which is still quite affordable.

Stephen Slifer


Charleston, SC

Consumer Confidence

April 25, 2017

The Conference Board reported that consumer confidence fell 4.6 points in April to 120.3 after having surged upwards by 9.8 points in March and 4.5 points in February.  The March level was a 17-year high (December 2000).

Lynn Franco, Director of Economic Indicators at the Conference Board said  “Despite April’s decline, consumers remain confident that the economy will continue to expand in the months ahead.”

Confidence data reported by the Conference Board are roughly matched by the University of Michigan’s series on consumer sentiment.   As shown in the chart below, trends in the two series are identical but there can be month-to-month deviations.   Any way you slice it, confidence remains at levels not seen in more than a decade.

The consumer should continue to provide support for overall GDP growth in 2017.  The stock market is near a record high level.  Home prices continue to climb.  Consumer net worth is at a record high level and rising.  Jobs are rising by about 170 thousand per month.  The unemployment rate is falling slowly. The consumer has little debt.  Interest rates remain low.  In addition, consumers are likely to get a cut in income tax rates in 2017.  Clearly, the consumer’s optimism is valid..

We anticipate GDP growth of 2.4% in 2017.

Stephen Slifer


Charleston, SC

Case Shiller Index of Home Prices

April 25, 2017

Case Shiller Index of Home Prices rose 0.6% in February after having risen 0.9% in January.   Over the course of the past year home rices have risen 5.1%.  In a world in which income is rising fairly slowly, an increase in home prices of that magnitude seems sustainable.  However, it is worth noting that the pace of home prices may be quickening.  For example, in the past six months they have risen at an 8.4% rate and in the  past three months at a steamy 9.4% pace.  If sustained such price gains would far exceed the likely increase in income and would soon create a problem with affordability.  But the key words are “if sustained”.  This can be a bumpy series, but it clearly bears watching.

There is a shortage of homes available for sale.  The inventory of existing homes is at 3.8 months which is well below the 6.0 month supply that is generally regarded as the point where supply and demand are roughly in balance.  This shortage of homes available for sale portends a trend towards higher prices in the months ahead.

While  builders have stepped up the pace of production there is still a significant shortage of available homes for sale.  While some are still having difficulty finding adequate financing and an adequate supply of skilled labor, as the economy continues to chug along  in 2017 banks should be more willing to extend credit to builders which will help to alleviate the shortage.

At the same time a continuation of job gains will boost income and make homes more affordable which means that moderately rising prices are not going to significantly hamper the housing industry.

Mortgage rates since the election have jumped  to 4.1%.  They should rise only slightly from about 4.1% currently to 4.4% by the end of 2017 if the Fed raises short-term interest rates two more times in 2017 to 1.25%.

Housing today continues to be affordable.  The chart below from the National Association of Realtors indicates that after peaking at 213.6 in January of 2013 the affordability index now stands at 162.0 in January.  That means that consumers still have 60.0% more income than is necessary to buy a median priced home.   To put the current level in context,  just prior to the recession in 2007 consumers had 14% more income than was necessary to purchase a median priced home.   Housing at that time was very expensive.  Housing today remains affordable even though mortgage rates have risen to the 4.1% mark because consumer income is also rising.  However, as described earlier, the pace of home price appreciation now bears watching and could impact affordability in the months ahead.

Stephen Slifer


Charleston, SC

Existing Home Sales

April 21, 2017

Existing home sales jumped 5.7% in March to 5,710 thousand after having declined 3.9% in February.  While these sales bounce around a bit from month to month they clearly continue to trend higher,.  The March sales pace was the fastest since February 2007.

Lawrence Yun, NAR chief economist  says, “The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month.  Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does.”

The months’ supply of unsold homes remained at 3.8 months.  Realtors consider a 6.0 month supply as  being the point at which demand for and supply of homes are roughly in balance.  Thus, housing remains in short supply.  If sales were not being constrained by the limited supply it would almost certainly be at a 6,000 thousand pace.

The National Association of Realtors series on affordability reached a peak of 213.6 in January of 2013.  It now stands at 160.6 in February.  At 160.6 it means that a household earning the median income has 62.0% 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 despite the backup in mortgage rates.  That is because sizable job gains are boosting income almost as fast mortgage rates are rising.

The housing sector will continue to expand in the quarters ahead.   Jobs growth is expected to remain solid which should boost  income.  Builders are trying hard to boost production to increase the supply of available homes which should slow the pace of price appreciation. Finally, mortgage lenders should become slightly less restrictive as the economy remains healthy and default rates decline.

Existing home prices rose 3.6% in March to $236,400. Because this is a relatively volatile series we tend to focus on the 3-month average of prices which now stands at $227,850.  Over the course of the past year existing home prices have risen 6.8% and have generally been bouncing around in a 4.5-8.0% range.

Stephen Slifer


Charleston, SC

Growth Remains Moderate – Weather Distorts Data

April 21, 2017

Early in the year it appeared that the economy was in the process of taking off.  Three months later it has seemingly slowed dramatically.  But monthly data swings are the norm, not the exception.  As we see it, the economy continues to chug along at about a 2.0% pace.  Expectations were too high earlier and they are too low today.  In this case, most of the shifting expectations are attributable to nothing more than the weather which frequently tends to muddy the outlook at this time of the year.  Specifically, the warmer than normal weather early in the year boosted everything from employment, to retail sales, to housing starts, and interest rates.  Once the weather returned to normal suddenly all of those indicators seemed weak.  It is sometimes hard to look past the monthly wiggles and the associated knee-jerk reaction by the markets.  But, more often than not, it is the right thing to do.  Not to worry, growth remains at a steady – if unimpressive – pace for now with somewhat faster growth likely in the quarters ahead.

In December, January, and February virtually every economic indicator seemed strong.  Employment gains surged to about 200 thousand per month.  Housing starts climbed 10% or so from 1,150 thousand from 1,275 thousand.  Retail sales jumped 1.0% in December and an additional 0.5% in January.  The inflation rate climbed by 0.3% in December and another 0.6% in December.  With the economy at full employment the fear was that this additional strength would boost the inflation rate far above the Fed’s 2.0% target and force the Fed to raise short-term interest rates more than three times this year.  Good news.  Bad news.  The economy was doing better, but the Fed might have to raise more quickly than expected to cool things off.

The March data provided an entirely different picture.  Employment slid to just 98 thousand.  Housing starts fell almost 7%.  Retail sales declined 0.2%.  The inflation rate fell 0.3%.  Suddenly expectations shifted.  The economy wasn’t expanding too rapidly after all.  The inflation rate might not surge.  The Fed does not have to panic.  It can afford to maintain its go-slow trajectory for raising interest rates.

While perfectly understandable, it is hard not to get caught up in the enthusiasm (or disappointment) of the moment.  Which is why we always recommended looking at 3-month averages which smooth out some of the monthly distortions.  Longer-term averages, like year-over-year growth — even out the data so much that changes in trend may not be discernible for months.  That is not good either.

In this case, the apparent surge and subsequent slowdown were clearly impacted by deviations from normal winter weather patterns.   In other recent years we have seen surprisingly harsh winter weather conditions depress the early year data.  By spring the weather returned to normal and pent up demand caused sales to surge.  This year was the opposite.    January and February were much warmer than normal in most areas of the country.  Builders were able to dig some holes in the ground and begin construction on a number of new houses and apartments.  Consumers took advantage of the mild weather conditions and went shopping for cars and other goodies.  Perhaps they bought some garden equipment they might ordinarily have bought a couple of months later.   In March when those housing starts and sales would ordinarily have occurred they did not materialize because they had actually taken place a couple of months earlier.

Are those swings in economic activity legitimate?  Yes.  Do they mean much?  No.  At some point the weather will return to normal and, in this case, people should have expected the March data to be as weak as the January and February data were strong.  But markets are markets and they react to each new data point.  But you, dear readers are able (most of the time) to sift through the monthly wiggles and keep your eye on the trend.  As we see it, the housing market is steady and builders will gradually boost the pace of production.  Consumers are continuing to spend at a moderate rate.  Inflation is inching its way higher. And the Fed remains on track for three rate hikes this year which would bring the yearend funds rate to 1.25%.

The economy may deviate from our expectation as the year progresses but, for now at least, the moderate growth scenario remains intact.

Stephen Slifer


Charleston, S.C.

Housing Starts

April 18, 2017

Housing starts declined 6.8% in March to 1,215 thousand after having risen 5.0% in February. Because these data are particularly volatile on a month-to-month basis, it is best to look at a 3-month moving average of starts (which is the series shown in blue above).   That 3-month average now stands at 1,253 thousand which is close to the fastest pace of construction thus far in the cycle.  It should continue to climb slowly.

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

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

Mortgage rates have risen 0.6% since the election in early November but at 4.1% they are still quite low by any historical standard.

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

As a result housing remains affordable for the median-price home buyer.  Mortgage rates may have risen, but income has been rising at almost as quickly, hence affordability has not dropped much.  At 161 the index indicates that a median-income buyer has 61% more income than is necessary to purchase a median-priced house.

The problem in housing is not a lack of demand.  Rather it is a constraint on the production side.  Builders have had difficulty finding an adequate supply of skilled labor although construction industry jobs have picked up in recent months.

As one might expect there is a tight correlation between home builder confidence and the starts data which probably makes a great deal of sense.   Judging by the homebuilder confidence data we should expect starts to eventually climb to 1.5 million or so from about 1.3 million currently.  However,  as noted above, many home builders  report an inability to get the skilled workers they require.   Overcoming the labor shortage on a long-term basis will be challenging.  Employment in the construction industry will continue to climb, but slowly, which will limit the speed with which starts rise in the months ahead.

The other thing worth noting is that about 1.3 million new households are being formed every year.  Those families all need a place to live, either a single-family home or an apartment.  Thus, we need to see housing starts rise by 1.3 million just to keep pace with growth in households.  However, the fact that housing starts were substantially below the growth in households for so long, there is pent-up demand.  We expect starts to reach 1.4 million by the end of 2017 and 1.5 million in 2018.

Building permits rose 3.6% in March to 1,260 thousand after having declined 6.0% in February.  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 1,256 thousand which continues to point towards slow but steady improvement in housing.   The reason people look at permits is because a builder must first attain a permit before beginning construction.  Thus, it is a leading indicator of what is likely to happen to starts several months down the road.  If permits are currently at 1,256 thousand, housing starts will gradually approach the 1.4 million mark.

Stephen Slifer

Charleston, SC

Homebuilder Confidence

April 17, 2017

Homebuilder confidence dipped 3 points in April to 68 after surging upwards by 6.0 points in March to 71 (which was a 12-year high level).   Clearly, builders believe that housing market will perform well in 2017.

Robert Dietz, Chief Economist for the home builders association said, “The fact that the HMI measure of current sales conditions has been over 70 for five consecutive months shows that there is continued demand for new construction,.  However, builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices.”

Traffic through the model homes edged lower by 1 point in April to 52 after having jumped 8 points in March to 54 (once again the highest reading thus far in the business cycle).

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

Stephen Slifer


Charleston, SC

Fulfilling Expectations

April 14, 2017

There can be little doubt that expectations about President Trump’s proposed policy changes are influencing individual and business attitudes.  It is evident in the stock market which remains close to a record high level.  It can be seen in measures of consumer confidence and indicators of business confidence.  But are rising expectations based solely on hoped for policy changes?  We do not think so.  Our sense is that the economy will experience slightly faster GDP growth this year even if none of President Trump’s policy changes are enacted.  Our hope is that many of his policy changes will be adopted (to some degree) which will further stimulate near-term GDP growth and, simultaneously, boost the economy’s long-run potential growth rate from 1.8% today to 2.8% by the end of the decade.

Rising investor expectations can be seen in the stock market which is within 2.0% of its record high level.

Consumer confidence measures are at their highest levels thus far in the business cycle.

With respect to rising consumer confidence, the University of Michigan’s Chief Economist, Richard Curtin, had an interesting observation.   The University of Michigan apparently tracks its survey responses by political affiliation so they can compare the attitudes of Republicans versus Democrats.

There was no discernable different between the two groups with respect to current conditions.  Indeed, the current conditions component at 115.2 is at its highest level since 2000 and partisanship had no particular impact with little difference between Republicans and Democrats.

That was not the case with the expectations component.  Expectations amongst Democrats were 64 in April which is consistent with a deep recession.  Expectations amongst Republicans were at 115 which is generally associated with robust economic activity.  That is an astonishing difference of more than 50 points.

As evidenced by the rise in the overall expectations index, the majority of consumers have a sense that President Trump will produce meaningful cuts in individual and corporate income tax rates, regulatory relief for businesses, and some repatriation of corporate earnings.  That will, presumably, boost GDP growth for both 2017 and the years beyond.  But because a significant number of consumers do not share that enthusiasm, it will be difficult to envision a significant upswing in consumer spending and GDP growth until these divergent views converge.  Given the apparent lack of progress on policy issues in Washington It seems likely that this gap will remain wide for months to come.

Businesses in America are equally upbeat.  For example, the Institute for Supply Management’s report on business conditions indicates that corporate sentiment amongst manufacturing firms has climbed to its highest level in two years and is within a couple of points of being the highest level in a decade.  Sentiment amongst non-manufacturing firms has climbed appreciably.  Small business confidence has already surged to its highest level since 2004.

One might be tempted to dismiss the stock market gains since the election and these big increases in consumer and business confidence as merely indicators of hoped for policy changes and if President Trump cannot pass legislation to implement them the economy will weaken noticeably.

But be careful.

Firms are seeing significant increases in their order books.  Orders do not rise solely based on expectations.

These firms indicate they are boosting employment to presumably help them increase production to satisfy the demand associated with the additional orders.  Employment does not rise based solely on expectations.

Furthermore, since the election numerous companies have announced an intent to boost hiring in the U.S., shift overseas production back to the United States, and/or boost investment.  The list is long and includes such firms as Amazon, Walmart, General Motors, Ford, Hyundai, Sprint, Pizza Hut, Bayer, and even the Chinese retail giant Alibaba.  While the exact magnitude and timing of the additional hiring and investment remains uncertain, the reality is that something fundamental has changed since the election which will boost GDP growth completely apart from a mere hope that Trump’s policy changes will bring about change.

Meanwhile, prices are on the rise.  In late 2014 and 2015 falling prices, particularly in the oil sector, led to a sharp contraction in both current spending and investment in that sector.  But oil prices have rebounded.  Drillers are re-opening previously shuttered oil rigs.  The drag on GDP growth from the oil sector has ended and it is now providing a moderate amount of stimulus for the economy.

GDP growth in 2016 was 2.0%.  Even without policy changes from President Trump and Congress, we would expect GDP growth for 2017 to edge upwards to 2.2% given the factors cited above.  If some of the hoped for policy changes can be enacted (even a watered down version), GDP growth this year should accelerate further to 2.4%.  But the most significant impact will probably be on GDP growth in the years ahead.

Trump’s policy changes will significantly stimulate investment spending which will, in turn, boost productivity growth which has slipped in recent years to about 0%.  Because productivity growth is one of the determinants of the economy’s “potential” growth rate, faster growth in productivity should boost our economic speed limit from 1.8% or so today to 2.8% by the end of the decade.

The bottom line is that the economy is gathering some momentum with or without help from President Trump.

Stephen Slifer


Charleston, S.C.

Retail Sales

April 14, 2017

Retail sales fell 0.2% in February after having declined 3% in February and risen  0.5% in January.   During the course of the past year sales have risen 5.1%.

Sometimes sales can be distorted by changes in autos which tend to be quite volatile.  In this particular instance unit auto sales as well as the car sales component of retail sales have fallen in each of the first three months of the year.

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 fell 1.0% in March which appears to largely reflect an increase in gasoline prices and not any particular change in the volume of gasoline sales.

Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories.  Such sales rosee 0.1% in both February and March after having climbed 1.0% in January.   In the last year retail sales excluding cars and gasoline have risen 4.1%.  No evidence of a slowdown in this series.

While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments (like Macy’s, Sears, K-Mart, and Limited) the reality is that they need to develop a better business model.  The action these days is in non-store sales which have been growing rapidly. Consumers like the ease of purchasing items on line.  While sales at traditional brick and mortar general merchandise sales have risen a meager 0.5% in the past year, on-line sales have risen a steamy 12.3%.  As a result, their share of total sales has been rising steadily and now stands at 88.6% of all general merchandise sales.  That percentage has risen 10.0% (from 79%) at this time last year.

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









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

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

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

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

Thus, in our view, the first quarter weakness is sales is not a harbinger of a consistently slower pace of spending in the months ahead.  We continue to expect GDP growth to quicken to 2.4% in 2017 and 2.7% next year.



Stephen Slifer


Charleston, SC