Tuesday, 22 of January of 2019

Economics. Explained.  

Small Business Optimism

January 8, 2019

Small business optimism fell 0.4 point in December to 104.4 after having declined 2.6 points in November.  The August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.

NFIB President Juanita Duggan said,  “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects.  Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.”

NFIB Chief Economist added that, “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates.  However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

In our opinion the economy is expected to expand at a reasonably robust pace this year.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

The stock market has retreated from its recent record high level.   However, jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  Mortgage rates have fallen in the past couple of months from 4.9% to 4.5%.  And investment spending remains solid.  We expect GDP growth to be 2.8% this year after having risen 3.1% in 2018.  The core inflation should be relatively stable at 2.3% in 2019 after rising 2.2% in 2018.  The Fed will continue to raise short-term interest twice this year but the hikes will not occur until after midyear.  Accelerating GDP growth, low inflation, and low interest rates should re-invigorate the stock market in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Managers Index — Nonmanufacturing

January 7, 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 5.3 points in December to 59.9 after having risen 2.7 points in November as stock market volatility, tariffs, and weakness overseas (most notably in China) appear to have taken a toll.   However the decline is from the November level of 65.2 which was was the highest level for this index since January 2004.  In December, 16 of 18 service-sector  industries  reported expansion.  Still good, solid, broad-based growth continues at a relatively high level.  At its December level the non-manufacturing index equates to GDP growth of 3.2%.

Typically, large changes in the overall index are led by orders but, in this case, the orders component for December rose 0.2 point to 62.7 after having climbed 1.0 point in November.  Orders continued to flow in at a solid pace in December.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment fell 2.1 points in December to 56.3 after having declined 1.3 points in November.   The September level of 62.4 was the highest level thus far in the business cycle.  Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 190 thousand per month.

Finally,  the price component declined 6.7 points in December to 57.6 after having risen 2.6 points in November.   Prices continued to climb in December, but at a slower pace than in other recent  months.

Stephen Slifer

NumberNomics

Charleston, SC


Recession Fears Unwarranted – Stay the Course

January 4, 2019

Stock market volatility is continuing in the early part of this year. Depending upon exactly when you look, you might conclude that a recession is in the cards by the end of this year or be reassured that the economic activity is on a relatively steady track. We remain in the latter camp. Having said that, consumer confidence edged lower in December while the manufacturing sector weakened notably. It could be that the combination of slower growth in China, the impact from tariffs on the economy, the continuing government shutdown, and gridlock in Washington will dent first quarter growth. But the government shutdown will soon end. Furthermore, pressure is on both the U.S. and China to strike a deal. As those events unfold in the months ahead consumers, businesses, and investors should conclude that there is no chance of a recession by yearend.

Consumer confidence fell eight points in December. That is the first drop since the stock market began its gyrations back in October. However, it fell from an 18-year high. The decline most likely does not mean much – but it was at least a noticeable drop.

Slightly more problematic is the decline in the purchasing managers index for December. It fell five points in that month to 54.1. The falloff was led by an 11-point drop in orders and a 6-point drop in production. These two categories tend to be more forward-looking and suggest that first quarter GDP growth could be weaker than the 2.7% pace we are projecting. Our sense is that an end to the government shutdown, reassuring economic data in the months ahead and, perhaps, some sort of a deal with China will allow this index to rebound.

When the stock market experiences a down day, the market concludes that the economy could enter a recession by the end of this year and that the Fed will lower rates by yearend. Forget it. Neither of those things are going to happen.

In mid-December the Fed suggested that the it would boost funds rate twice in 2019 from its current 2.25-2.5% target range to 2.9% by yearend. We still expect that to happen. However, in the near-term more and more Fed officials will advocate no additional rate hikes until some of the current uncertainty comes to an end. If that happens, which is what we expect, the Fed may well implement two additional rate hikes later this year.

The Fed continues to believe that potential GDP growth is 1.9%. GDP growth last year was 3.1% and it expects 2.3% growth in 2019. Both growth rates exceed potential. Because the economy is at full employment the Fed worries that inflation could begin to climb. Potential growth measures how quickly the economy can grow over the longer-term when it is at full employment. It is interested in, say, a 3-year growth rate for the labor force and productivity. We take comfort from the fact that growth for both measures has accelerated in the past year and, most likely, potential GDP growth is on the rise.

Growth in the labor force has picked up considerably. At the end of 2017 the 3-year growth rate for the labor force was 0.9%. But the labor force increased 1.6% this year as rapid GDP growth lured some previously unemployed workers back into the labor force. The 3-year growth rate in the labor force has climbed to 1.1%, and if it climbs as rapidly this year as in 2018 the 3-year growth rate will continue to climb.

Productivity growth has quickened. The 3-year growth rate remains sluggish at 0.9% because of slow growth in earlier years. But growth this past year picked up to 1.5% and surpassed the 2.0% mark in the two most recent quarters. Like growth in the labor force, productivity seems to be gathering momentum.


This suggests that potential GDP growth is on the rise. The Fed’s 1.9% estimate probably consists of 0.9% growth in the labor force and 1.0% growth in productivity. But, as described above, growth in the labor force has picked up to at least 1.1%. Productivity growth has climbed to 1.5%. Thus, potential growth is no longer 1.9%. It is probably close to the 2.5% mark. If that is accurate, the economy can grow at a sustained 2.5% pace without generating inflation. If our forecast of GDP growth for 2018 of 2.8% is accurate the Fed has little reason to further raise rates.
That is particularly true if inflation expectations remain in check. In the past couple of months inflation expectations have slipped from 2.1% to 1.8%.

Also, keep in mind that the yield curve has flattened considerably in the recent months. With the yield on the 10-year note currently at 2.6% and the funds rate at 2.4%, the yield curve is positive by just 0.2%. The Fed does not want the yield curve to invert. It knows that an inverted curve is a warning sign that a recession is likely within the next year.

If potential growth is picking up to a pace roughly in line with projected GDP growth, inflation expectations are declining, and the yield curve is extremely flat, the Fed is not going to raise the funds rate any time soon.

While recession chatter has become more widespread in the past month or two there is no recession on the horizon for the foreseeable future.

Stephen Slifer
NumberNomics
Charleston, S.C.


Private Employment

January 4, 2019

Private sector employment for December jumped 301 thousand in December after having risen a disappointing 174 thousand in November. One month was smaller than anticipated.  The next month produced an outsized gain.  The outlook for employment has not changed much in the wake of this report.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 252 thousand.  That compares to an average increase of 175 thousand in 2017.  Thus, employment continues to chug along.  Labor force growth has picked up an average monthly increase of 83 thousand in 2017 to 217 thousand in 2018.  Thus, it appears that the relatively rapid GDP growth in 2018 has lured some workers back into the labor force.  That makes it easier for employers to sustain monthly increases in employment of about 200 thousand.

Amongst the various employment categories construction employment rose 38 thousand in December after having been unchanged in November.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment climbed by 32 thousand in December following an increase of 27 thousand in November.    Factory employment is now rising by about 25 thousand per month.

Mining rose 4 thousand in December after having been unchanged in November.  After a long period of steady declines mining employment is now rising about 5 thousand per month as rising oil prices are boosting hiring in that  sector.

Elsewhere, health care  climbed by 50 thousand.  Professional and business services increased 43 thousand in December.  Employment in leisure and hospitality establishments rose 41 thousand in December.  Retail jobs rose 24 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 rose 0.1 hour to 34.5 hours in December after a similar-sized decline in November.  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 0.4% in December after having fallen 0.2% in November.  This index rose 2.1% in the fourth quarter.  Assuming a small increase in productivity we continue to anticipate a 2.6% GDP growth rate in the fourth quarter.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual  income tax cuts should slightly boost spending in 2019.  The stock market has had a tough couple of months but the economic fundamentals continue to look solid so we expect it to resume its rise in the months ahead.  Consumer confidence is holding up well and has largely shrugged off the recent declines in the stock market.  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 has now turned upwards.  As noted earlier, factory employment is climbing at a moderate pace.  Construction employment has been rising steadily.  And even mining has been rising slowly.

Looking ahead the prospect of both individual and corporate income cuts and the repatriation of some overseas earnings currently locked overseas GDP growth should rise 2.8% this year versus 3.1% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

January 4, 2019

Payroll employment for December jumped 312 thousand in December after having risen a disappointing 176 thousand in November. One month was smaller than anticipated.  The next month produced an outsized gain.  The outlook for employment has not changed much in the wake of this report.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 254 thousand.  That compares to an average increase of 175 thousand in 2017.  Thus, employment continues to chug along.  Labor force growth has picked up an average monthly increase of 83 thousand in 2017 to 217 thousand in 2018.  Thus, it appears that the relatively rapid GDP growth in 2018 has lured some workers back into the labor force.  That makes it easier for employers to sustain monthly increases in employment of about 200 thousand.

Amongst the various employment categories construction employment rose 38 thousand in December after having been unchanged in November.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment climbed by 32 thousand in December following an increase of 27 thousand in November.    Factory employment is now rising by about 25 thousand per month.

Mining rose 4 thousand in December after having been unchanged in November.  After a long period of steady declines mining employment is now rising about 5 thousand per month as rising oil prices are boosting hiring in that  sector.

Elsewhere, health care  climbed by 50 thousand.  Professional and business services increased 43 thousand in December.  Employment in leisure and hospitality establishments rose 41 thousand in December.  Retail jobs rose 24 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 rose 0.1 hour to 34.5 hours in December after a similar-sized decline in November.  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 0.4% in December after having fallen 0.2% in November.  This index rose 2.1% in the fourth quarter.  Assuming a small increase in productivity we continue to anticipate a 2.6% GDP growth rate in the fourth quarter.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual  income tax cuts should slightly boost spending in 2019.  The stock market has had a tough couple of months but the economic fundamentals continue to look solid so we expect it to resume its rise in the months ahead.  Consumer confidence is holding up well and has largely shrugged off the recent declines in the stock market.  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 has now turned upwards.  As noted earlier, factory employment is climbing at a moderate pace.  Construction employment has been rising steadily.  And even mining has been rising slowly.

Looking ahead the prospect of both individual and corporate income cuts and the repatriation of some overseas earnings currently locked overseas GDP growth should rise 2.8% this year versus 3.1% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

January 4, 2019

The unemployment rate rose 0.2% in December to 3.9% after having declined 0.1% in November.    The November level of 3.7% was the lowest level for the unemployment rate in 48 years.  The labor force jumped 419 thousand in December.  Employment increased 142 thousand.  As a result, the number of unemployed workers rose by 276 thousand.  Thus, the unemployment rate rose 0.2% to 3.9%.  While that increase in the unemployment rate seems large, keep in mind that it was actually 3.85% so it barely rounded upwards to 3.9%.  While employment used in calculating the unemployment rate rose 142 thousand, payroll employment increased by 312 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 fell sharply in December.  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 was 1.6% which is slightly more than growth in the population which was 1.1%.  Thus, the labor force partition rate rose during that period of time.  It is now 63.1%.  A year ago it was 62.7%.  Also note that 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.  With labor force growth having risen 217 thousand per month on average last year, it becomes much easier for firms to sustain monthly employment gains of 200 thousand per month.

At 3.9 the unemployment rate is far below the 4.5% 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 has risen in the past couple of months and is now slightly higher than  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 was unchanged in December at 7.6%.  At 7.6% 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 of  7.6% compares to 3.9% 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.  Employers may have a bit 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 steadily declining and getting very close.

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.  Thus far the increase in wages is being partially offset by gains in productivity such that “unit labor costs” or labor costs adjusted for the increase in productivity have risen just 0.9% in the past year.  Thus, the seemingly tight labor market is not generating any significant upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Workweek

January 4, 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 December jumped 312 thousand in December after having risen a disappointing 176 thousand in November.  One month was small than anticipated.  The next month produced an outsized gain.  The outlook for employment has not changed much in the wake of this report.

The nonfarm workweek rose 0.1 hour in December to 34.5 hours after a similar-sized decline in November.  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 0.4% in December to 110.4 after having fallen 0.2% in November.  This index rose 2.1% in the fourth quarter which, when coupled with a moderate increase in productivity, seems consistent with our projected 2.6% GDP growth rate for that quarter.

The factory workweek rose 0.1 hour in December to 40.9 after having been unchanged in November.  This series remains high and will lead to additional factory hiring in the months ahead.  With individual and corporate tax cuts taking effect this year and U.S. firms able to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector continues to climb at a moderate pace.

Overtime hours rose 0.1 hour in December to 3.6 hours after having been unchanged in November .  Like the factory workweek this series, too, is quite long.  The manufacturing sector is trying hard to find the workers it needs — hiring as best it can given the shortage of qualified workers, working existing employees longer hours, and asking people on the line to work more overtime hours.  There is no sign of slower growth in any of these data.

The economy continues to expand at a respectable pace.  We currently expect GDP to increases 2.8% this year after having risen 3.1% 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 now manufacturing is expanding at a moderate pace.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

January 4, 2018

Average  hourly earnings rose 0.4% in December to $27.48 after having risen 0.2% in November.  Hourly earnings are gradually accelerating.  During the past year hourly earnings have risen 3.2%.  This is 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 3.9% pace.  This series has been growing somewhat more quickly than the official hourly earnings data 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 jumped 0.7% in December after having fallen 0.1% in November.  Weekly wages have risen 3.2% 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 risen 0.9% with a 2.2% increase in compensation partially offset by a 1.3% 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 rising by just 0.9%, the tight labor market is not putting upward pressure on the inflation rate.  Much of the increase in wages is being offset by an increase in productivity.

Stephen Slifer

NumberNomics

Charleston, SC

 

 


Average Duration of Unemployment

January 4, 2019

The average duration of unemployment rose 0.1 week in December to 21.8 weeks after having declined declined 0.7 week in November.  This series bounces around from month to month.  The June level of 21.2 was the shortest average length of time workers remain unemployed since March 2009.

While the unemployment rate has fallen by 6.1% 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 1.31 million workers have been jobless for 27 weeks or longer, and that represents 20.5% of all unemployed workers.

The average duration of unemployment should continue to 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


ADP Employment

January 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 60 thousand.  So while it is not perfect, it does have a respectable track record.

For December the ADP survey said that employment rose 271 thousand.    In the most recent 3-month period employment has risen 222 thousand so the December increase was considerably larger than average.  On Friday BLS will release the payroll employment statistics for December.  We look for an increase of about 200 thousand.

Jobs in goods-producing industries  rose 47 thousand in December after having climbed 13 thousand in November   —  construction employment rose 37 thousand, mining declined by 2 thousand,  and manufacturing rose by 12 thousand.   Service providers boosted payrolls by 224 thousand in December after having risen 144 thousand in November.  The December increase was led by an increase of 66 thousand in professional and business jobs,  41 thousand in health care,  20 thousand in education, 39 thousand jobs in leisure and hospitality, an increase of 33 thousand jobs in trade, transportation, and utility workers, and 7  thousand in financial services.

With the labor force rising very slowly, employment gains of 190 thousand or so will continue to slowly push the unemployment rate lower.  The unemployment rate currently is 3.7% which is 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 rose 0.9%.  Despite the seemingly tight labor market there is little upward pressure on the inflation rate.

The stock market has had a tough couple of months but, finally, but it resume its ascent in the months ahead.   Interest rates are rising slowly but remain low.  Consumers remain confident.  Corporate earnings are solid.  The economy is receiving stimulus in the form of both individual and corporate income taxes.  Thus, our conclusion is that the economy will expand by 3.1% in 2018 versus 2.8% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC