Sunday, 26 of March of 2017

Economics. Explained.  

Unemployment vs. Job Openings

March 16, 2017

Unemployment vs. Job Openings

This release in 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 rose 1.6% in January to 5,626 after having declined a similar amount in December.    It is worth noting that there are more job openings today than there were prior to the recession.   There were 7.6 million people unemployed in December.

As shown in the chart below, there are currently 1.3 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 as good shape now as it was prior to the recession.

Unemployment vs. Job Openings (Ratio)

In  this same report the Labor Department indicated that the quit rate rose to 2.2 in January  which is the highest reading thus far in the business cycle.  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 2.2; at the beginning of the recession it was at 2.0.

Unemployment vs. Job Openings (Quit Rate)

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 have been rising rapidly (and are considerably higher now than they were prior to the recession); hires have been rising far less rapidly.

Unemployment vs. Job Openings and Hires

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?

Unemployment vs. Job Openings -- Openings to Hires Ratio

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


Charleston, SC

Trade-Weighted Dollar

March 15, 2017

Trade-weighted dollar

The trade-weighted value of the dollar, which represents the value of the dollar against the currencies of a broad group of U.S. trading partners has risen 4.0% from where it was at this time last year.  But that pattern is a bit skewed.  The dollar’s valued declined in the first few months of 2016, was relatively steady throughout the summer, and then rose sharply since the election in November as potential policy changes advocated by President Trump seem likely to accelerate GDP growth, raise the inflation rate, and cause the Fed to push interest rates steadily higher.  All of those changes are attractive to foreign investors as they seek the relatively higher returns available in the U.S. stock market, and the higher yields of U.S. Treasury securities.

When you try to figure out the impact of currency movements on our trade, you have to weigh the movements depending upon the volume of trade we do with that country.  For example, our largest trading partners are:

With respect to the Chinese yuan the dollar has strengthened about 6.0% over the past year.  A year ago one dollar would buy 6.50 yuan.  Today it buys 6.89 yuan.

Trade-weighted dollar -- China

The U.S. dollar has strengthened 1.2% versus the Canadian dollar during the past year.  For example, a year ago one U.S. dollar would purchase $1.32 Canadian dollars.  Today it will buy $1.34 Canadian dollars.

Trade-weighted dollar -- Canada

And against the Mexican peso the dollar has strengthened by 12.3% during the past year.  A year ago one dollar would buy 17.6 Mexican pesos.  Today it will buy 19.8 pesos.

Trade-weighted dollar -- Mexican Peso

The dollar has strengthened by 1.2% against the yen during the course of the past year.  A year ago one dollar would buy 112 yen.  Today that same one dollar will buy 114 yen.

Trade-weighted dollar -- Yen

The dollar has strengthened by 5.3% against the Euro during the course of the past year.  A year ago one Euro cost $1.11.  Today that same Euro costs $1.05.

Trade-weighted dollar -- Euro

Thus, the dollar has strengthened against every major currency during the course of the year.   That appreciation has been the largest against the Mexican peso (12%), the Chinese yuan (6%) and the Euro (5%) with relatively small 1% increases against the Canadian dollar and the Euro.   As a result, the trade-weighted value of the dollar, as noted earlier, has risen 4.0% during the past year.

Currency changes can affect the economy in several ways.   First, a rising dollar can reduce growth of U.S. exports because U.S. goods are now more expensive for foreign purchasers.  Similarly, a rising dollar can accelerate growth of imports because foreign goods are now cheaper for Americans to buy.  A rising dollar can also lower the rate of inflation in the U.S. because the prices of foreign goods are likely to fall.

From October 2014 to January 2016 the dollar rose 22%.  That is a huge change.  The trade component subtracted about 0.5% from GDP growth in both 2014 and 2015.  We expect the dollar to rise about 10% this year.  If that is the case the trade component of GDP should subtract a relatively modest 0.2% from GDP growth in 2017.  The rising dollar will also help to keep the inflation rate in check this year as the prices of imported goods decline, but this effect will be quite small.

From the European and Japanese vantage points a weaker currency will help to boost GDP growth which is currently anemic.  That is a good thing  Furthermore, both Europe and Japan suffer from too little inflation.  A weaker currently will tend to raise it.  That, too, is a good thing.  So from a European and Asian viewpoint more growth and inflation caused by a weaker currency is a good thing.  If Europe and Japan are successful, stronger growth in those sectors of the world will ultimately help stimulate the U.S. economy.

Stephen Slifer


Charleston, SC

S&P 500 Stock Prices

March 15, 2017

S&P 500 Stock Prices

The S&P is at record high level. of 2383. Since the election the stock market has gotten excited about possible policy changes supported by President Trump.  In the upcoming months we should see both corporate and individual income tax cues, corporations being allowed to repatriate overseas earnings to the U.S. at a 10% tax rate, a significant reduction in the regulatory burden, revamping of the dysfunctional Obamacare system, and in the years ahead some shrinkage in the budget deficit.

The cut in the corporate tax rate and repatriation of overseas earnings should give rise to a tidal wave of investment spending which should, in turn, boost growth in productivity.  If productivity growth accelerates than the economic speed limit should climb from 1.8% or so currently to 2.8% within a couple of years.  Those gains in productivity will help to keep inflation in check.  Specifically, we look for the core inflation rate to increase from 2.2% in 2016 to 2.5% in 2017.  And if all of that transpires the Fed will continue on its very gradual pace of rate hikes.  By the end of 2017 the funds rate is expected to be about 1.25%.  More rapid GDP growth, low inflation, and low interest rates should be a dynamite combination for the stock market.

As we see it the stock market and the economy will continue to climb at a moderate pace in 2017.

Stephen Slifer


Charleston, SC

Homebuilder Confidence

March 15, 2017

Homebuilder Confidence

Homebuilder confidence surged upwards by 6.0 points in March to 71 which is 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, “While builders are clearly confident, we expect some moderation in the index moving forward.  Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”

Traffic through the model homes jumped 8 points in March to 54, once again the highest reading thus far in the business cycle.

Homebuilder Confidence -- Traffic

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.

Homebuilder Confidence -- versus Starts

Stephen Slifer


Charleston, SC

Retail Sales

March 15, 2017

Retail Sales (Growth 3 month avg)

Retail sales rose 0.1% in February after rising 0.6% in January after having climbed a solid 1.0% in December.   During the course of the past year sales have risen 5.5%.

Sometimes sales can be distorted by changes in autos which tend to be quite volatile.  In this particular instance unit auto sales were essentially unchanged in February but the trend is clearly upwards.  Keep in mind that 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.

Car & Truck Sales

Existing Home Sales

Fluctuations in gasoline prices can also distort the underlying pace of sales.  If gas prices rise, consumer spending on gasoline can increase even if the amount of gasoline purchased does not change.  Gasoline sales rose 2.3% in January 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 rose 0.2% in February after having risen 1.1% in January after having climbed 0.2% in December.   In the last year retail sales excluding cars and gasoline have risen 4.2%.

Retail Sales Ex Autos and Gas -- (Growth 3 mo. avg)

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 where have been growing rapidly. Consumers like the ease of purchasing items on line.  With on-line sales having risen a steamy 12.9% in the past year, their share of total sales has been rising steadily and now stands at 89% of fall general merchandise sales.  That percentage has risen 10.0% (from 79%) at this time last year.

Retail Sales -- Nonstore retailers as % Total

On balance consumer spending on goods seems to be holding up well and should climb at about a 2.5% pace in both 2017 and 2018.

Later this year we expect cuts in both individual and corporate income tax rates to give the economy a boost.  Firms will be able to repatriate earnings to the U.S. at a favorable 10% tax rate.  And Trump promises to eliminate all unnecessary, overlapping, and confusing Federal regulations.  These policy changes should boost the potential GDP growth rate from 1.8% today to 2.8% within a couple of years.  .

Stephen Slifer


Charleston, SC

Consumer Price Index

March 15, 2017


The CPI rose 0.1% in February after having jumped 0.6% in January .  During the past year the CPI has risen 2.8%.  The big increase in recent months is largely attributable to the rebound in energy prices.

Food prices rose 0.2% in February after having risen 0.1% in January and after having been unchanged for seven consecutive months.  Food prices have risen 0.1% in the past twelve months.

CPI -- Food

Energy prices declined 1.0% in February after having  jumped 4.0% in January and 1.2% in December.   Over the past year energy prices have risen 15.6%.  Given that oil prices have leveled off in the spot markets, the run up in energy prices at the consumer level appears to have run its course.

CPI -- Energy

Excluding the volatile food and energy components, the so-called “core” CPI was unchanged in January after having risen 0.2% in both November and December.  The year-over-year increase now stands at 1.9%.

The core rate of inflation will have an upward bias in 2017 because of what has been happening to shelter and medical care.

Shelter costs rose 0.3% in February after having risen 0.2% in January.  In the  past year they have climbed 3.5%.  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.  It has been a long time since we have any component of the CPI show any upward pressure, so this category needs to be watched particularly since it makes up 33% of the overall index.

CPI -- Shelter


Medical costs rose rose 0.1% in February after having increased 0.2% in both December and January.  The recent increases have been led by a run-up in the hospital services index, an increase in prescription drug prices, and a jump in the price of health insurance.  Over the past year medical costs have increased 3.5%.  They continue to climb rapidly and will put upward pressure on the core rate of inflation in 2017.

CPI -- Medical

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 1.6% rate and is poised to head higher.  The Fed has a 2.0% inflation target.  However, going forward we have to watch out for the acceleration 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.

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 pricey 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 2.2%.  However, with the economy growing steadily, rents rising, and the unemployment rate falling, the inflation rate should pick up during 2017 and rise by 2.8% in 2017 and 2.7% in 2018.  And because the core PCE increases at a rate slightly slower than the core CPI, the core PCE should increase  2.3% in both 2017 and  2018.  Both rates are trending higher.

CPI -- Projected

CPI -- Versus PCE Deflator

Stephen Slifer


Charleston, SC

Business Inventories / Sales Ratio

March 15, 2017

Inventory to Sales Ratio

Firms are always trying to keep their inventories in line with sales.  When the economy falls into recession, typically businesses do not cut back production as quickly as sales decline, so the inventory/sales ratio rises sharply  — which is exactly what happened during the 2008-2009 recession.  Then, as the economy recovers and sales once again begin to rise, corporate leaders are able to  get inventory levels into closer alignment with sales.

In January business inventories rose 0.3% while sales rose 0.2%.  As a result, the inventory to sales ratio was unchanged at 1.35.  In recent months sales have outpaced inventories and the inventory/sales ratio has declined.  That may continue for a while longer but ultimately a faster pace of sales will eventually require business people to build inventories at a faster pace than sales to ensure that they have adequate supplies on hand to satisfy demand.

Stephen Slifer


Charleston, SC


March 14, 2017

PPI -- Final Demand

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 0.3% in February after having risen 0.6% in January.  During the past year this inflation measure has risen 2.2%  which is the largest 12-month increase since May 2014 which is, not surprisingly, about that point in time when oil prices began to plunge.

Excluding food and energy producer prices rose 0.3% in February after having risen 0.4% in January.  They have risen 1.5% since February of last year.  However, in the past three months this series has risen at a 2.0% pace so even apart from the upswing in energy prices, the prices of all goods have begun to accelerate.

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

The PPI for final demand of goods rose 0.3% in February after having climbed 1.0% in January. These prices have now risen 4.0% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.1% in February after having jumped 0.4% in January.  During the past year the core PPI for goods has risen 2.0% (right scale).  It has been steadily rising for more than a year.

PPI -- Final Demand -- Goods

Food prices were rose 0.3% in February after having been unchanged in January.  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 declined 1.8%.

ppi -- Final Demand -- Food

Energy prices increased 0.6% in February after having jumped 4.7% in January and 1.9% in December.  Energy prices have risen 19.8% in the past year.  The earlier drop was due to a sharp increase in oil production in the U.S., and weaker demand from China.  However, crude oil inventories have reached a record high level and in the past week crude prices fell $6 per barrel to $48 so the energy component of the PPI will soon begin to head downwards.

ppi -- Final Demand -- Energy

The PPI for final demand of services rose 0.4% in February versus an increase of 0.3% in January.  This series has risen 1.3% over the course of the past year (left scale).  Changes in this component largely reflect a drop 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 0.5% in February after having declined 0.1% in January .  It has climbed 1.6% during the past year.

PPI -- Final Demand -- Services

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 4.8%, the labor market is at full employment.  At that point 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 2.8% in  2017 and 2.7% in 2018.

Stephen Slifer


Charleston, SC

Small Business Optimism

March 14, 2017

Small Business Optimism

Small business optimism edged lower by 0.6 point in February to 105.3 after having risen 0.1 point in January and having surged 7.4 points in December.  This is the highest level for this index since 2004.

“It is clear from our data that optimism skyrocketed after the election because small business owners anticipated a change in policy,” said NFIB President Juanita Duggan. “The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.”

In our opinion the economy is bouncing along at a respectable pace and should gather momentum in coming months as the new Trump Administration produces a number of significant policy changes.  Specifically, we believe that in the first six months of this year we will see both individual and corporate income tax cuts, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 10% rate, elimination of all unnecessary, confusing and overlapping federal regulations, and re-vamping of our health care system to a less expensive and less complicated health care system consisting of tax-advantaged health savings accounts combined with a high deductible health insurance plan to ensure against catastrophic problems.  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  at full employment.  The housing sector is booming.  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 2.4% in 2017 and 2.7% in 2018.  The core inflation will  probably quicken from 2.3% in 2016 to 2.7% in 2018 and 2019, but that will not derail the Fed’s plan to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to even higher high levels..

Stephen Slifer


Charleston, SC

Corporate Profits

March 22, 2017


Corporate profits with inventory valuation and capital consumption adjustments rose 5.8% in the third quarter to $2138.8 billion.   Profits on this basis have risen 2.1% in the past year.  Inventory valuation adjustment deals with the difference in measuring the cost of inventory replacement.  Capital consumption adjustment deals with the difference in depreciation allowances used for accounting and income tax purposes.  Hence, changes in tax laws impact this series and it does not accurately reflect profits from current production which have been fairly stable.

Corporate profits without such adjustments rose 2.9% in the third quarter to $2,242.8 billion after  having risen 4.9% in the first quarter.  Over the course of the past year such profits have risen 4.8%.    A  large part of the earlier decline reflects weakness in one specific sector — the oil patch.  Indeed, profits in petroleum and coal products registered a loss of $79.6 billion in the fourth quarter and another loss of $13.0 billion in the first quarter and yet another loss of $10.7 billion in the second quarter and $10.3 billion in the third quarter.  Without these huge declines corporate profits would have been much closer to the corporate profits reported in the past couple of years.  Once data for the fourth quarter are available at the end of this month, the year-over-year growth rate should surge to 12.2%,


The economy will continue to climb at roughly a 2.4% pace in 2017, inflation will rise modestly, and interest rates will remain low.  As a result, corporate profits should climb at a double-digit pace in 2017.

Stephen Slifer


Charleston, SC