Monday, 11 of December of 2017

Economics. Explained.  

Nonfarm Productivity

December 6, 2017

Upon revision nonfarm productivity rose 2.9% in the third quarter after having climbed by 1.5% in the second quarter.   That is the  biggest single quarter advance in three years.  Something seems to be happening.  During the course of the past year productivity has risen 1.5%.  The 2.9% increase in the third quarter consists of a 4.1% increase in output and a 1.1% increase in hours worked.

Clearly, productivity growth slowed in the past 15 years. From 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%.  In the past three years it has slipped to 0.7%.

Some suggest that productivity is not properly capturing productivity gains in the service sector, particularly with respect to the internet.  For example, apps allow people to book airfares, hotels, and cars from their living room and get directions all at the same time.  But such gains do not appear to be captured anywhere in the productivity data.  The problem with that assertion is that manufacturing productivity  — which can be more accurately measured — has experienced a similar slowdown.  From 2000- 2007 (when the recession began) manufacturing productivity averaged 5.0%.  In the last three years it has fallen 0.3%.

Another part of the problem could be that retiring baby boomers could be leaving both their jobs and the labor force, and taking some of their knowledge with them which is adversely impacting the growth rate for productivity.

The basic problem however, in our view, is that businesses have been reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market because they have been bothered by uncertainty about future tax rates, the inability to repatriate overseas earnings to the United States, the rising cost of health care which firms with more than 50 employees have to provide,  and an avalanche of onerous, confusing, and sometimes conflicting regulations.  But productivity growth is largely determined by the  pace of investment spending.  After several years in which nonresidential investment was essentially unchanged, it had a dramatic  surge to a 7.2% pace in the first quarter of this year, followed by an additional 6.7% increase in the second quarter, and 3.9% in the third.  This turnaround in corporate willingness to invest clearly reflects the prospect of imminent cuts in the corporate tax rate, the ability to repatriate earnings at a favorable tax rate, and general confidence about economic conditions both in the U.S. and abroad.

These major changes in policy should unleash a continuous wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity,productivity growth will climb from 1.0% or so today to 2.0%.  That, in turn, will boost the economic speed limit from 1.8% today to 2.8% within a couple of years.  If these changes actually happen they would represent the most significant economic events that  have occurred in years!

Stephen Slifer

NumberNomics

Charleston, SC


ADP Employment

December 6, 2017

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

In November the ADP survey showed an increase of 190 thousand jobs after jumping by 235 thousand jobs in October (a post-hurricane rebound).  Over the past three months  the trend rate of ADP employment is 174 thousand.    On Friday BLS will release the payroll employment statistics for November.  We look for an increase of about 190 thousand.

Jobs in goods-producing industries  rose 36 thousand in November following an increase of 85 thousand in October–  construction employment declined 4 thousand, mining was unchanged,  and manufacturing jumped by 40 thousand.   Service providers boosted payrolls by 155 thousand in November after rising by 150 thousand in October.  The  November  increase was led by an increase of 47 thousand in professional and business jobs,  31 thousand in health care, 23 thousand in education,  25 thousand jobs in leisure and hospitality, and an increase of 36 thousand jobs in trade, transportation, and utility workers.

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 4.1% which is below the full employment threshold.  As a result we are beginning to see more and more shortages of available workers, and we are also beginning to see upward pressure on both wage rates and inflation.

The stock market is near a record high level.  Interest rates remain low in the U.S..  Consumers remain confident.  Gasoline prices  are now steady at about  $2.40 per gallon. Corporate earnings are at a near record high level.  Firms are flush with cash.  And the economy could soon receive 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 2017 and 2.9% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Managers Index — Nonmanufacturing

December 5, 2017

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 0.8 point in November to 61.4 after having risen 0.9 point in October.   In October, 16 of 17 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a slightly slower pace than in October.  At its November level the non-manufacturing index equates to GDP growth of 3.3%.

The orders component  declined 4.1 points in November to 58.7 after edging lower by 0.2 point in October.  Orders continued to flow in at a rapid rate in November.

The ISM non-manufacturing index for employment fell 2.2 points in November to 55.3 after having risen 0.7 point in October.   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 fell 2.0 points in November after having declined 3.6 points in October.   That is the sixth consecutive monthly increase.  The price run up in September probably reflect the interruption of the supply chain in that month from the hurricanes.  However, even apart from the hurricanes it is clear that non-manufacturing firms are encountering higher prices for their materials.

Stephen Slifer

NumberNomics

Charleston, SC


Trade Deficit

December 5, 2017

The trade deficit for October widened by $3.8 billion to $48.7 billion after having widened by $0.6 billion in September.     Exports were unchanged.  Imports rose by 1.6%.

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 was widened by $3.1 billion in October to $65.3 billion after having been unchanged in September.

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 $2.0 billion to almost $10.0 billion, while real oil imports have fallen from $20.0 billion to $18.0 billion. As a result, the real trade deficit in oil has been cut by about $10.0 billion or 55% in the past several years and is the smallest since the early 1990’s.  Most energy exports believe that by the end of the decade the U.S. will not only surpass Saudi Arabia and Russia  and become the world’s biggest producer of oil, but also become a net exporter of oil.  Very impressive!  And now with U.S. producers allowed to export oil, that could happen even sooner.

Significant strength or weakness in the dollar can impact the trade deficit for any given period of time.  For example, the dramatic 22% rise in the value of the dollar from October 2014 through the end of 2015 subtracted about 0.5% from GDP growth in both 2014 and 2015.  But the dollar has weakened slightly this year.  As a result, we expect the trade component to add about 0.1% to GDP growth in 2018.

The non-oil trade ga phas widened somewhat in the past year to about $61.0 billion as non-oil exports rose 0.8% while non-oil imports climbed by 5.3%.

Stephen Slifer

NumberNomics

Charleston, SC


2018 Economic Outlook Conference

 2018 Economic Outlook Conference

In times of uncertainty whether you are running a business or planning your investments,

knowledge can be your most valuable asset.


Stephen Slifer, Owner and Chief Economist at NumberNomics  will provide insight regarding what to expect in 2018.

Why is growth so slow?  Will it ever accelerte?

When will interest rates begin to bite?

Why is inflation so low?  When will it accelerate?

Can Trump pass anything that will help?

When might the expansion end?

DATE:., Tuesday, December 5, 2017

TIME: 7:30 to 9:00 A.M.

PLACE: Daniel Island Club, 600 Island Park Drive, Charleston, SC 29492

COST: ..$40.00 includes breakfast

Stephen Slifer:  From 1980 until his retirement in 2003, Mr. Slifer was the Chief U.S. Economist for Lehman Brothers in New York City.  In that role he directed the firm’s U.S. economics group and was responsible for the firm’s forecasts and analysis of the U.S. economy.

Prior to that, he spent a decade as a senior economist at the Board of Governors of the Federal Reserve in Washington, D.C.  He has written two books about the various economic indicators and how they can be used to forecast economic activity.  He writes a regular bi-weekly economics column for the Charleston Regional Business Journal.

Proudly sponsored by:

Charleston Digital Corridor ……………… ..Charleston Regional Business Journal

Daniel Island Business Association ………Daniel Island Town Association

NumberNomics …………………………….. Wells Fargo Advisors

Baird ………………………..                      ..Trident Technical College

 

To Register:  Click Here


Bitcoin is a Bubble, But Its Technology is a Breakthrough

December 1, 2017

Bitcoin is new and exciting.  But bitcoin was developed in secrecy by a person or group of people whose identity remains unknown.  Its whole purpose is to evade regulation which makes it particularly appealing to the darker side of society – drug dealers, arm sales, terrorists, sex traffickers – which gives it a close link to tax evasion and organized crime.  While it is being billed as “money”, it is not.  It is neither a medium of exchange nor a store of value.  Bitcoin purchasers today are doing so solely because they seek the anonymity or because they believe the value of a bitcoin will be higher tomorrow.  Thus, it seems to us that bitcoin is more like a tulip than money and does not serve any socially useful economic function.  Having said that, the underlying technology on which it is based is revolutionary and could make identity theft by hackers far more difficult, and eventually eliminate the 2-3% transaction fee typically charged today on credit card transactions.  It is important to distinguish between bitcoins and the technological advancement that was used to create it.  One is useful, one is not.

The origination of the bitcoin is shrouded in secrecy.  It was developed in 2008 by some person or a group of people, using a pseudonym — Satoshi Nakamoto — whose identity remains unknown.   That is hardly a confidence-boosting start.

Bitcoins are being billed as a new form of “money”.  But money is supposed to be a “medium of exchange” which means that it is a widely accepted means of payment.  However, few legitimate businesses today accept bitcoin as a means of payment.  Money is also supposed to be a “store of value”.  But the value of a bitcoin is wildly unstable and its value can change by 10% or more in a single day.  It is hard to imagine any investor choosing to park a large portion of his or her assets in bitcoins given this extreme volatility.  Thus, bitcoins do not fit any conventional definition of “money”.

The appeal of bitcoin is that the technology on which it is based makes transactions largely anonymous which explains bitcoin’s appeal to the darker side of society.  Most illegal activities from drug and gun sales to prostitution and the sex trade are done in cash. But money laundering is challenging, and bitcoins offer the perfect opportunity to convert a mountain of cash into a useable form without alerting authorities.  But the illegal nature of these transactions is sure to encourage regulators to keep a watchful eye on the market and could lead them to impose regulations which would dampen its appeal.  It is also going to attract the attention of crime-busters like the FBI.  Silk Road was an online black market best known as a platform for selling illegal drugs.  It was shut down by the FBI in 2013 but, unfortunately, many Silk Road look-alikes have emerged.

While recognizing the downside of bitcoin, the blockchain technology on which it is based is revolutionary.  In today’s world transactions are cleared by banks which verify that the purchaser has the funds available and transfer the proceeds to someone else’s account.  Thus, transactions are controlled by banks.  But blockchain can be thought of as a giant private sector database that performs those transactions without the bank or any other central authority.  Once a transaction is recorded the bitcoin network it is encrypted by a formula that can supposedly be unlocked only through a trial-and-error process and eventually the bitcoin proceeds find their way to the seller.  The transaction is both anonymous and cost-less.  Those are powerful advantages.

As a result, central banks around the world are working feverishly to determine whether adoption of blockchain technology could make it harder for hackers to engage in identity theft.  Furthermore, in today’s world a merchant pays a 2-3% fee when a purchaser uses a credit card.  Bitcoin technology could eliminate these fees to the middleman.  Thus, bitcoin technology offers the opportunity to advance the financial payments mechanism into the 21st century.

As we see it, bitcoins have no socially useful economic function.  They are not money and they facilitate the ability of drug dealers, gun sellers, sex traffickers, and terrorists to finance their operations.  Bitcoins are only useful to speculators – hedge funds and high-speed trading firms in particular.  For these reasons, in our opinion, bitcoin has limited appeal.  But the blockchain technology on which it is based is revolutionary and will both enhance cyber security and make the current payment mechanism far more efficient.

Stephen Slifer

NumberNomics

Charleston, S.C.


Purchasing Manager’s Index

December 1, 2017

The Institute for Supply Management’s index of conditions in the manufacturing sector declined 0.5 point in November to 58.2 after having fallen 2.1 points in October.  The September level of the index of 60.8 was the highest level for this index in more than thirteen years (May 2004).  Clearly manufacturing activity is recovering.  Some of the strength in September, October, and November reflects the impact of Hurricanes Harvey and Irma  as the re-building effort gets underway.  If the PMI for November  is annualized it corresponds to a 4.5% increase in GDP growth.  If one uses the January through November average PMI it would imply a 4.5% increase in GDP growth this year.

It is important to recognize that the overall index is the compilation of a number of different components — production, orders, employment, supplier deliveries, inventories, prices, the backlog of orders, exports, and imports.

The orders component rose 0.6 point in November to 64.0 after having declined by 1.2 points in October.  The recent surge in orders almost certainly reflects the impact of the back-to-back hurricanes as the re-building process gets started.  The February level of 65.1 was the highest level for the orders component in seven years.   The ISM indicates that an orders index above 52.3  is consistent with an increase in the Census Bureau’s series on factory orders.  It is clear that orders have begun to accelerate which will boost factory production in the months ahead.

In addition to orders, the production component rose 2.9 points in November to 63.9 which is the highest level for this index since February 2011.  Thus, the pace of production has begun to climb and given the rise in orders it should gather momentum as we move into the early part of 2018.   A level above 51.4 is consistent with an increase in the Federal Reserve’s industrial production figure.

The employment index fell 0.1 point in November to 59.7 after having declined 0.5 point in October.  The September level of 60.3 was the highest level for this index since  June 2011.  The employment index had been right about at the break-even point of 50.0 for almost a year but has now broken out to the upside in the  past nine months. While the economy is currently cranking out about 180 thousand jobs per month, the factory sector thus far has produced few of them.  The jobs are coming from services and construction.  An ISM employment index above 50.5 is consistent with the Bureau of Labor Statistics data on manufacturing employment.  Hopefully, 2018 should bring some moderate increases in factory jobs.

The backlog of orders was unchanged in November at 55.0 after having declined 3 points in October.  The backlog had been  fairly steady for a long while, but now orders are rising and the backlog has climbed significantly in the past ten months which will encourage still faster production in the months ahead.

The prices paid component declined 3.0 points in November to 65.6 after having fallen 3.0 points in October.  The September level of 71.5 was the highest reading since May 2011.  Prices continue to climb.  Of the 18 industries reporting, 14 were paying increased prices for raw materials in November.  All 18 industries paid higher prices in September.  Clearly, the two hurricanes were a major factor in the price jump.  A price index level above 52.4 is consistent with an increase in the BLS producer prices index for intermediate materials.

We believe that the economy is  expanding at a moderate pace.  We expect GDP growth of 2.6% in 2017 and 2.9% in 2018.  During that period of time the manufacturing sector will once again begin to expand slowly.

Stephen Slifer

NumberNomics

Charleston, SC


Construction Spending

December 1, 2017

Construction spending (the green bars above) jumped 1.4% in October after having risen 0.3% in September.  Over the past year it has risen 2.9%.  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.

Private construction rose 0.6% in October after having fallen fell 0.2% in September.  Over the past year private construction spending has risen 3.2%.   The 3.2% increase in the past year reflects a 1.3% decline in private non-residential construction and a sizable 7.4% increase in the private residential category.

Within the private construction spending category, residential spending rose 0.4% in October after having declined 0.2% in September.   Over the course of the past year private residential construction has risen by 7.4%.  The shortages of both homes available for sale and apartments will push this series higher in the months ahead, however the scarce availability of labor will limit its rise.  Construction of private single family homes has risen 11.9% in the past year, multifamily construction has climbed by 0.9%.

The Census Bureau tells us that on average 0.7 million new households are being formed every year.  That is a much slower Pace than what it had been estimating six months ago.  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 1.2 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 rose 0.9% in October after having fallen 0.2% in September.   During the past 12 months nonresidential construction has declined 1.3%.  To get some lift in the investment spending component of GDP we need this component to turn upwards.

Public sector construction jumped 3.9% in October after having risen 2.0% in September and 2.7% in August.  This category can be quite volatile on a month-to-month basis.  Over the past year such spending has risen 1.8%.

Stephen Slifer

NumberNomics

Charleston, SC


Consumer Debt Service Ratio

November 30, 2017

Consumers debt service payments relative to their income were essentially unchanged in the second quarter at 9.9%.  This debt service ratio peaked at 13.2% of income in the fourth quarter of 2007, and it has fallen rapidly ever since then.  The current level of the debt service ratio is essentially the lowest on record for a series that stretches back to 1980 — 37 years ago!

The household debt service ratio is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio is a somewhat broader concept and adds automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments to the debt service ratio.  The picture looks much the same.

This series has averaged 16.6% over the past 30 years.  At 15.5% currently it is close to its record low level of 14.9% set in the fourth quarter of 2012.

Any way one slices it consumer debt is  at a very comfortable level and there is plenty of room for consumers to take on additional debt if they so choose.

Stephen Slifer

NumberNomics

Charleston, SC


Consumer Net Worth

November 30, 2017

Consumer net worth rose $1.7 trillion in the second quarter.  That works out to an annualized rate of increase of 7.2%.  Over the past year consumer net worth has increased 9.3%.

Net worth declined sharply during the recession but has long since recovered all that was lost and is actually 42.0% higher than it was prior to the recession.  The rebound reflects, in part, the steady increase in stock prices during the course of the past 8 years and in home prices which have been climbing steadily.

This high and climbing level of  net worth should encourage consumers to spend at  roughly a 2.5% pace in the quarters ahead.

Stephen Slifer

NumberNomics

Charleston, SC