Monday, 16 of July of 2018

Economics. Explained.  

Private Employment

July 6, 2018

Private sector employment for June rose 239 thousand after having risen 239  thousand in May.   Thus, 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 217 thousand.  That compares to an average increase of 180 thousand in 2017.  Thus, employment continues to chug along.  The labor force is growing by about 150 thousand per month.  For employment gains to be consistently larger than the increase in the labor force implies some people not previously in the labor force are choosing to return (like discouraged workers).

Amongst the various employment categories construction employment rose 13 thousand in June after having climbed 29 thousand in May.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment climbed by 36 thousand in June after having increased 19 thousand in May.    Factory employment is now rising by about 25 thousand per month.

Mining increased 5 thousand in June after having risen 6 thousand in May.  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 35 thousand.  Professional and business services increased 50 thousand in June.  Transportation and warehousing gained 15 thousand.  Employment in leisure and hospitality establishments increased 25 thousand in June.  And jobs in the financial industry climbed by 8 thousand.  On the flip side, retail jobs declined 22 thousand in June.

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 for June was unchanged at  34.5 hours.  That is the fifth straight month at that level and it is about as long as it gets.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in both May and June after having climbed 0.1% in April.  Thus, it rose 2.3% in for the second quarter as a whole and continues to climb at a steady pace.  If second quarter GDP growth turns out to be between 3.5-4.0%, then productivity growth for the quarter should be between 1.2-1.7%.

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 2018.  The stock market is rebounding following a correction and is now just 3% below its previous peak.  Consumer confidence is holding up well.  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 seems to be changing.  As noted earlier, factory employment is rising modestly.  Construction employment has been rising steadily.  And even mining has been rising somewhat after a steady series of declines associated with the drop in oil prices.

Looking ahead the prospect of both individual and corporate income cuts and the repatriation of some overseas earnings currently locked overseas should boost GDP growth from 2.6% in 2017 to 3.0% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

July 6, 2018

Payroll employment for June rose 213 thousand after having risen 244  thousand in May.   Thus, 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 employment which is now 211 thousand.  That compares to an average increase of 180 thousand in 2017.  Thus, employment continues to chug along.  The labor force is growing by about 150 thousand per month.  For employment gains to be consistently larger than the increase in the labor force implies some people not previously in the labor force are choosing to return (like discouraged workers).

Amongst the various employment categories construction employment rose 13 thousand in June after having climbed 29 thousand in May.    The trend increase in construction employment appears to be about 25 thousand per month.

Manufacturing employment climbed by 36 thousand in June after having increased 19 thousand in May.    Factory employment is now rising by about 25 thousand per month.

Mining increased 5 thousand in June after having risen 6 thousand in May.  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 35 thousand.  Professional and business services increased 50 thousand in June.  Transportation and warehousing gained 15 thousand.  Employment in leisure and hospitality establishments increased 25 thousand in June.  And jobs in the financial industry climbed by 8 thousand.  On the flip side, retail jobs declined 22 thousand in June.

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 for June was unchanged at  34.5 hours.  That is the fifth straight month at that level and it is about as long as it gets.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in both May and June after having climbed 0.1% in April.  Thus, it rose 2.3% in for the second quarter as a whole and continues to climb at a steady pace.  If second quarter GDP growth turns out to be between 3.5-4.0%, then productivity growth for the quarter should be between 1.2-1.7%.

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 2018.  The stock market is rebounding following a correction and is now just 3% below its previous peak.  Consumer confidence is holding up well.  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 seems to be changing.  As noted earlier, factory employment is rising modestly.  Construction employment has been rising steadily.  And even mining has been rising somewhat after a steady series of declines associated with the drop in oil prices.

Looking ahead the prospect of both individual and corporate income cuts and the repatriation of some overseas earnings currently locked overseas should boost GDP growth from 2.6% in 2017 to 3.0% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

July 6, 2018

The unemployment rate rose 0.2% in June to 4.0% after having declined 0.1% in May and 0.2% in April.    But the unemployment rate increased because the labor force swelled in June by 601 thousand. It is tempting to say that this reflects discouraged workers now believing that they can actually get a job and are beginning to look for a job.  That may be true to some extent, but the labor force also declined sharply in March and April and was essentially unchanged in June.  It obviously bounces around considerably from month to month.   Employment in June rose  thousand 102 thousand.  As a result, the number of unemployed workers rose by 499 thousand and the unemployment rate rose 0.2% to 4.0%.  While employment used in calculating the unemployment rate rose 102 thousand, payroll employment increased by 213 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 declined in June.  The other reality is that there is just statistical noise between the two surveys.  The trend rate of growth is similar, but with wide variation from month to month — the household survey being the more volatile of the two.

Labor force growth in the past year was 1.2% which is roughly in line with growth in the population which was 1.1%.  Thus, the labor force partition rate rose 0.1% during that period of time.  It is now 62.9%.  A year ago it was 62.8%.

At 4.0% the unemployment rate is far below the low end of the 4.5-5.0% 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 been falling quite steadily and is now roughly in line with where it was going into the recession.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate rose 0.2% in June to 7.8% after having declined 0.2% per month in March, April, and May.  At 7.8% 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  7.8% compares to 4.0% 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 lower  than it was going into the recession.

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.

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 which should, in turn, gradually lift the inflation rate.  As a result, the Fed will continue to gradually raise the funds rate in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Workweek

July 6, 2018

Payroll employment for June rose 213 thousand after having risen 244 thousand in May.  Thus, the outlook for employment has not changed much in the wake of this report.

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 for February, March, April,  May and June came in at 34.5 hours.  That is about as long as it gets.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in both May and June after having climbed 0.1% in April.  For the second quarter as a whole this index rose 2.3%.  If second quarter GDP comes in between 3.5-4.0%, it implies that productivity growth in that quarter was between 1.2-1.7%.  That is up from about 0.8% in the previous three years.  Thus, this series continues to chug along which suggests that the economy is expanding at a steady pace.

The factory workweek rose 0.1 hour in June to 40.9 hours after having declined 0.2 hour in May.  This series is also about as high as it gets 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 is gathering  momentum.

Overtime hours rose 0.1 hour in June to 3.5 hours after having declined 0.2 hour in May .  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.

The economy continues to expand at a respectable pace.  We currently expect GDP to quicken from a 2.6% pace in 2017 to 3.0% in 2018 given the prospect of both 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 housing and now manufacturing is coming on strong.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

July 6, 2018

Average  hourly earnings rose 0.2% in June to $26.98 after having risen 0.3% in May.  Hourly earnings are gradually rising.  During the past year hourly earnings have risen 2.7%.  This series 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 3.2% 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 overtime hours.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings rose 0.2% in June to $930.81 after having risen 0.3% in May.  Weekly wages have risen 3.0% during the course of the past year.

While there has been a lot of discussion about the lack of growth in wages, they appear to be rising a bit more quickly and are able to support a moderate sustained 2.5% pace of consumer spending.

Stephen Slifer

NumberNomics

Charleston, SC

 

 


Average Duration of Unemployment

July 6, 2018

The average duration of unemployment fell 0.1 week in June to 21.2 weeks after having  plunged by 1.8 weeks in May and 1.0 week in April.  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 6.0% 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 1.48 million workers have been jobless for 27 weeks or longer, and that represents 23.0% 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


Trade Deficit

July 6 2018

The trade deficit for May narrowed by $3.0 billion to $43.1 billion after having narrowed in April by $1.1 billion and narrowed in March by $8.3 billion.     Exports rose 1.9% in May.  Imports rose 0.4%.  This dramatic narrowing of the trade gap in the last three months is likely to add about one percentage point to U.S. GDP growth in the second quarter and lift GDP growth in that quarter beyond the 4.0% mark.

While the rising trade gap earlier in the year seemed scary, but the reality is that it was financed by foreign capital inflows into the U.S.  Thus far foreigners seem quite willing to invest in the U.S.  And with the prospect of tax cuts boosting the pace of GDP growth in the U.S. and lifting the U.S. stock market, such capital inflows should continue apace.  Trump’s imposition of tariffs on all steel and aluminum imports is a step in the wrong direction.  We certainly support the notion of free trade.  Through trade American consumers have access to a much wider variety of goods and services at lower prices than they would otherwise.  But the free traders (like us) assume that there is also fair trade.  That is the rub.  The Chinese in particular, and others ,do not play by the same rules as everybody else.  Thus, in our opinion, some sort of  punishment is appropriate.  But rather than imposing tariffs on all steel and aluminum imports (and possibly tariffs on other products) which hurts our neighbors and allies as well as the bad guys, we would support a more targeted approach.  Find the top 10 culprits and impose a 50% tariff on their imports of these products.

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 narrowed by $2.2 billion in May to $75.3 billion.

Increasing energy production in the U.S. is having a significant impact on our trade deficit in oil.  Since 2007 real oil exports have almost quintupled from $4.0 billion to $19.0 billion, while real oil imports have fallen from $43.0 billion to $30.0 billion. As a result, the real trade deficit in oil has been cut by about $28.0 billion or 70% 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!

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 risen only 1.0% in the past year.  As a result, we expect the trade component to have little impact on GDP growth in 2018, but it will have a big impact on GDP growth in the second quarter.

The non-oil trade gap has widened significantly  in the past year to about $59.0 billion as non-oil exports rose 8.2% while non-oil imports climbed by 5.8%.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Managers Index — Nonmanufacturing

July 5, 2018

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 rose 2.6 points in June to 63.9 after having risen .2 points in May.   In June, 17 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a relatively high level.  At its June level the non-manufacturing index equates to GDP growth of 3.7%.

The orders component  jumped 2.7 points in June to 63.2 after having risen 0.5 point in  May.  Orders continued to flow in in June at a solid pace.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment declined 0.5 points in June to 53.6 after having risen a comparable amount in May.   The January level (at 61.6) was by far 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 180 thousand per month.

Finally,  the price component declined 3.6 points in June to 60.7 after having risen 2.5 points in May.   That is the tenth consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.  That will continue to put some upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


ADP Employment

July 5, 2018

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.

In June the ADP survey showed an increase of 177 thousand jobs after rising by 189 thousand in May.  Over the past three months  the trend rate of ADP employment is 179 thousand.    On Friday BLS will release the payroll employment statistics for April.  We look for an increase of about 180 thousand.

Jobs in goods-producing industries  rose 29 thousand in  June after having climbed 49 thousand in May  —  construction employment rose 13 thousand, mining climbed by 5 thousand,  and manufacturing rose by 12 thousand.   Service providers boosted payrolls by 148 thousand in June after having risen 149 thousand in May.  The  June increase was led by an increase of 33 thousand in professional and business jobs,  18 thousand in administrative and support positions, 37 thousand in health care, 33 thousand jobs in leisure and hospitality, an increase of 24 thousand jobs in trade, transportation, and utility workers, and 7  thousand in financial services..

With the labor force rising very slowly, employment gains of 180 thousand or so will continue to slowly push the unemployment rate lower.  The unemployment rate currently is 3.8% which is well 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 several percentage points below its peak as trade and tariff announcements take their toll.  Small company stocks (the Russell 2000) and tech company stocks (NASDAQ Composite) are essentially at record high levels.  Interest rates remain low in the U.S..  Consumers remain confident.  Gasoline prices  should be peaking at about  $2.95 per gallon. Corporate earnings are solid.  Firms are flush with cash.  And the economy is beginning to receive stimulus in the form of both individual and corporate income taxes.  Thus, our conclusion is that the economy will expand by 3.0% in 2018 versus 2.6% last year.

Stephen Slifer

NumberNomics

Charleston, SC


Car and Truck Sales

July 3, 2018

Unit car and truck sales rose 3.2% in June to 17.4 million units after having declined 1.8% in May and 1.4% in April..  A 17.4 million pace is moderate and is 4.7% higher than it was at this time last year.  Car sales have leveled off in the past year or so and auto industry experts think this  modest pace will continue for the rest of this year.  They talk about the fact that the period of ultra-low interest rates has ended.  The Fed is raising short-term interest rates and is expected to boost rates two more times later this year.  They talk about how automobile quality has improved so that consumers are holding onto their vehicles for longer periods of time.  And now they talk about higher prices for gasoline which could dampen growth.  All of those are fair points.  However, we expect car sales to continue to climb slowly for some time to come for a couple of reasons.

First, all measures of consumer confidence are close to their highest levels thus far in the business cycle.

Second, real, disposable consumer income (what is left after taxes and inflation) is rising at a solid pace as jobs growth continues apace, and as the tax cuts began to boost after tax income

Third, the stock market is in the midst of a correction but it is only about 4%  below its record high level while the Russell 2000 and the NASDAQ are essentially at record high levels.  That is an indicator of investor sentiment.  In addition, a rising stock market also boosts consumer net worth.  With corporations destined to benefits from tax cuts this year, interest rates still low, and the consumer spending at a solid 2.5% pace, corporate earnings should continue to rise.  We anticipate a 10% increase in earnings in 2018 which should put the stock market at an even higher record level by yearend.

Fourth home sales remain at s solid pace.  Because car and home sales are the two biggest ticket items in a consumers budget, it is not surprising that a change in trend will be evident in these two categories first.  If home sales seem pretty solid it would be surprising if car sales did not follow suit.

It is true that gasoline prices have risen, but the Energy Information Institute expects gasoline prices to peak at about $2.95 per gallon by the end of June as the summer driving season reaches its peak and then decline slowly in the second half of the year.

Finally, keep in mind that consumers have paid down tons of debt and are now in a position to spend.  Jobs are climbing at a pace of 190 thousand per month.  The unemployment rate has fallen to a level that is far below the full employment mark.  Consumers are benefiting from stable and still low gasoline prices. For all of these reasons we look for  3.0% GDP growth in 2018 and car sales to remain healthy.

Stephen Slifer

NumberNomics

Charleston, SC