Saturday, 19 of August of 2017

Economics. Explained.  

PPI

August 10, 2017

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 fell 0.1% in July after having risen 0.1% in June.  During the past year this inflation measure has risen 2.0%.  It has been bouncing around in a range from 2.0-2.5% for the past six months.

Excluding food and energy producer final demand prices also fell 0.1% after having risen 0.1% in June.  They have risen 1.8% since July of last year.  This series has not climbed above the 2.0% mark since April 2014 but it is obviously getting close.  Some economists are once again beginning to fret about deflation.  Forget about it.  Not going to happen.  This series continues to track near the Fed’s desired 2.0% pace.

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

The PPI for final demand of goods was unchanged in July after having risen 0.1% in June. These prices have now risen 2.4% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods fell 0.1% in July after having risen 0.1% in June.  During the past year the core PPI for goods has risen 2.0% (right scale).  It steadily accelerated for more than a year but has leveled off in recent months.

Food prices were unchanged in July after having jumped 0.6% in June.  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 risen 1.9%.

Energy prices declined 0.3% in July after having fallen 0.5% in June.  Energy prices have risen 4.3% in the past year.  These prices are also very volatile.

The PPI for final demand of services fell 0.2% in July after having risen 0.2% in June.  This series has risen 1.7% over the course of the past year (left scale).  The 2.1% year-over-year increase for May was the largest 12-month increase in this services index since January 2015.  Changes in this component largely reflect a change 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 0.2% in July after having risen 0.3% in June.  It has climbed 2.0% during the past year.  The 2.2% year-over-year increase for June was the largest 12-month increase thus far in the business cycle.  Once again, any concern about deflation in the United States is totally off base.  Not going to happen.

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 4.3%, the labor market is beyond full employment.  As a result, 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 1.9% in  2017 and 2.5% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC



Nonfarm Productivity

August 9, 2017

Nonfarm productivity rose 0.9% in the second quarter after having risen 0.1% in the first quarter.   During the course of the past year productivity has risen 1.2%.  The 0.9% increase in the second quarter consists of a 3.3% increase in output and a 2.4% increase in hours worked.

Clearly, productivity growth has slowed. For example, from 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%.  In the past three years it has been even slower at 0.8%.

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 risen 0.1%.

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 remain reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market.  Investment is the primary driving force behind rapid gains in productivity.  Unfortunately, business leaders appear to be bothered by uncertainty about future tax rates (will the corporate tax rate get cut and, if so, what deductions might be disallowed), 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.  After several years in which nonresidential investment has been essentially unchanged, it had a dramatic  surge to a 7.0% pace in the first quarter of this year followed by an additional 5.1% increase in the second quarter.  These back-to-back gains could be Trump-related.

President Trump appears likely to bring about change to all of these concerns.  Trump hopes to lower the corporate tax rate from 35% to 15%.  He will allow firms to bring overseas earnings back to the U.S. at a favorable 10% tax rate.  He still hopes to revamp health care.  And he intends to completely revamp the regulatory environment with the elimination of all unnecessary, overlapping, and confusing regulations.  These major changes in policy should unleash a wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity, the economic speed limit should climb gradually from 1.8% today to 2.8% within a couple of years.  If these regulatory changes actually happen they would represent the most significant economic events that  have occurred in years!

Stephen Slifer

NumberNomics

Charleston, SC


Unit Labor Costs

August 9, 2017

Unit labor costs might be a term that is not familiar to you.  Unit labor costs represent the increase in compensation adjusted for the gains in productivity.  You might think that if labor costs are rising that would put upward pressure on inflation.    It does not matter so much what wages are doing, but what wages adjusted for the change in productivity is doing.  Think of it this way.  If I pay you 3% more money, on the surface you might think that my costs as a businessman have just gone up by 3%.  That is not quite true.  What if you are 3% more productive?  Then I am getting 3% more output from you, so I really do not care.  I am very happy to pay you 3% more money.  In this case, unit labor costs, or labor costs adjusted for the gain in productivity, are 0%.  To take the example one step farther, if I pay you 3% higher wages but you are no more productive, then unit labor costs are rising by 3% and I am probably going to raise my prices to offset the higher cost of labor.  So, a gain of that magnitude in unit labor costs is quite likely to exert upward pressure on inflation.  So always watch what is happening to unit labor costs and not just wages.

Unit labor costs rose 0.6% in the second quarter after having jumped 5.3%% in the first quarter.  The second quarter increase consists of a 1.5% increase in compensation less a 0.9% increase in productivity.  During the past year unit labor costs have declined 0.2%.  But be careful.  This figure has registered significant changes of plus or minus 5% or so for several quarters.  The trend rate appears to be about 1.5% currently.

Looking ahead into 2017 we expect compensation to increase by 2.8% given the tightness in the labor market.  But we also expect productivity growth to climb by 0.9%.  Hence unit labor costs should increase 1.9% versus a 0.2% decline currently.

Stephen Slifer

NumberNomics

Charleston, SC


Hourly Compensation

August 9, 2017

The Bureau of Labor Statistics indicated that compensation rose 1.5% in the second quarter after having jumped 5.4% in the first quarter.  This means that over the past year hourly compensation has climbed by 1.0% but with a lot of bounciness from quarter to quarter.

But, as noted in the section on unit labor costs, what really matters to an employer is not how much they pay someone, but how much they pay them adjusted for the change in productivity.  If I pay you 3% more money, but you are 3% more productive, I really do not care.  I am getting 3% more output from you.  That increase in labor costs adjusted for the change in productivity is known as “unit labor costs”.  If I pay you 3.0% more money but you are no more productive, then my unit labor costs have risen 3% and I may need to raise prices to compensate for the additional labor cost.  So watch compensation, but focus even more closely on unit labor costs.

Currently, unit labor costs have declined 0.2% in the past year but that figure does bounce around a lot from quarter to quarter.  Going forward, the tightness in the labor market should cause compensation to climb by 2.8% in 2017.  Productivity should climb by 0.9%.  As a result, unit labor costs in 2017 should rise by 1.9%.  That will put a moderate amount of upward pressure on the inflation rate.

Growth in hourly compensation is a good thing, but some of that increase can be offset by inflation.  So what we are also  interested in is real hourly compensation.  In the second quarter real compensation rose 1.9% after having climbed by 2.3% in the first quarter.   The first quarter decline consisted of a 1.5% increase in compensation which was  enhanced by a 0.4% decline in inflation as oil prices fell slightly.  In the past year real compensation has declined 0.9% but that largely reflects a huge 8.1% drop in the fourth quarter of last year.  The trend rate for real hourly compensation seems to be about +1.0%.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment vs. Job Openings

August 8, 2017

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 surged 8.1% in June to 6,163 thousand which is a record high level after having fallen 4.4% in May.    It is worth noting that there are more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 7.0 million people unemployed in June.

As shown in the chart below, there are currently 1.1 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 better shape now than it was prior to the recession.

In  this same report the Labor Department indicated that the quit rate was fell by 0.1 in June to 2.1 after having risen 0.1 in May.  The highest reading thus far in the business cycle was 2.2 on several occasions in recent months.  This series has been bouncing around between 2.1 and 2.2 for the  past two years.  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 2.1; at the beginning of the recession it was at 2.0.  Thus, it is not clear exactly how high this series can go.  Probably not a lot higher.

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

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?

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

NumberNomics

Charleston, SC


Small Business Optimism

August 8, 2017

Small business optimism climbed by 1.6 points in July to 105.2. after having declined 0.9 point in June.  This is slightly lower than the cycle high reading of 105.9 set in January which was the highest level for this index since 2004.  A couple of months ago the NFIB noted that the level of the index during the past six months represents a hot streak not seen since 1983.

NFIB President and CEO Juanita Duggan said, ”The Index peaked at 105.9 in January, just 0.7 points above the July reading. Main Street was buoyed by stronger customer demand despite the dysfunction in Washington, D.C.”

In our opinion the economy is bouncing along at a respectable pace and should gather momentum in coming months as the new Trump Administration will hopefully produce a number of significant policy changes.  Specifically, we believe that later 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.  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 below the full employment threshold.  The housing sector is continuing to climb.  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 2.3% in 2017 and 2.8% in 2018.  The core inflation will  probably slip from 2.2% in 2016 to 1.9% in 2017 but then up to 2.5% in 2018.  The Fed will continue to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to new record high levels.

Stephen Slifer

NumberNomics

Charleston, SC


Free Trade Is Not the Issue –Fair Trade Is the Problem

August 4, 2017

The U.S. trade imbalance has been maligned by many.  Some economists contend that the U.S. losses jobs when American companies build plants overseas rather than in the United States. They also believe that continuous trade deficits allow foreigners to accumulate so many dollars that they are “buying up America”.  The solution is, therefore, to slap massive tariffs on goods coming into the United States from China and Mexico (in particular) in an attempt to rein in the deficit.

But let’s be clear.  The trade deficit itself is not the problem.  Rather, it is a sign of a healthy economy.  The United States economy is growing more quickly than the rest of the world and, as a result, we are buying more goods from foreign countries than they are buying from us.  That is not a bad thing.  Furthermore, Americans are freely buying all those goods from China, Mexico, and elsewhere.  It is not some nefarious plot to undermine the economic health of the U.S.   The reality is that if Americans would choose to save more and spend less, we would not be purchasing so many goods from China, Mexico and elsewhere in the first place.  But, primarily to take advantage of lower prices, we willingly purchase imported products.  As a result, our imports grow rapidly and the trade gap widens.

Furthermore, it is hard to argue that the size of our trade deficit is costing jobs.  With the unemployment rate at 4.3% and a shortage of available workers, that contention is a little hard to swallow.

The other side of the coin is the current account surplus.  Whenever, we buy goods from other countries they accumulate dollars.  Therefore, the current account surplus is the mirror image of the trade account deficit.  Those countries then invest those dollars in U.S. assets like real estate, the stock market, or financial assets – U.S. Treasury securities in particular.  It is important to recognize that the capital stock of the U.S. is not a fixed amount to be divvied up amongst U.S. and foreign entities.  It is constantly growing.  Thus, foreign investment in the United States is a good thing.  But right now the U.S. budget deficit is so large that these foreign capital inflows are being gobbled up largely by the government sector.  If our policy makers would take action to cut government spending and shrink the budget deficit, more of these overseas funds would flow to the private sector.  Private sector investment is what boosts productivity growth and raises our standard of living.  Thus, “free trade” is a good thing.

But free trade is not the same thing as “fair trade” and that is where the problem exists.  When countries impose tariffs on goods coming into their country to protect domestic industries they are carving out an unfair advantage for themselves.  In a recent op-ed piece in the Wall Street Journal, Commerce Secretary Wilbur Ross noted that China’s tariffs are higher than those of the U.S. in 20 of 22 major categories of goods.   Europe imposes higher tariffs in 17 of 22 categories.  In the automobile industry, for example, the E.U. charges a 10% tariff on imported American cars while the U.S. imposes a mere 2.5% tariff on European cars arriving in the United States.  China slaps U.S. automakers with a 25% tariff and an even higher tariff on luxury vehicles.

The non-tariff trade barriers are even more oppressive and come in a variety of forms like daunting procedures to register imports and requirements that foreign companies build local plants.  Both the E.U. and China boost their export industries via low-cost loans to export companies, refunds of value added taxes, and below market real estate purchases.  The U.S. simply does not provide this type of assistance to its export industries.  Secretary Ross does a nice job of highlighting these tariff and non-tariff barriers to trade.

Economists generally agree that free trade is a good thing, boosts economic growth in both countries, and reduces the prices that consumers pay.  A trip to WalMart, COSTCO or Target will quickly highlight the advantage of lower prices for imported goods.  But all countries need to play with the same set of rules.  Tariff and non-tariff barriers to trade can only be characterized as “cheating”.  None of us will willingly choose to play in any game where the deck is stacked against us.  Why should our export industries be forced to do so?  Trump is right in going after those countries that have chosen to protect their domestic industries via these mechanisms.  And that is not “protectionist”.   It is simply calling out cheaters for what they are and insisting on a level playing field.

Stephen Slifer

NumberNomics

Charleston, S.C.


Private Employment

August 4, 2017

Private sector employment for July rose 205 thousand after having climbed by 194 thousand in June.  The July increase in employment was higher than the expected increase of 180 thousand.

The best reading of what is truly going on is represented by the  3-month moving average of private employment which is now 184 thousand.  That compares to an average increase of 170 thousand in the past year.  Thus, employment continues to chug along.  The labor force is growing by about 100 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 6 thousand in July after have climbed by 15 thousand in June.   The trend increase in construction employment appears to be about 15 thousand  per  month.

Manufacturing employment rose by 16 thousand in July after having climbed by 12 thousand in June.   Factory employment is now rising — but rather slowly.  We think the trend increase is currently about 10 thousand per month.

Mining climbed by 1 thousand in July after having risen 6 thousand in June .  After a long period of steady declines mining employment is now rising about 5 thousand per month.

Elsewhere, health care climbed by 39 thousand.  Professional and business services continued to trend upward and rose 49 thousand in July.  Leisure and hospitality jobs climbed by 62 thousand of which food services and drinking places accounted for 53 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In July the nonfarm workweek was unchanged at 34.5 hours.  That is a near record long workweek and implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

This increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in July after  having risen 0.5% in June.  Thus, the economy continues to expand at a moderate pace.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual income tax cuts still seem possible later this year.  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 its 2016 2.0% pace to 2.3% in 2017 and 2.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

August 4, 2017

Payroll employment for July rose 209 thousand after having climbed by 231 thousand in June.  The July increase in employment was higher than the expected increase of 180 thousand.

The best reading of what is truly going on is represented by the  3-month moving average of private employment which is now 195 thousand.  That compares to an average increase of 170 thousand in the past year.  Thus, employment continues to chug along.  The labor force is growing by about 100 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 6 thousand in July after have climbed by 15 thousand in June.   The trend increase in construction employment appears to be about 15 thousand  per  month.

Manufacturing employment rose by 16 thousand in July after having climbed by 12 thousand in June.   Factory employment is now rising — but rather slowly.  We think the trend increase is currently about 10 thousand per month.

Mining climbed by 1 thousand in July after having risen 6 thousand in June .  After a long period of steady declines mining employment is now rising about 5 thousand per month.

Elsewhere, health care climbed by 39 thousand.  Professional and business services continued to trend upward and rose 49 thousand in July.  Leisure and hospitality jobs climbed by 62 thousand of which food services and drinking places accounted for 53 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  In July the nonfarm workweek was unchanged at 34.5 hours.  That is a near record long workweek and implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

This increases in  employment and hours worked are reflected in the aggregate hours index which rose 0.2% in July after  having risen 0.5% in June.  Thus, the economy continues to expand at a moderate pace.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.  Individual income tax cuts still seem possible later this year.  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 its 2016 2.0% pace to 2.3% in 2017 and 2.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

August 4, 2017

The unemployment rate edged lower by 0.1% in July to 4.3% after having risen 0.1% in June.    In July the labor force rose 349 thousand. Employment rose by 345 thousand.  As a result, the number of unemployed workers rose by 4 thousand.  Payroll employment, which is measured by a different survey, rose by 209 thousand in July.

Labor force growth has picked up slightly from about 0.5% in 2015 to 0.8% as the faster pace of economic activity appears to have enticed some people who had given up looking for a job back into the labor force.

At 4.3% the unemployment rate is below the low end of the 5.0% level that the Fed considers to be full employment.  However, some have suggested that the official rate is 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.

Fed Chairwoman Yellen has told us we should be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate was unchanged in July at 8.6% after having risen 0.2% in June. That puts it almost exactly 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 8.6% compares to 4.3% 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 more success here.  The number of part time workers who say they want full time employment is still higher than it was going into the recession although it is gradually 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 will, in turn, 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