Wednesday, 22 of May of 2019

Economics. Explained.  

Small Business Optimism

May 15, 2019

Small business optimism climbed 1.7 points in April to 103.5 after having risen 0.1 point in March.  The August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.  So while confidence has slipped in the past four months, it has fallen from a record high level and still remains lofty.

NFIB President Juanita Duggan said, “America’s small and independent businesses are rebounding from the first quarter ‘shut down, slow down’ and don’t appear to be looking back. April’s Index is further evidence that when certainty and stability increase, so do optimism and action.”

NFIB Chief Economist added that, “The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs were created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated, and consumers and small businesses are an important part of the improvement in sales,”

In our opinion the economy is expected to expand at a reasonably robust 2.7% pace this year.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

After falling 20% late last year the stock market recovered almost all of the earlier loss and established a new record high level and is currently only about 3% below that new peak level.   Jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  Mortgage rates have fallen in the past couple of months from 4.9% to 4.1%.  And investment spending remains solid.  We expect GDP growth to be 2.7% this year after having risen 3.0% in 2018.  The core inflation should be relatively stable at 2.1% in 2019 after rising 2.2% in 2018.  The Fed will has pledged to keep rates steady through the end of the year.  Moderate GDP growth, low inflation, and low interest rates should continue to bolster the stock market in the months ahead.

Stephen Slifer


Charleston, SC

Political Decisions Muddy the Economic Waters   

May 10, 2019

 The waivers on U.S. sanctions for purchases of Iranian oil expired earlier this month.  Oil exports from that country have plunged and the drop-off in economic activity in Iran has accelerated.  But will this deteriorating economy result in the regime change that Trump desires, or merely heighten Iran’s resolve to retaliate?

Trump has raised tariffs from 10% to 25% on almost every Chinese export to the U.S.  Unlike the earlier round which targeted goods used by businesses in the production process, this round will impact a broad array of consumer products and be far more visible.  Not surprisingly, China has said it intends to retaliate but it has not yet provided details of what that might look like.  Higher tariffs will adversely impact both countries, but they will hit the Chinese economy far harder than the U.S.  Will this force the Chinese back to the bargaining table which is what Trump is trying to do?  Or simply broaden the trade war and reduce global GDP growth for the second half of this year and 2020?

Finally, North Korea has resumed testing short-range missiles which heightens tensions in yet another corner of the world.  The stock market has noticed all of these events but, thus far, the reaction has been muted.

Iran.  The sanctions on Iranian oil exports have sharply curtailed oil production in that country which has been cut almost in half from what it was a year ago and it is expected to continue shrinking throughout the summer.  The IMF expects that GDP growth in Iran will fall 6.0% in 2019 after having declined 3.9% last year.  Highlighting the importance of oil production to the Iranian economy, the unemployment rate has risen from 11.9% in 2017 to an expected 15.4% this year.  Inflation has accelerated from 9.6% in 2017 to more than 37% this year.  No wonder Iran’s leaders are furious with the United States and have threatened to retaliate which often takes the form of heightened terrorist activity against the U.S. and its allies.  While the negative impact of sanctions on the Iranian economy are obvious, they seem unlikely to result in the regime change that Trump would like.  As long as strong dictators maintain the support of the military, they are likely to remain in power.

China.  According to Trump the Chinese have reneged on parts of the trade agreement to which they had previously agreed in an effort to soften the blow on the Chinese economy.  That is a typical Chinese bargaining tactic but, in this case, they have perhaps underestimated Trump’s resolve to force the Chinese to play by the rules and quit stealing technology from U.S. companies, eliminate the requirement for U.S. firms that would like to do business in China to share their technology, and respect intellectual property rights.  But those are core principals of business for Chinese firms.  Abandoning those methods of behavior as the result of U.S. pressure would represent a significant loss of face for Chinese leaders.  They cannot accept such changes without some concessions from the U.S.     Despite this recent controversy we continue to expect some sort of a U.S./Chinese trade agreement in the months ahead because it is in the best interest of both countries to do so.  Tit-for-tat tariff escalation by the U.S. and China will hurt the Chinese economy far harder than the United States simply because trade is 10% of the U.S. economy but 50% of Chinese GDP.  These increased tariffs could slice Chinese GDP by 1.3% while U.S. growth would be reduced by only about 0.3%.  We currently anticipate U.S. GDP growth for both this year and next of 2.7%.  The tariffs could chop those growth rates to 2.4% or so which is meaningful, but the U.S. economy would be in no danger of slipping into recession.

North Korea.  Finally, relations between the U.S and North Korea continue to deteriorate.  Thus far the renewed missile testing is only for short-range missiles which does not technically violate the agreement reached between Trump and Kim Jong Un to eliminate the Korean testing of long-range missiles.  These heightened tensions are the direct result of Trump and the U.S. delegation abruptly walking out of the summit in Hanoi earlier this year due to disagreements about denuclearization and sanctions.  This was a significant loss of face for Kim and he was duty bound to retaliate.

We do not know if, how, or when these global quarrels will be resolved.  But in the absence of military action our sense is that the worst-case scenario would be the loss of perhaps 0.3% from U.S. GDP growth for both this year and 2020 from the tariffs imposed on China and their almost certain retaliation on the U.S.    Having said that, heightened tensions make everybody nervous and increase the risk of a policy mistake.  That is not our call, but obviously these situations bear watching.

Stephen Slifer


Charleston, S.C.

Consumer Price Index

May 10, 2019

The CPI rose 0.3% in April after having risen 0.4% in March.  During the past year the CPI has risen 2.0%.  The March and April gains were almost entirely attributable to increases in the price of crude oil.

Food prices rose fell 0.1% in April after having risen 0.3% in March.  Food prices have risen 1.7% in the past twelve months.  These prices tend to be lumpy with increases reported for a few months followed by several months of declining prices.

Energy prices climbed an additional 2.9% in April after having jumped 3.5% in March.  These prices are always volatile on a month-to-month basis.   Over the past year energy prices have risen 1.7%.

The drop in energy prices late last year was  partly related to a drop-off in demand outside the U.S., principally in China.  It also reflects a huge jump in U.S. oil production.  As a result, oil prices plunged from $76 per barrel back in October to a low of about $45 billion in early January.  However, a rebound in demand in the U.S. combined with sizable declines in oil output from Venezuela and Iran, as well as a cut in Saudi output announced last month, has lifted prices back to about $62 per barrel.  The DOE expects oil prices to average $62.79 this year.

Excluding food and energy the CPI rose 0.1% in February, March, and April.  Over the past year this core rate of inflation has risen 2.1%.  We expect the core CPI will increase 2.1% in 2019.

The most interesting development in the CPI in recent years has been the dichotomy between the prices of goods (excluding the volatile food and energy components) and services.  For example, in the past year prices for goods have fallen 0.2% while prices for services have risen 2.8%.

With respect to goods prices, it appears that the internet has played a big role in reducing the prices of many goods.  Shoppers can instantly check the price of any particular item across a wide array of online and brick and mortar stores.  If merchants do not match the lowest price available, they risk losing the sale.  Thus, they are constantly competing with the lowest price available on the internet.  Looking at specific items in the CPI we find that prices have been unchanged or fallen for almost every major category in the past year.  Apparel prices have declined 2.9%, new cars have risen 1.2%, airfares have fallen 1.8%, televisions have declined 18.8%, audio equipment has  risen 3.8%, toys have fallen 9.8%, information technology commodities (personal computers, software, and telephones) have declined 6.5%.  Prices for all of these items are widely available on the internet and can be used as bargaining chips with traditional brick and mortar retailers.

In sharp contrast prices of most services have risen.  Specifically, prices of services have risen 2.8% in the past year.  The increase in this  broad category has been led by shelter costs which have climbed 3.4%.  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.

The CPI, both overall and the core rate, will be relatively steady  in the months ahead.  Steadily rising shelter prices, gradually rising labor costs, and rising producer prices will tend to boost the CPI.  But on the flip side, productivity gains are countering much of the increase in labor costs, and the internet is keeping a lid on the prices of goods.  We look for an increase in the core CPI of 2.1% in 2019.

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.  We expect it to climb 1.7% in 2019.  The Fed has a 2.0% inflation target.

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 should increase 2.1% in 2019 while the core PCE climbs 1.7%.  That compares to the Fed’s targeted rate of 2.0%.

Keep in mind that real short-term interest rates are quite low.  With the funds rate today at 2.4% and the year-over-year increase in the CPI at 2.0% the “real” or inflation-adjusted funds rate is 0.4%.  Over the past 57 years that “real” rate has averaged about 1.0% which should be regarded as relatively close to a “neutral” real rate.  Given sustained growth in GDP growth this year and the inflation rate being close to target, the Fed is likely to leave the funds rate unchanged for the balance of this year.  However, at some point in time the next most likely rate change by the Fed will be a rate hike rather than a rate decline.

Stephen Slifer


Charleston, SC

Producer Price Index

May 9, 2019

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 0.2% in April after having jumped 0.6% in March.  During the past year this inflation measure (the red line) has risen 2.3%.

Excluding food and energy producer final demand prices rose 0.1% in April after having climbed 0.3% in March after having risen 0.1% in February.  They have risen 2.4% in the past year (the pink line).  This series was steadily accelerating for a couple of years, but it has leveled off in the past 12 months or so.

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

The PPI for final demand of goods increased 0.3% in April after having jumped 1.0% in March . These prices have now risen 1.6% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods was unchanged in April after having risen 0.2% in March.  During the past year the core PPI for goods (the light green line) has risen 1.8% (right scale).

Food prices fell 0.2% in April after having risen 0.3% in March.  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 1.0%.

Energy prices gained an additional 1.8% in April after having jumped 5.6% in March.  Energy prices have risen 1.1% in the past year.   The drop late last year occurred in part because global demand declined sharply late last year and, at the same time, U.S. oil output was surging.  But  demand around the global now appears to be rebounding, output in Venezuela and Iran has been declining, and Saudi Arabia recently cut its oil output.  As a result, oil prices have risen to $62 per barrel but OPEC would like them to rise to the $85-90 per barrel mark.  Not going to happen with U.S. output surging.

The PPI for final demand of services rose 0.1% in April after having risen  0.3% in March.  This series has risen 2.4% over the course of the past year (left scale).   The jump in service goods prices late last year was caused by a run-up in the trade services category.  These swings largely reflect the 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 (the light blue line)  increased 0.3% in April after having been unchanged in March.  It has climbed 2.1% in the past year.

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 3.6% the labor market is well beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation has been countered by an increase in productivity.  Unit labor costs, labor costs adjusted for the increase in productivity, have risen 0.1% in the past year.  Compensation climbed 2.5% during that period of time but that increase was almost entirely offset by a 2.4% increase in productivity.  No wonder the seemingly tight labor market is not putting upward pressure on inflation — the increase is being almost entirely offset by an increase in productivity.  That means that firms have no real incentive to raise prices — workers have earned their fatter paychecks.

We expect the core CPI to increase  2.2% in 2019 after having risen 2.2% in 2018.

Stephen Slifer


Charleston, SC

Trade Deficit

May 9, 2019

The trade deficit for March widened by $0.7 billion to $50.0 billion after having narrowed by $1.8 billion in February   Exports rose 1.0% in March.  Imports rose 1.1%.  The trade deficit for 2018 was $622 billion which consisted of a goods deficit of $891 billion combined with a services surplus of $269 billion.  The $891 million trade deficit in goods is a record high level.

If we ultimately get renewed deals with Canada, Mexico, the E.U., the U.K., and China (perhaps among others),  those agreements will call for those countries to open their markets, reduce tariffs, and import more goods from the U.S.   Thus, the trade gap may well shrink over time as exports climb.  But late last year through January of this year  countries have been racing to get goods into the U.S. before the new tariffs became applicable.  As a result, imports surged late in the year.  The implementation date for those new tariffs has since been postponed.

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 there are a couple of important points.  First, 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.  Second, the yawning trade gap perhaps indicates that current trade agreements like NAFTA, as well trade agreements with Europe and Japan, were not well negotiated and allowed other countries to take advantage of the U.S.    One can make a case that the U.S. has been subsiding growth in other countries at its own expense for years.  Trump has decided that is true and has chosen to impose across-the-board tariffs.

Personally, we think the focus on the magnitude of the trade deficit is misplaced.  A $900 billion trade gap simply means that we bought more from foreigners than they bought from us.  As a result, foreigners accumulated $900 billion of dollars that will be re-invested in the U.S.   Those people might establishes businesses here in the U.S., hire American workers, or invest in our stock and bond markets.  It is not the magnitude of the trade deficit that bothers us.  But, as shown below one-half of that trade gap is with one country — China.  We do not have yawning trade gaps with Canada, Mexico, Europe, Japan, or OPEC.  If Trump is truly concerned about the magnitude of the trade deficit, he should have targeted those countries where it was the largest, namely China.  But he didn’t.  He chose to impose tariffs across the board which impacted our neighbors, friends and allies alike.  Not surprisingly, the imposition of U.S. tariffs generated retaliation by many other countries and it appeared that a trade war was underway.

But as the trade war got started investors around the globe tried to figure out which countries might fare best in a trade war.  Answer:  U.S.  Why?  Because trade is only 10% of the U.S. economy.  It is about 50% of everybody else’s economy.    Everybody loses in a trade war, but the U.S. may lose far less than others.

As other countries began to believe that the U.S. could withstand a trade war better than anybody else,  foreign investors flooded into the U.S. stock and bond markets.  The dollar soared.  That money would be used to create new businesses in the U.S., hire more American workers, and boost our stock market.  Elsewhere, the opposite was occurring.  Currencies were weakening, stock markets were falling, growth was slowing.  The U.S. was winning, the rest of the world was losing.  The question quickly became, how long could these countries withstand the pain?  The answer is apparently, not long.  A new agreement has already been reached with Mexico and Canada.  We are negotiating with Europe.  A deal with China may not be far off.

This has been a painful and perhaps scary process to see in action but, in the end, we may end up with both freer and fairer trade than we had initially.

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 widened by $0.5 billion in March to $82.1 billion after having narrowed by by $2.1 in February.

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 $4.0 billion to $21.0 billion, while real oil imports have fallen from $42.0 billion to $28.0 billion. As a result, the real trade deficit in oil has been cut by about $31.0 billion or 75% in the past several years and is the smallest since the early 1990’s.  In March of last year the U.S. surpassed Saudi Arabia and Russia  and become the world’s biggest producer of oil.  By the end of the decade it should also become a net exporter of oil.  Very impressive!

The non-oil trade gap has widened by about $6.0 billion  in the past year to about $69.0 billion as non-oil exports fell 0.1% while non-oil imports rose by 2.9%.

Stephen Slifer


Charleston, SC

Unemployment vs. Job Openings

May 7, 2019

The  Labor Department reported that job openings rebounded by 4.8% in March to 7,488 thousand after having fallen 6.3% in February .  There are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.2 million people unemployed in March.

As shown in the chart below, there are currently 0.8 unemployed workers for every available job.   Think of that — there are more job openings today than there are unemployed workers.  Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

In  this same report the Labor Department indicated that the quit rate in March was  at 2.3 which is the highest level since January 2001.   It has been at that level since June of last year.  This is a measure of the number of people that voluntarily quit their jobs in that  month.  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 2.3.  At the beginning of the recession it was at 2.0 and the record high level for this series was 2.6 back in January 2001.

There is one other point that should be made about this report.  Janet Yellen used to  claim that there were 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 far 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 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.

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

Car and Truck Sales

May 5, 2019

Unit car and truck sales fell 5.8% in April to a 16.4 million pace after having jumped 6.5% higher in March.  Stocks have been volatile in recent months but during the last year car sales have fallen 4.5%.  But the softness in car sales is not the result of an inability of consumers to afford cars.

Consumer confidence got hit late last year but it has already recovered almost all of what it lost and remains at a lofty level.

Confidence will remain solid simply because the economy continues to crank out 190 thousand jobs per month.  Steady growth in jobs means continuing growth in income.  At 3.6% the unemployment rate is at a 50-year low so almost everyone who wants a job has one.

Driven by the steady jobs gains, real disposable consumer income (what is left after taxes and inflation) is rising at a solid 2.3% pace.

Meanwhile, consumers have paid down tons of debt and are now in a position to spend.  At the same time, mortgage rates have fallen almost 1.0% to 4.1% in the past couple of months.  For all of these reasons we look for  2.7% GDP growth in 2019 after a 3.0% increase in 2018.  Thus, the consumer is in good shape to continue to spend at a brisk pace in 2019.

However, the reality is that many Americans, particularly younger Americans, are less enamored with owning a car than their parents.  Ones who live in larger cities have chosen not to own a car but to use ride-sharing services like Uber or Lyft.  At the same time Americans preferences have shifted away from sedans to SUV’s of varying sizes.  The car manufacturers are only now beginning to adjust production towards the different mix of cars being sold.  Thus, we expect car sales to remain fairly steady at roughly their current pace in the months ahead.

Stephen Slifer


Charleston, SC

Wanted – Higher Inflation, But How to Achieve It

May 3, 2019

Perhaps the biggest economic surprise of the past year has been the stubbornly low inflation rate.  Over the course of the past year the Fed’s preferred inflation measure, the personal consumption expenditures deflator (excluding the volatile food and energy components) has risen 1.6%.  The Fed’s target is 2.0%.  Fed Chair Powell has indicated that the 2.0% inflation goal is “symmetric”.  Given that inflation has generally run below target for most of the past six years, the Fed would welcome a 2.5% inflation rate for a period of time so that it averages 2.0% throughout the expansion.  But how exactly can it make that happen?  To say it wants 2.5% inflation is one thing.  Achieving it is something else.

As we see it, two factors are responsible for the currently low inflation rate.  First, labor costs adjusted for the change in productivity, or what economists call “unit labor costs”, have been essentially unchanged over the past year.  That comes about from a 2.5% increase in compensation almost entirely offset by a 2.4% increase in productivity. From a business viewpoint, employers are paying their workers 2.5% high compensation, but they are also getting 2.4% more output.  Business leaders are satisfied with that outcome.  Basically, workers have earned their fatter paychecks.  In the 10-years since the recession ended, unit labor costs on average have risen 1.0%.  In today’s world this means that wages can grow about 1.0% more quickly than they are currently without boosting inflation.

But if the Fed only has control over interest rates, how exactly can it entice firms to lift wages?  If for a short period of time the Fed chooses to pursue a 2.5% inflation rate it might actually like to see unit labor costs rise by 2.0% or so, presumably consisting of wage gains of 4.5% offset by 2.5% growth in productivity.  But how exactly does it entice firms to bump worker pay from 2.5% currently to 4.5%?  It does not have the tools to do that.

The other factor keeping inflation in check is technology.  When we want to buy anything in today’s world from a car to a toaster, we search the internet to find the lowest price available.  As a result, goods-producing firms today have absolutely no pricing power.  If we split the CPI between goods and services, goods inflation in the past year has been unchanged while service sector inflation has risen 2.7%.  Put it all together and in the past year the core CPI has risen 2.0%.  The Fed might like to see inflation 1.0% or so higher than it is currently but it still has the same problem – how can it make that happen?

Some have argued that the Fed should lower the funds rate.  But that would be ill-advised for a couple of reasons.  First, the funds rate is already relatively low.  The Fed has recently lowered its estimate of a “neutral” funds rate from 3.0% to a range of 2.5-3.0%.  The current funds rate is in a range from 2.25-2.5%.  Thus, the current level of the funds rate remains low and is not in any way constraining growth.  Lowering the funds rate does not seem like the right solution.

Second, if the Fed could somehow make the economy grow faster and inflation accelerate, the bulk of the inflation pickup would likely be in services.  Presumably, given technology, the goods sector of the economy will have little ability to raise prices for the foreseeable future.  If the Fed tries to boost the inflation rate by 1.0% it might end up with goods inflation still at zero percent, but with service sector inflation of 4.0-4.5%.  Is that what it wants?  That does not see like a desirable solution either.

As we see it, if the economy can continue to grow at something close to a 3.0% pace and the inflation rate remains steady at 1.6% or 0.4% below the 2.0% target, what is the matter with that?  That strikes us as being a situation that is sustainable for years to come.  An expansion that endures for an additional three, four, or five years beyond its already-achieved 10 years of growth would be an ideal outcome.  Why in the world would the Fed choose to make adjustments that could possibly short circuit the current delicate balance between growth, inflation, and interest rates?  That makes no sense.   Stick with the plan and keep rates steady!  Even Trump might like the eventual outcome.

Stephen Slifer


Charleston, S.C.

Purchasing Managers Index — Nonmanufacturing

May 3, 2019

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index rose 2.1 points in April to 59.5 after having fallen 7.3 points in March.  The February level of 64.7 was the highest level for this index since January 2004.      In April 16 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth.  At its April level the non-manufacturing index equates to GDP growth of 2.4%.

Typically, large changes in the overall index are led by orders which, in this case, fell 0.9 point to 58.1 after having declined 6.2 points in March.   At 58.1 this level portends robust growth in services in the months ahead.  Comments from respondents include: “Driven by new customers” and “Major orders received and booked; quoted last year.”

The ISM non-manufacturing index for employment fell 2.2 points in April to 53.7 after having risen 0.7 point in March.  Comments from respondents include: “Difficult to fill open positions and retain entry-level personnel” and “Recent vacancies have been difficult to fill. Tight labor market.”   Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 200 thousand per month.

Finally,  the price component fell 3.0 points in April to 55.7 after having risen 4.3 points in March.   Eleven non-manufacturing industries reported an increase in prices paid during the month.  At its current level of 55.7, prices are rising at a moderate pace.

Stephen Slifer


Charleston, SC

Private Employment

May 3 2019

Private sector employment for April rose 236 thousand after having risen 179 thousand in March.   A better reading of what is truly going on is typically represented by the  3-month moving average of private employment which is now 154 thousand, but that includes the minuscule 46 thousand increase in February.  Thus, it too is a bit misleading.  To us, employment continues to rise almost 200 thousand per month.  That compares to an average increase of 172 thousand in 2017 and 215 thousand last year.  Thus, employment continues to chug along despite the monthly wiggles.  Labor force growth rose 100 thousand in the past year.  With employment gains continuing to exceed growth in the labor force, the unemployment rate should continue to decline slowly.

Amongst the various employment categories construction employment rose 33 thousand in April after having risen 20 thousand in March.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment rose 4 thousand in April after having been unchanged in March.    Factory employment is now rising by about 17 thousand per month.  It is struggling as the recently imposed tariffs take a toll on growth in the goods sector.

Elsewhere, health care  climbed by 27 thousand.  Social assistance jobs gained 26 thousand.  Professional and business services increased 76 thousand in April.   Transportation and warehousing rose 11 thousand.  Employment in leisure and hospitality establishments climbed 34 thousand.  Financial services gained 12 thousand workers.  Retail jobs declined 12 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek fell 0.1 hour in April to 34.4 hours after having risen 0.1 hour in March .  It has been bouncing around between 34.4 and 34.5 hours for the past year.  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 fell 0.1% in April after having risen 0.5% in March.  This index climbed by 1.8% in the first quarter.  We expect a gain of similar magnitude in Q2.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.   The stock market had a tough couple of months late last year but has completely recovered.  Consumer confidence fell somewhat given the government shutdown but it, too, has recovered.

The sector of the economy that had previously been weak was the various production industries.  That is climbing but very slowly.  As noted earlier, factory employment is barely increasing.  Construction employment has been rising steadily.  And mining employment has been rising by about 5 thousand per month.  The service sector, however, is booming.

Looking ahead, steady consumer spending and continued rapid growth rate in investment should cause  GDP to grow 2.7% this year.

Stephen Slifer


Charleston, SC