Thursday, 19 of April of 2018

Economics. Explained.  

Small Business Optimism

April 10, 2018

Small business optimism dipped 2.9 poionts in March to 104.7, but it fell from a record high level of 107.6 in February.

NFIB President Juanita Duggan said, ““It has been a remarkable 16 months for small business optimism.  Small business owners are so optimistic that they feel confident enough to raise wages and invest in their business, which grows the economy.”

NFIB Chief Economist added that, “Although expected sales and expected business conditions posted large declines, it was from historically high levels and this still left the overall index reading among the 20 best in survey history,”

In our opinion the economy is expected to gather momentum in coming months in response to a number of significant policy changes.  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.

The stock market has been extremely volatile in the past month or two as market participants fret about the possibility of a trade war and increasing tensions with Syria and Russia.  However, 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 2.5% in 2017 to 2.8% in 2018.  The core inflation will  climb from 1.8% in 2017 to 2.4% 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 prior to yearend.

Stephen Slifer

NumberNomics

Charleston, SC


Nobody Wins a Trade War


April 6, 2018

Sometimes when watching the stock market’s shenanigans, it is easy to lose track of the big picture.  We get it.  When the market moves up or down 500 points on successive days, it is easy to conclude that the stock market is emitting a warning signal that all is not right in the economy.   Stock market volatility is unsettling.  But sit back, take a deep breath, and try to figure out why the stock market has been reacting so violently.  Determine in your own mind whether that is likely to have any long-lasting impact on the economy.  If you are a consume are you any less willing to buy that new car or house?  Do you have any desire to postpone that long-planned summer vacation?  If you are a business person have you seen any drop-off in your order book?  Are you considering layoffs or cutting back on the hours your employees work?  Our guess is that in the current environment none of you are contemplating any of the above.  As we see it the economy is expanding nicely.

On Friday morning, April 27, we will get our first look at first quarter GDP growth.  We expect it to be 2.5%.  That means that in the last four quarters we have seen GDP growth of 3.1%, 3.2%, 2.9% and 2.5%.  That represents average growth of 2.9%.  In the previous four quarters it averaged 2.0%.  Not too shabby.  In that first quarter we anticipate consumer spending of 1.9% which is a bit on the slow side, however that follows a 4.0% increase in the fourth quarter of last year.  Consumer spending seems to be holding up nicely at about 2.5%.  Importantly, investment spending should surge to an 8.5% pace in the first quarter and register average growth of 6.8% in the past four quarters.  Remember, this is the GDP component which registered virtually no growth in 2015 and 2016.   It is amazing what tax cuts, repatriation of earnings, and regulatory relief can do to encourage business people to spend.

While first quarter GDP growth is now history, you might ask whether the recent stock market behavior is likely to impact the pace of economic activity in the second quarter and beyond.  But first note that the S&P 500 index – despite its recent ups and downs – is only 7% below its record high level.  It feels much lower than that.  Also note that, thus far, none of the high frequency data series are sending out any warning signals.

Consumer sentiment, for example, was 102.0 for the first half of March and 100.8 in the second half which gives an average level of 101.4 for the month.  That is the highest level of sentiment since January 2004.  The consumer does not seem to be bothered at all by the recent stock market volatility.

Car and truck sales climbed 2.5% in March to a respectable 17.4 million pace.  Sales have slipped in recent months in part because of lousy weather conditions in many areas of the country.  Eventually, the weather will improve, and sales will rebound.

The Institute for Supply Management index of conditions in the manufacturing sector fell 2.4 points in March to 57.3, but that was from a February level which was the highest since May 2004.  It is hard to characterize the March decline as an indication of emerging softness amongst manufacturers.

Then there is the ADP employment survey for March which revealed an increase of 241 thousand which is virtually identical to the 243 thousand average increase for the past three months.  The labor market continues to be hot and one wonders where all these hirable bodies are coming from.  Once again there is no hint of a change in business’ employment practices.

The stock market is clearly nervous about the possibility of a full-blown trade war.  Fair enough.  But the skirmish at this point seems largely focused on the Chinese.  Trump seems intent on forcing the Chinese to alter their way of doing business which is a legitimate objective because China does not play by the same rules as everybody else.  While nobody can predict exactly how this will turn out a couple of things are important.  First, nobody wins a trade war.  Trump’s tariffs may well inflict damage on the Chinese economy, but U.S. consumers and companies will also end up getting hit.  Second, this is not the piece that will end the current expansion.  Having said that, it could trim GDP growth a bit and boost inflation later in 2018 and beyond if these issues are not resolved in a timely manner.

Stephen D. Slifer

NumberNomics

Charleston, S.C.


Private Employment

April 6, 2018

Private sector employment for March rose 102 thousand which was much less than the 200 thousand increase that had been anticipated.  However, that follows a whopping 320 thousand increase in February, so over the two months employment has risen about in line with its recent trend.  The March softness in employment is inconsistent with other labor market indicators like initial unemployment claims which are at their lowest level since 1974, the ADP employment report which continues to show monthly gains in excess of 200 thousand, and the very long length of the nonfarm workweek and extremely high level of factory overtime hours.

A better reading of what is truly going on is represented by the  3-month moving average of private employment which is now 232 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 130 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 fell 15 thousand in March after having surged by 65 thousand in February.   Thus, much of the March weakness in overall employment appears to have been weather related.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment rose by 22 thousand in March after having climbed by 32 thousand in February.    Factory employment is now rising by about 20 thousand per month.

Mining rose by 9 thousand in both February and March.  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 and social assistance climbed by 34 thousand.  Professional and business services increased 33 thousand in March led by a 25 thousand increase in temp employment.  Retail jobs fell by 4 thousand.  Employment in leisure and hospitality establishments rose 5 thousand in March.  And jobs in the financial industry climbed by 2 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 for March was unchanged 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 0.1% in March after having risen 0.6% in February.  For the first quarter the AHI rose 2.0%  With any sort of a moderate increase in productivity we could see an increase in first quarter GDP  next Friday of 2.5%.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.8% pace.  Individual  income tax cuts should slightly boost spending in 2018.  The stock market is in the midst of a correction as concerns about a trade war and a possible conflict with Syria and Russia has made investors nervous.  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 2.5% in 2017 to 2.8% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

April 6, 2018

Payroll employment for March rose 103 thousand which was much less than the 200 thousand increase that had been anticipated.  However, that follows a whopping 326 thousand increase in February, so over the two months employment has risen about in line with its recent trend.  The March softness in employment is inconsistent with other labor market indicators like initial unemployment claims which are at their lowest level since 1974, the ADP employment report which continues to show monthly gains in excess of 200 thousand, and the very long length of the nonfarm workweek and extremely high level of factory overtime hours.

A better reading of what is truly going on is represented by the  3-month moving average of payroll employment which is now 202 thousand.  That compares to an average increase of 182 thousand in 2017.  Thus, employment continues to chug along.  The labor force is growing by about 130 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 fell 15 thousand in March after having surged by 65 thousand in February.   Thus, much of the March weakness in overall employment appears to have been weather related.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment rose by 22 thousand in March after having climbed by 32 thousand in February.    Factory employment is now rising by about 20 thousand per month.

Mining rose by 9 thousand in both February and March.  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 and social assistance climbed by 34 thousand.  Professional and business services increased 33 thousand in March led by a 25 thousand increase in temp employment.  Retail jobs fell by 4 thousand.  Employment in leisure and hospitality establishments rose 5 thousand in March.  And jobs in the financial industry climbed by 2 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 for March was unchanged 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 0.1% in March after having risen 0.6% in February.  For the first quarter the AHI rose 2.0%  With any sort of a moderate increase in productivity we could see an increase in first quarter GDP  next Friday of 2.5%.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.8% pace.  Individual  income tax cuts should slightly boost spending in 2018.  The stock market is in the midst of a correction as concerns about a trade war and a possible conflict with Syria and Russia has made investors nervous.  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 2.5% in 2017 to 2.8% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

April 6, 2018

The unemployment rate was unchanged in March  at 4.1% which is where it has been since October.    In March  the labor force fell 158 thousand after having surged by 806 thousand in February.  Employment declined 37 thousand in March after having climbed by 785 thousand in February.  As a result, the number of unemployed workers declined by 121 thousand and the unemployment rate did not change.  While employment used in calculating the unemployment rate fell 37 thousand, payroll employment increased by 103 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 March (after a big February gain).  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 1.0% which is roughly in line with growth in the population which was 1.1%.  Thus, the labor force partition rate did not change much during that period of time.  It is now 62.9%.  A year ago it was 63.0%.

At 4.1% the unemployment rate is below the low end of the 4.5-5.0% 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.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate declined 0.2% in March to 8.0%. That it slightly 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  8.0% compares to 4.1% 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 slightly 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 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

April 6, 2018

Payroll employment for March rose 103 thousand for March after having jumped by 326 thousand in February.  While the March increase was less than expected, the average increase over the two months was in line with other recent months.  There is nothing in other labor market indicators that point towards any softness in employment.  Initial unemployment claims are the lowest since 1974, the ADP employment report continues to show monthly increases in excess of 200 thousand and, as shown below, the nonfarm workweek and overtime hours are very long which suggests a need for further hiring.

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 both February and March 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 0.1% in March after having climbed 0.6% in February.  For the first quarter as a whole the AHI rose 2.0%.  With any sort of a moderate increase in productivity we should see an increase in first quarter GDP next Friday of 2.5%.

The factory workweek declined 6 minutes in March to 40.9 hours after having climbed by 0.3 hour in February.  This series is still 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 perhaps being allowed to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector is gathering  momentum.

Overtime hours were fell 0.1 hour in March to 3.6 hours after having risen 0.2 hour in February.  This series, too, is about as long as it gets.

The economy continues to expand at a respectable pace.  We currently expect GDP to quicken from a 2.5% pace in 2017 to 2.8% 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 has begun to show signs of life.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

April 6, 2018

Average  hourly earnings rose 0.3% in March to $26.82 after having risen 0.1% in February.  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 2.9% pace.  This series had been growing somewhat more quickly than the official hourly earnings data and, therefore, seem more consistent with the apparent tightness in the labor market.

In addition to their hourly wages workers can also work longer hours and overtime hours.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings rose 0.4% in both February and March and are now $925.99.  Weekly wages have risen 3.4% during the course of the past year which is the biggest increase since September 2010.

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 2.8% pace of consumer spending.

Stephen Slifer

NumberNomics

Charleston, SC

 

 


Average Duration of Unemployment

April 6, 2018

The average duration of unemployment rose 1.2 weeks in March to 24.1 weeks after having declined by 1.2 weeks in February.  The February level was the shortest average length of time workers remain unemployed since May 2009.

While the unemployment rate has fallen by 5.9% 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 1.32 million workers have been jobless for 27 weeks or longer, and that represents 20.3% 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


GDP Forecasts

April 5, 2018

The second revision to fourth quarter GDP growth came in at 2.9% which compares to the first revision which came in at 2.5% and an initial reading of 2.6%.

Consumer spending climbed at a robust 4.9% rate in the fourth quarter following growth of 2.2% in the third quarter.  Third quarter growth was held down by the two hurricanes last summer, and fourth quarter growth represents the rebound.  We expect consumer spending to rise 2.4% this year.  The consumer and corporate tax cuts have lifted the stock market to a record high level.  The increase in stock prices is boosting household wealth.  The gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Consumer confidence is at a multi-year high.  Gas prices are expected to remain at their current relatively low level through the end of this year.  Interest rates remain low and are rising very slowly.

Investment spending rose 6.8% in the fourth quarter after climbing 4.7% in the third quarter.  However, investment spending was essentially unchanged for the previous three years.  It appears that the prospect of corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden is giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% today to 2.8% or so in the years ahead.

The trade gap widened by $56.4 billion in the fourth quarter after having narrowed by $16.1 billion in the third quarter.  The swings seem to reflect the inability to import goods into the Houston area in the third quarter in the wake of the two hurricanes, and the subsequent rebound in Q4.  We expect the trade component to subtract about 0.2% from GDP growth in 2018.

Expect GDP growth of 2.8% in 2018 after having registered growth of 2.6% in 2017.

The inflation rate is gradually beginning to climb.  The economy is at full employment which finally appears to be boosting wages.  Both manufacturing and non-manufacturing firms are paying high prices for their raw materials so commodity prices are on the rise.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  Thus inflation does, in fact, seem headed higher as the year progresses.   However, the pickup in inflation will be limited as internet price shopping will keep goods prices falling in 2018.  As a result we expect the core CPI to climb from  1.8% last year to 2.4% in 2018.  Slightly faster inflation will push long-term interest rates higher with the 10-year hitting 2.9% by the end of 2018 and mortgage rates climbing to 4.5%.

With GDP likely to expand in 2018 at a rate slightly faster than its current potential and inflation expected to rise slightly above its target, the Fed will feel compelled to continue on a path towards gradually higher interest rates.  It needs to do so to get itself into position to lower rates when the time comes, but it appears to have the luxury of taking its time.  We expect two more rate hikes in 2018 which would put the funds rate at 2.1% by the end of that year.  The Fed will also continue to run off some of its security holdings throughout 2018.

Stephen Slifer

NumberNomics

Charleston, SC

 


Purchasing Managers Index — Nonmanufacturing

April 4, 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 declined 2.2 points in March to 60.6 after having risen 3.0 points in February.   In March 15 of 17 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a relatively high level.  At its March level the non-manufacturing index equates to GDP growth of 3.6%.

The orders component  cooled off by declining 5.3 points in March to 59.5 after having climbed 2.1 points in February.  Orders continued to flow in in March although at a slower pace than in February.  February was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment rose 1.6 points in March to 56.6 after having declined 6.6 points in February to 55.0 and having jumped 5.3 points in January.   The January level 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 200 thousand per month.

Finally,  the price component rose 0.5 point in March to 61.5 after having declined 0.9 point in February.   That is the seventh consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.

Stephen Slifer

NumberNomics

Charleston, SC