Higher Rock Education - Economics Blog

Friday, January 12, 2018

State of the Economy - November and December 2017

I hope our readers had a terrific Christmas and are enjoying a prosperous beginning to 2018.

Economic growth exceeds 3%. Unemployment has fallen to its lowest level since 2000. Personal incomes are increasing. Inflation remains low, but there are signs inflation is increasing because wage increases continue to outpace inflation.

Consumer confidence dropped slightly in December, but remains close to the high it achieved in November because consumers are slightly more pessimistic about business and job prospects. (Read the Conference Board’s Consumer Confidence Survey.)

Real Gross Domestic Product

Economic growth has accelerated in each of the first three quarters of 2017. The Bureau of Economic Analysis (BEA) revised its third quarter estimate of growth of the US real gross domestic product (RGDP) downward from 3.3% to 3.2%. The downward adjustment was because personal consumption expenditures was slightly less than the prior estimate. RGDP is up sharply from the first quarter, when the economy grew at 1.2%, and slightly over the 3.1% growth in the second quarter.



Growth in private consumption expenditures (PCE) slowed from 3.3% to 2.2% between the second and third quarters. PCE measures consumer spending on goods and services and accounts for approximately 60% of the nation’s GDP. Spending in services slowed the most. This was partially offset by an increase in private investment spending, which jumped 7.3%. This jump is an indication that businesses anticipate growth in the fourth quarter, and are investing to increase their capacity and improve their productivity.

The economy has grown nine years according to the National Bureau of Economic Research. Only the 1961 - 1969 and 1991 - 2001 expansions have been longer. Growth exceeded 3.0% several times during Mr. Obama’s presidency, but failed to sustain the momentum. The last time RGDP increased more than 3% was in the first quarter of 2015, when the economy grew at 3.2%. Most economists do not believe the current growth rate is sustainable, and their belief is supported by the Congressional Budget Office, which estimates 2017’s potential or sustainable output at $17,093 billion (2009 dollars). (CBO Sustainability) RGDP in the third quarter equaled $17,164 billion.

Corporate profits rose sharply from the second quarter ($90.2 billion, compared to $14.4 in the second quarter). Domestic financial companies showed the greatest gain. Higher profits have contributed to the stocks appreciating to record highs.

Visit our free lesson, Gross Domestic Product – Measuring an Economy’s Performance, if you would like to learn more about the GDP.

Personal Income and Outlays

Personal consumption expenditures (PCE) increased 0.6% in November. Wages also continued their rise, increasing 0.4%. Both increases exceeded third quarter figures and contributed to growth into the fourth quarter. However, the increase in personal income fell to 0.3%. I am not very concerned by the drop because the increase remains higher than in earlier quarters. It also resulted from a drop in transfer payments rather than a drop in wages.

There was a sharp increase (1.2%) in spending on nondurable goods. This probably reflects a large increase in gasoline prices. During November spending on energy related products increased 4.3%. Growth in spending on durable goods was less than earlier months because the prior months were probably higher than normal because families were replacing items destroyed in Hurricanes Harvey and Irma.

November’s PCE price index equaled 0.2%, up from October’s 0.1%. Again, this reflects the increase in gasoline prices. For the past twelve months the PCE price index equaled 1.8%. The PCE price index is favored by the Federal Reserve, making it more important than the more commonly used consumer price index, when evaluating monetary policy. The core index, which excludes food and energy, equaled 1.5% for the prior twelve months and 0.1% for the month. The Federal Reserve’s annual target is 2%. Normally a growing economy adds pressure to wages, which in turn increases inflation. The Federal Open Market Committee would like to see a continued increase in wages.

The consumer price index is the most widely used measure of inflation. Unlike the consumer price index, the PCE price index accounts for changes in spending behavior as the price of a good increases or decreases. For example, the weight given to chicken would increase if consumers substitute chicken for beef following an increase in the price of beef. The consumer price index compares items in a “basket” of commonly used goods and services. The measure assumes no change in the basket contents.

The personal savings rate decreased from 3.2% to 2.9%. This is not unexpected since the increase in consumer spending exceeded the increase in income.

Read the Bureau of Economic Analysis’s November Personal Income and Outlays report.

Consumer Price Index

The Bureau of Labor Statistics reported that prices increased 0.4% in November and 0.1% in December. Over the past 12 months prices have increased 2.1%. October’s increase was only 0.1%. Gasoline fueled the wide fluctuations in prices in recent months. In October, gasoline prices decreased 2.4%. This was followed by a 7.3% increase in November and a 2.7% drop in December.

Many economists were surprised by the 0.3% increase in December’s core index. The core price index measures the inflation rate of all items except food and energy. For the past 12 months the core index is 1.8% higher. Most economists view the core inflation rate as more reliable when gauging long-term trends because they do not include the large fluctuations of food and energy prices.

Read the Bureau of Labor Statistics Consumer Price Index report.

Employment

Unemployment continues to fall. In November and December, the seasonally adjusted unemployment rate remained at 4.1%. Unemployment decreased 0.6% over the past 12 months. Other unemployment figures have also improved. Underemployment dropped from 8.3% in September to 8.1% in December, indicating that people who had settled for a part-time position or a job that is beneath their skill level are now being hired in preferable jobs.

The 148,000 jobs added was disappointing in December since it followed an increase of 252,000 in November. 2.1 million jobs were created in 2017. Health care, construction, and professional office personnel were some of the largest gainers, while retail was hurt the most, particularly department and general merchandise stores.

The number of long-term unemployed decreased 354,000 during 2017. To be classified as long-term unemployed a worker must be unemployed for 27 or more weeks.

The unemployment rate continues to be below what most economists consider the full-employment rate of approximately 5 percent. The tightening of the labor market has pushed wages higher, but not as much as most economists predicted. An interesting theory I recently read is higher paid baby boomers are retiring and are being replaced by lower paid younger workers. This lowers the overall average. In recent months wage increases have started to exceed the inflation rate. In December, the average hourly earnings equaled $26.63 which is $.09 more than November. Average earnings increased 2.5%, or $0.65 higher over the prior 12 months. Most economists believe pressures on wages should increase into 2018.

All ethnic groups experienced an improvement in employment. African Americans benefited the most, with a 1.1% drop in unemployment in the past 12 months, to the lowest level in 45 years.


Table of Improvements in Employment by Groups (Figures are seasonably adjusted).




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