Tags: economy | home prices | trade deficit | labor market

Tax Cuts, Spending Hikes Amid Labor Shortages Will Be Risky

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Tuesday, 07 Feb 2017 01:20 PM Current | Bio | Archive

  • INDICATOR: December Job Openings, Trade Deficit and Housing Prices
  • KEY DATA: Openings (Private): +71,000; Hires (Private): +77,000; Layoffs (Private): +43,000/ Trade Deficit: $1.5 billion narrower/ Home Prices (Over Year): +7.2%
  • IN A NUTSHELL: “A tightening labor market is tightening, soaring home prices and a moderate trade deficit are all signs of a solid economy.”

WHAT IT MEANS: The more data we get on 2016, the more it is clear that the economy ending the year in good shape. One of Fed Chair Yellen’s favorite indicators is the JOLTS report, which provides information on job openings, hiring, firing and quits.

While overall job openings were down a touch, the private sector is becoming desperate for workers.

Openings jumped, but we did get a surge in hiring. I suspect the definition of “qualified” is being stretched. Interestingly, the exact opposite occurred in the public sector. Private sector openings are well above the highs reached in the 2000s, but the government is pretty much at levels we saw in the past expansion. Businesses did lay off more workers, but the level is still generally trending downward. The interesting numbers in the report were quits. While it seemed that during the fall and summer, workers were feeling their oats and leaving jobs, the pace moderated in the fall and early winter. That was a surprise.

The trade deficit narrowed a touch in December. For all of 2016, the deficit was little changed from 2015. Both exports and imports of goods and services declined over the year by a similar amount. As for the deficits with out major trading partners of China, Canada, Mexico, Germany and the United Kingdom, they either narrowed, or went into surplus for all except Mexico. While imports from Mexico declined, exports fell even more. That is a reminder that trade is a two way street and we have to be concerned not just with what we buy form other countries but what we sell to them as well.

Home prices soared in December and for all of 2016, according to the latest CoreLogic data. Nationally, prices are within 4% of their peak with fifteen states and many metro areas exceeding their previous highs. CoreLogic expects a new national high to be reached by the fall. Black Knight Financial Services puts the gap at less than 1% and has found that home affordability is the lowest since 2010. However, the ratio of payments to income, while rising sharply, is still below what existed in the 2000s and is now only starting to approach the levels hit in the 1990s. That indicates there is still some room for prices to rise, though a jump in mortgage rates could create issues.

MARKETS AND FED POLICY IMPLICATIONS: The economy is doing just fine, thank you. That said, the labor market isn’t so tight that the lack of qualified workers is not yet large enough to force firms to bid up wages rapidly. Firms are surviving even with the high level of job openings because growth hasn’t been robust.

What they would do if we had 3% or 4% growth is anyone’s guess. Tax cuts and spending increases that hype the economy are great ideas, but when they come at a time of labor shortages, the risks are great. That is a reminder that policy has to take into account the business cycle. If the same policies were implemented five years ago, there would have been plenty of excess labor to support the growth. Now, not so much.

Aggressive fiscal policy could duplicate in the labor market what is happening in the housing market, where a dearth of supply is causing prices to surge. If the economy does accelerate sharply, it is hard to believe wage gains will not gap upward. That could put pressure on prices and ultimately interest rates.

Reality has set in when it comes to replacing Obamacare and it appears nothing will be done until the end of the year, if even then. The tax cuts would cause the deficit to surge and will have to be offset, unless Republicans now embrace deficits of one trillion dollars or more.

Can the offsets of tax increases and budget cuts be found or are we going to see more budget games in order to get a budget passed? 

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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A tightening labor market is tightening, soaring home prices and a moderate trade deficit are all signs of a solid economy.
economy, home prices, trade deficit, labor market
Tuesday, 07 Feb 2017 01:20 PM
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