First Trust Advisors' Outlook: Economy Rising

Brian Wesbury at FTPortfolios.com

A solid 3.5% real GDP growth rate reported for Q3 wasn't enough to appease the doomsayers.  They say inventories boosted growth and that can't last.  Plus, they say, business investment was soft.

What the pessimists miss is that the surge in inventories in Q3 was a rebound from the unusual outright decline in Q2.  Inventories subtracted 1.2 percentage points from real GDP growth in Q2 and then added 2.1 points in Q3.  This was close to a mirror-image of what happened with net exports, which added 1.2 points in Q2 and then subtracted 1.8 in Q3.

Yes, real business investment grew at only a 0.8% annual rate in Q3, but we've had tepid quarters before, including as recently as the end of 2016, without signaling an impending recession.  And don't be surprised if the recent figures get revised up in the next two months.

Are we counting the benefits of cloud computing to GDP?

A new NBER working paper by David Byrne, Carol Corrado and Daniel E. Sichel titled, "The Rise of Cloud Computing:  Minding Your P's, Q's and K's."

Abstract:

Cloud computing--computing done on an off-site network of resources accessed through the Internet--is revolutionizing how computing services are used.  However, because cloud is so new and it largely is an intermediate input to other industries, it is difficult to track in the U.S. statistical system.  Moreover, there is a paucity of systematic information on the prices of cloud services.  To begin filling this gap, this paper does three things.  First, we define the different segments of cloud computing and document its explosive expansion.  Second, we develop new hedonic prices indexes for cloud services based on quarterly data for compute, database, and storage services offered by Amazon Web Services (AWS) from 2009 to 2016.  These indexes fall rapidly over the sample period, with quickening (and double digit) rates of decline for all three products starting at the beginning of 2014. Finally, we highlight the puzzle of why investment in IT equipment in the NIPAs has been so weak while capital expenditures have exploded for IT equipment associated with cloud infrastructure.  We suggest that cloud service providers are undertaking large amounts of own-account investment in IT equipment and that some of this investment may not be captured in GDP.

Gated copy available here. 

Are Cars Much Better than 50 Years Ago? - Econlib

Are Cars Much Better than 50 Years Ago?

David Henderson Asks: Are Cars Much Better than 50 Years Ago?

More here.

Third-quarter GDP cools a bit to a still-solid 3.5% rate - MarketWatch

Third-quarter GDP cools a bit to a still-solid 3.5% rate - MarketWatch

How Scooters (and the Data They Collect) Can Transform Cities | News & Opinion | PCMag.com

How Scooters (and the Data They Collect) Can Transform Cities | News & Opinion | PCMag.com

Gallup: U.S. Economic Assessments Best in Nearly Two Decades

U.S. Economic Assessments Best in Nearly Two Decades

The U.S. is back on top!

You will find more infographics at Statista

New Boston Indicators analysis finds that despite economic gains, inequality persists in Greater Boston

A new report by Boston Indicators finds that Greater Boston’s continued economic boom has failed to crack persistent economic inequality among residents. 

The new report, Boston’s Booming… But for Whom?: Building Shared Prosperity in a Time of Growth, was released Wednesday morning to a crowd of 300 people at the Edgerley Center for Civic Leadership.

The report finds that Boston actually ties for second nationally among the nation’s largest cities when it comes to the ability of those raised in lower-income households to improve their economic state as working-age adults. Boston also ranks high when breaking out by race, but the analysis finds that Blacks in the cohort still earn 22% less than their white peers.

The challenges of the economic boom on the middle-class are evident in the shrinking size of Boston’s middle class. A Boston Indicators analysis finds that while the number of low- and high-income city residents has risen sharply in the past three decades, the number of middle-class residents has declined.

One possible culprit? The cost of housing. Despite the City of Boston playing a leadership role in the region by creating thousands of units of affordable housing, the Indicators team analysis found just 20 census tracts of 150 in Boston where median rent would be considered affordable for a median income household. That list included zero tracts in Roxbury, Dorchester or Mattapan.

Affordable housing by median income
Redoubling efforts to produce affordable housing, close Boston’s racial homeownership gap, improve transportation, and continue to reduce incarceration in Massachusetts are highlighted among a dozen local action areas for building greater shared prosperity in the region.

The report is available now for download, and easily can be read online at bostonindicators.org.

The Indicators team plans to take deeper dives into a number of the issues raised by the report during the course of the coming year.


Source: Boston Foundation

Can higher capital taxes finance infrastructure and diminish inequality?

A new NBER working paper, "Overcoming Wealth Inequality by Capital Taxes that Finance Public Investment," by Linus Mattauch, David Klenert, Joseph E. Stiglitz, and Ottmar Edenhofer 

Abstract:

Wealth inequality is rising in rich countries. Capital taxation used simply to finance redistribution may not be able to counteract this trend, but can increased public investment financed by higher capital taxes? We examine how such a policy affects the distribution of wealth in a setting with distinct wealth groups:  dynastic savers and life-cycle savers. Our main finding is that public investment financed through capital taxes always decreases wealth inequality when the elasticity of substitution between capital and labor is moderately high.  Indeed, for all elasticities of substitution greater than a threshold value, at high enough capital tax rates, dynastic savers disappear in the long run.  Below these rates, both types of households co-exist in equilibrium with life-cycle savers

gaining from the higher capital tax rates.  These results are robust with respect to the different roles of public investment in production. We calibrate our model to OECD economies and find the threshold elasticity to be 0.82.

More here. 

Notable read: James Dorn on Leland B. Yeager

From the just-released Fall 2018 issue of Cato Journal: James Dorn memorializes Leland Yeager, a member of the Virginia School of Political Economy. 


Abstract: 

In this memorial essay, I wish to paint a picture of Leland as a “market grandmaster,” in the sense of his keen understanding of markets and prices along with the role of money in facilitating exchange, and the importance of property rights in shaping incentives and behavior. Along with James Buchanan, Gordon Tullock, Ronald Coase, G. Warren Nutter, Roland McKean, and others, he was an important member of the Virginia School of Political Economy.

U.S. Employment Situation: 3.7% unemployment rate with 134,000 new payrolls

OVERVIEW

• The unemployment rate dropped to 3.7 percent in September with payrolls expanding by 134,000 jobs, according to the Bureau of Labor Statistics.  The unemployment rate is the lowest since 1969. 
• The Labor Force Participation (LFP) remained at 62.7 percent. The Employment-population ratio finished for the month at 60.4 percent, little changed. The number of unemployed for the month was 6.0 million, declining by 270,000. 
• The economy added 137,000 jobs in September.  Job gains took place in Professional and business services (+54,000), Health care (+26,000) and the Transportation and warehousing sector (+24,000).
• In addition, Construction added 23,000 jobs while Manufacturing added 18,000 jobs.  
• According to the BLS, the following sectors saw little or no change in employment: Wholesale trade, Retail trade, Information, Financial activities and Government. 
• Over the year, average hourly earnings have increased by 73 cents or 2.8 percent. In September the average hourly private nonfarm wage rang in at $27.24, an increase of eight cents. The average workweek for all employees was unchanged at 34.5 hours. 
• Despite Hurricane Florence, the BLS said its surveys were within normal ranges. Major analysts appeared to agree.  
• The number of persons employed part-time for economic reasons increased by 263,000 to 4.6 million. The number of long-term unemployed was little changed at 1.4 million. This group represents 22.9 of all unemployed persons.

ANALYSIS

Total nonfarm payroll employment rose by 134,000 in September well below the 12-month average of 201,000.  Wall Street expected a payroll increase by 185,000 jobs. The BLS reported 121,000 new private sector jobs were created compared with the ADP payrolls report released earlier this week of 230,000 private payrolls. 

While jobs created were below expectations, the BLS revised numbers for July (from 147,000 to 165,000) and August from 201,000 to 270.000). After revisions, the BLS found the three-month average for new jobs arrived at 190,000 per month. Manufacturing continues to improve. Over the past year the sector has added 278,000 jobs — four-fifths of that growth taking place in the high-wage durable goods sector. 

That could continue to improve as the nation’s manufacturing system continues to express optimism despite a worker shortage. According to the National Association of Manufacturers, “Nearly 93 percent of manufacturers are projecting further expansion for their businesses, and positive sentiment among smaller companies is up to 91.3 percent.” 

In one of the only downsides of today’s report, Hurricane Florence may have caused some weakness in the Leisure and hospitality sector (-17,000).  
Hispanic unemployment is at an all-time low.  

Unemployment drifted downward for all groups by educational attainment (See chart below). "The labor market is in excellent shape heading into the end of 2018, perhaps the best it has been in 50 years,"  Gus Faucher, chief economist at PNC told CNBC. "Job growth was a bit softer in September, but some of that was from Hurricane Florence, and it should bounce back through the rest of 2018 and into 2019."

Chart by East Boston Economics - BLS,Table A4 - Educational Attainment

Fake News Comes to Academia - WSJ

Gated, WSJ subscription required "Fake News Comes to Academia"

September 2018 ADP National Employment Report : +230,000 nonfarm private sector jobs

ADP National Employment Report | September 2018

New article from Econ Journal Watch: And the IMF Said, Let There Be Data, and There Was Data: Private Capital Stocks in the Eastern Bloc

From two graduates of the Suffolk University PhD program in Economics I had the pleasure of knowing and working with over the years. Here's Ryan Murphy and Colin O'Reilly's new paper. 

And the IMF Said, Let There Be Data, and There Was Data: Private Capital Stocks in the Eastern Bloc

Abstract

The International Monetary Fund has recently published a dataset on public and private capital stocks for 170 countries from 1960–2015 using the perpetual inventory methodology. Following a reckless assumption, opaquely imposed, the dataset likely overstates levels of private investment as a percentage of total investment in former Eastern bloc countries, and thereby likely overstates their private capital stocks. This comment explores the nature and implications of the assumption, and suggests that, in light of the problem, the scope of the IMF project be significantly diminished to address the issue.

Read more here (PDF). 

Hat tip to MarginalRevolution.com.