America is in trouble and that trouble is real, factual, chaotic and dangerous. For the first time since the industrial revolution, the US faces two significant growth issues: 1) a declining labor force; and 2) a job skills mismatch.
The declining labor force is demographic in nature and is occurring in every industrial economy, likely a function of the long-term success of capitalism. The skills mismatch is a function of technological change that is so rapid that the skills of the existing labor force can’t keep up. The result of the two is a declining rate of raw economic growth, news outlets reported.
The Federal Reserve has raised its key interest rate for the third time in six months (on June 14) to a range of 1% to 1.25%. The Fed also plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.
The economic data was disappointing across the board last week in what is looking like a renewed deceleration in the rate of economic growth.
Overall retail sales declined 0.3% in May, which was the steepest drop since January 2016. Yet even when autos and gasoline are excluded there was no sales growth. There were declines for restaurants, department stores, as well as appliance and electronics (mobile phones) retailers. E-commerce continues to be the only category to show consistent monthly sales growth. Regardless, the overall trend continues to deteriorate.
Core retail sales, which exclude autos, gas, building materials and food service sales, were flat for the month. This number is important because core retail sales is the figure used to calculate GDP. The trend in the year-over-year rate of growth for core sales has been deteriorating for the past two years, and is expected to continue to deteriorate due to stagnant to declining real incomes, as measures by average hourly earnings.
Business Inventories
Total business inventories, which include those of retailers, wholesalers and manufacturers, declined 0.2% in April, while business sales were unchanged. This report is another negative for the rate of economic growth in the second quarter. The inventory-to-sales ratio held steady at 1.37 for a fifth month in a row. Inventories remain elevated relative to sales, which will continue to weigh on production moving forward and limit pricing power, Seeking Alpha reported.
Consumer Price Index
In what is a small boost to consumer spending power, the CPI decreased 0.1% in May, led by a 2.7% decline in energy prices, which reduces the year-over-year increase at 1.9%. The core index, which excludes food and energy, rose just 0.1% and is now up 1.7% on a year-over-year basis. When consumer demand is so weak, as indicated by retail sales, companies have very little pricing power. The only positive sign is that the decline in the rate of inflation led to a second monthly increase in real incomes.
Real income, as measured by average hourly earnings, rose 0.6% on a year-over-year basis in May. While this is a positive development, it is preferred to see the increase be a result of rising wages rather than a decline in the rate of inflation.
Home Construction
Given the 4.5% drop in building permits last month, it comes as no surprise that housing starts for May were a big disappointment. Starts plunged 5.5% to an annualized rate of 1.092 million, with permits also declining by 4.9%. Starts and permits were down for both single-family housing and multi-family dwellings.
Housing starts and building permits in April were both disappointing. New starts fell for the third time in the past four months to a seasonally adjusted annual rate of 1.172 million, which was down 2.6% from March, while building permits fell 2.5%.
Manufacturing declined 0.4% in May, leading to no change in the overall rate of industrial production. The weakness in manufacturing was also evident with respect to business equipment and high-tech durables. Capacity utilization dipped from 76.7% to 76.6%.
Overall, the economic data was disappointing across the board last week in what is looking like a renewed deceleration in the rate of economic growth. Consensus forecasts for 2017 remain far too optimistic. There may not be a recession in 2017, but the country will move perilously close to one if growth continues to slow.
