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May New and Existing Home Sales and April Housing Prices

KEY DATA: New Home Sales: +2.9%; Existing Home Sales: +1.1%; FHFA Prices (Over-Year): +6.8%:

IN A NUTSHELL: “The slowing in the housing market may be ending as demand is picking up and prices keep surging.”

WHAT IT MEANS: The housing market has been a puzzle recently, with sales and starts tumbling. That may no longer be the case. New home sales jumped up in May and the gain was on top of a sharp upward revision to the April sales pace. The rise in purchases over the year was nearly 9%, indicating that conditions are indeed getting better. That said, the increases were not well distributed across the country. The robust surge in sales in the West and strong gain in the South were almost entirely wiped out by double-digit declines in the Northeast and Midwest. As for prices, they hit record highs. The nearly 17% rise from the May 2016 median price level undoubtedly overstates the gain, so let’s don’t get too carried away. Nevertheless, supply remains limited and it is likely that the pressure that has been building for so long on prices will not go away anytime soon.

Earlier this week, two other reports on housing were released. The National Association of Realtors released their report on existing home demand and it too showed that demand is rebounding. Unlike the new home numbers, sales rose across the nation. And similar to the new home market, a lack of supply is keeping pressure on prices, which were up nearly 5% over the year.

There are many different reports on home prices, which is difficult to quantify given the changes in prices don’t necessarily measure the rise or fall in the cost of the same unit. Still, all the indices are showing the same thing: Prices are on the rise. The Federal Housing Finance Agency’s index posted another sharp increase in April and over the year. This index had decelerating during most of 2014 but has been on a slow but steady rise since.

MARKETS AND FED POLICY IMPLICATIONS: I don’t know how many times I have written that if it isn’t for sale, it is hard to buy and the housing market is clearly suffering from a lack of inventory. Just today I was cold-called by a realtor asking if I was interested in selling my house. That is how desperate things have gotten. Locational mobility has declined sharply and even those whose homes are now above water are hesitant to sell. Builders face cost and regulatory issues and those factors, plus more rational lending practices, is keeping new construction down. There is no simple solution to the problem, so don’t expect housing sales to surge. What should continue to rise are prices. For the Fed, that is good news as it will keep non-food and energy consumer costs from decelerating further and allow for additional rate hikes this year, assuming the economy keeps growing at a moderate pace. Investors, though, don’t seem to worry about economic fundamentals, so what, if anything, will slow the markets is unclear.

May Housing Starts and June Preliminary Consumer Confidence

KEY DATA: Starts: -5.5%; 1-family: -3.9%; Permits: -4.9%; 1-Family: -1.9%/ Confidence: down 2.6 points

IN A NUTSHELL: “The downward trend in home construction does not bode well for growth either this quarter or this year.”

WHAT IT MEANS: Business leaders and owners, whether they are involved with small or big businesses, are exuberant. But the optimism doesn’t seem to be translating into surging economic activity. The latest signal that the economy is bumping along comes from the home construction numbers. Housing tarts fell sharply in May, with both single-family and multi-family activity declining. This was the third consecutive decline in activity. There were big reductions in home building in the Midwest and South, while conditions were flat in the Northeast. Only the West posted a gain, and it wasn’t anything great. The level of starts is the second lowest over the past eighteen months. While permit requests are falling as well, they are still running a little above starts, so we might see some improvement in construction in the next couple of months. Still, don’t expect the rate to be anything great.

Consumer confidence continues to fade. The University of Michigan’s Consumer Sentiment index fell fairly sharply in the first part of June. Both the current conditions and expectations components were down. Consumers are still quite optimistic, but the bloom is off the rose when it comes to the euphoric outlook that people had after the election. Indeed, the expectations index was the lowest since October 2016 and is up only modestly since last June. The current conditions index is actually below its June 2016 number. As for inflation, while near-term expectations were stable, people now believe inflation will be higher over the next five years. That was surprising given the recent slowing in price increases. 

MARKETS AND FED POLICY IMPLICATIONS: I have been expecting second quarter growth to be pretty solid, somewhere in the 3% range. But the data that have come in recently raise doubts whether that handle could be reached. Housing has been a key driver of growth over the past two quarters, but that doesn’t look like it is the case during the current quarter. In addition, the slide in vehicle sales doesn’t bode well for second quarter consumption. And with businesses waiting for some indications about the shape of tax changes, we shouldn’t expect capital spending to be great either. Put that all together and I suspect most forecasters will be marking down their second quarter GDP growth estimates. I am. That is important because now that the Fed has moved twice this year, we need some economic strength to have confidence that process will continue. Living in Philadelphia, I have learned to “trust the process”, but Fed policy is different from sports management. The Fed appears to want to continue raising rate at a steady pace and once it begins shrinking its balance sheet, to do so consistently as well. For both of those things to happen, the economy has to expand at least at the trend rate of roughly 2% to 2.25%. We may not get there during the first half of the year if second quarter growth turns out to be 2.5% or less. That cannot be ruled out. As for investors, there is no reason to be bullish unless you think there will be significant tax changes, be it real reform or the more likely tax cuts (the two are very, very different). Given the chaos in Washington, you tell me what is going to happen and we both will know.

May Producer Prices and Small Business Optimism

KEY DATA: PPI: 0%; Over-Year: +2.4%; Goods: -0.5%; Energy: -3%; Services: +0.3%/ NFIB: Unchanged

IN A NUTSHELL: “With inflation at reasonable levels and small businesses optimistic, tomorrow the Fed can do what it is expected to do, which is raise rates again.”

WHAT IT MEANS: The Fed is starting its two-day meeting today and it would take a blockbuster number for the Fed to change course. Today’s reports don’t qualify as they were in line with what we all know and expect from the data: Inflation is not a threat but business leaders are exuberant. Wholesale costs were flat in May as declining food and energy prices offset moderate increases in other goods and services. Excluding energy, goods costs were up moderately with the pace over the year pretty much at the Fed’s target. Indeed, if you look at the details and the special indices, most rose since last May by somewhere between 1.5% and 2.5%. In other words, at least when it comes to producer prices, inflation is right where it needs to be for the Fed to make any move it wants to make.

If inflation is pretty much on the mark, what about growth? The disappointing first quarter will likely be followed by a better second quarter. But going forward, it will take businesses expanding more aggressively to move the expansion into higher (not necessarily high) gear. If you believe the business optimism numbers, the corporate sector is ready and willing to do its part. We already knew that CEO confidence was soaring and that exuberance is being matched by small business owners. The National Federation of Independent Business’ Confidence index was flat in May. However, that is misleading. It remained near record highs. Respondents think it is a great time to expand and they are extremely hopeful that business conditions and earnings will improve. They are hiring and hope to hire more workers, but they cannot find qualified applicants. No surprise there.

MARKETS AND FED POLICY IMPLICATIONS: The Fed will announce its decision tomorrow afternoon and we are likely to see another tick up in rates. The markets have given the FOMC a free pass so it might as well take it. But it isn’t just the funds rate that will be watched. It is clear the members want to start reducing the Fed’s balance sheet and we need to look for any signals on when that might start. We need to also watch for indications that the process of normalization will continue on a consistent basis. The view on the economy is important in making any judgment on how many more times the Fed may move this year. Today’s data should have made few waves with investors. It’s tomorrow’s statement, press conference and economic projections that most people will be watching closely.

April Consumer Spending and Income, May Confidence and March Home Prices

KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: +0.2%/ Confidence: -1.5 points/ National Home Prices: +0.3%; Over-Year: +5.8%

IN A NUTSHELL: “With income growth solid, consumers should be able to keep spending at a decent pace.”

WHAT IT MEANS: If there is any possibility that the economy can break out of its 2% growth trend, the consumer will have to play a major role. To do that, wages and salary increases have to accelerate and that may be happening. Incomes grew solidly in April, the third month out of the last four where the increases were strong. That is another sign that the tightening labor market is finally starting to force firms to pay up a little more for workers. And households are taking that money and spending it. Consumption was also pretty good in April as people bought a lot more goods. Unfortunately, the demand for services was largely flat and that component is nearly two-thirds of consumption. Even with the weak services spending, consumption is growing above 2% so far this quarter, which is a good start. As for inflation, prices continue to rise moderately. Actually, the year-over-year rise has decelerated and is now below the Fed’s 2% target.

Consumer confidence has started to wander around. Today, the Conference Board reported that their confidence index fell in May as expectations moderated. Last week, the University of Michigan said that consumer sentiment was largely flat as the current conditions measure declined. Put the two together and it appears that the Trump confidence bump has run its course. Given all the chaos we saw in May, that confidence hasn’t faded sharply is a good sign that people are still holding out hope that things could change.

With the supply of homes limited, is it any surprise that housing prices continue to rise solidly? The S&P CoreLogic Case Shiller national index of home prices was up again in March and over the year, the price increase is approaching 6%. This is somewhat below the Federal Housing Finance Agency’s reading, but both are indicating that the price gains are accelerating. 

MARKETS AND FED POLICY IMPLICATIONS: Did the government change the date for Memorial Day to April? That is the only reason I can explain temperatures in the sixties this past weekend. The government gets blamed for everything else, so why not the unseasonably cool Memorial Day weekend weather on the East Coast? As for the economy, today’s number provide hope that second quarter growth will be a lot better than the anemic, but at least upward revised, first quarter increase. This week we get vehicle sales and the May jobs report and those two should help determine what the quarter will likely look like, though I doubt they will influence what the Fed will do at the next FOMC on June 13-14. I expect vehicle sales to rise a little from the May pace but job gains could be below expectations of about 185,000. I would not be surprised if the payroll rise is around 140,000 and the unemployment rate ticks upward. The average monthly number of jobs added so far this year is 185,000, which I don’t think is sustainable. Something in the 140,000 range would bring the monthly average closer to the 150,000 to 175,000, which is what is believe is reasonable given the growth rate and the shortage of workers. But the number to watch is average hourly earnings. That is really the only measure in the employment report that attempts to gauge wage pressures, and it should be strong. It isn’t a good measure, but it is the best we have on Friday, so look for it.

April Existing Home Sales

KEY DATA: Sales: -2.3%; Over-Year: +1.6%; Prices (Over-Year): 6.0%

IN A NUTSHELL: “The biggest problem with the housing market is a dearth of inventory, which is keeping sales down and prices up.”

WHAT IT MEANS: What fun it must be to have a house on the market right now. Okay, it is rarely ever fun to be selling a home, but if you have to do it, now would be a good time. Yes, the National Association of Realtors reported that existing home sales fell in April. That mirrored the decline we saw in new home purchases. Demand has bounced around, as it usually does and the March pace was the highest in a decade, so don’t read too much into the April fall off in purchases. Sales rose in the Northeast and Midwest, but those gains were more than offset by drops in the South and West. There was no region, though, that posted outsized increases or declines. But the real story was in inventories. While they remain way too low, they have steadily increased for the past four months. Hopefully, that pattern will continue as there are only 4.2 months of supply on the market at current the sales pace. A normal market would have about six months of supply. The lack of homes being sold has affected prices and the sales pace. With few units available, buyers simply cannot find what they want. When they do, in a growing number of areas, they are finding themselves in bidding wars. That is leading to rising home prices.

MARKETS AND FED POLICY IMPLICATIONS: It is hard to buy a home that is not for sale and that is the issue facing the housing market. Builders are ramping up construction, but they are limited in their ability to meet the demand for more affordable housing due to costs. Meanwhile, people who already own homes are still reluctant to sell them. It may be an issue of a lack of equity, lack of mobility, low mortgage rates that they have locked into or the recognition that they simply don’t have to change location just because they no longer enjoy their current location. Essentially, the “churn” in the market, where existing owners pick up and move, just hasn’t come back and that was the key to the health of previous housing markets. It is unclear what will increase the churn, but until it does return, expect sales to rise only slowly while prices continue to jump. This is not a report that will have any impact on investors. Is anyone really trading on a housing market that is supply restricted? As for the Fed, the housing sales trend is generally up, which is what they care about. And the rising prices add to inflation, which buttresses the members’ view that their dual mandate has been met. A rate hike is coming. I would be surprised if the FOMC doesn’t make a move at either the June or July meeting.

April Consumer Prices, Retail Sales and Real Earnings

KEY DATA: CPI: +0.2%; Excluding Food and Energy: +0.1%/ Sales: +0.4%; Excluding Vehicles: +0.3%/ Real Hourly Earnings: +0.1%

IN A NUTSHELL: “The rising costs that businesses are facing have yet to translate into significant increases in consumer prices.”

WHAT IT MEANS: This week we saw that the goods businesses buy have been rising in cost. But that doesn’t mean firms are passing those costs along, at least not yet. Consumer prices rose moderately in April driven largely by jump in energy costs. Gasoline, electricity and natural gas costs all rose sharply. Otherwise, this was a pretty tame report as a number of goods posted declines. Prices of vehicles, both new and used, apparel and medical commodities were all down. It is interesting to note that medical services and commodity prices paid by consumers have been relatively modest and the medical care inflation rate has decelerated for the past seven months. It is now below 3%. Housing is one place where consumers are seeing consistently higher prices. Excluding food and energy, inflation has come off and is now below the Fed’s 2% target, though it remains above it for all consumer goods.

For the economy to pick up steam, consumers will have to spend a lot more than they did in the first quarter. They are doing that to some extent. Retail sales rose moderately in April as sales of motor vehicles rebounded. The vehicle sales rate, however, remains below where most manufacturers want to see it. But the really good news was that households went out and bought lots of electronics, building materials and to deal with the chaos in Washington, medical products. They ate out at a decent pace and online sales were strong. There was a rise in gasoline spending, but there was also a much larger rise in prices, so people may have actually cut back on their driving. The mid-April timing of Easter could have pulled some March spending forward, so we need to be careful in concluding that consumers are back out buying things.

Can households continue to pick up their spending pace? Yes, but not by much. Real earnings, which adjusts for inflation and represents spending power, rose minimally in April. If you want to know why consumption has its limitations, consider the simple fact that spending power rose by less than 0.5% over the past year. If you don’t have the money to spend, you cannot spend unless you go into debt. Unfortunately for the average retailer, households have gone heavily into debt for homes and vehicles this past year and that may be limiting their ability to spend on everything else.

MARKETS AND FED POLICY IMPLICATIONS: Inflation may not be rising sharply and that is the one saving grace for this economy. With wage gains barely exceeding the moderate inflation rate, the potential for consumption growth is limited. Let’s not forget that tax cuts prime the pump but once it is primed, you still need to expand spending power. So you get a short-term bump to a higher level of demand but where do you go from there? It depends heavily on income growth adjusted for inflation. Spending power growth peaked in October 2015 and has decelerated sharply since then as inflation accelerated and wage gains didn’t keep pace. Real wages have grown by less than 1% per year, on average, for the past seven years and increased by over 2% only in 2015.   Unless that changes, don’t expect consumers to spend at a pace that could lead to stronger economic growth. Investors might like these reports, but for the wrong reason. A more moderate inflation rate could be viewed as limiting the Fed’s animal instincts (i.e., their desire to normalize rates). But if the hope is that the economy will grow at 3% or more, well you can get it for a short time with a tax cut but it cannot be sustained without much more rapid real wage gains. And that could cut into earnings.

 

March Durable Goods Orders, Pending Home Sales and Weekly Unemployment Claims

KEY DATA: Orders: +0.7%; Excluding Transportation: -0.2%; Capital Spending: +0.2%/ Pending Sales: -0.8%; Claims: +14,000

IN A NUTSHELL: “The soft demand for big-ticket items doesn’t provide hope that the first quarter sluggishness will turnaround soon.”

WHAT IT MEANS: The administration wants to create 3% growth for as far as the eye can see. Well, it has a way to go to get there. Durable goods orders rose in March, which should be a good sign. However, much of the gain came from a surge in defense aircraft orders and a more moderate increase in nondefense airplane demand. Meanwhile, orders for vehicles, computers, communications equipment, fabricated metals and machinery were off. There was strength in the electrical equipment and appliances segment, as well as primary metals, but that was it. As for capital goods spending, it rose only minimally. CEOs may be optimistic, but they have yet to put their money where their mouths are. Looking outward, order books did fill a bit, so there could be some additional production going forward.

The housing market has been doing its part in keeping the economy going and that should continue. Yes, the National Association of Realtors reported that pending home sales eased in March, as three of the four regions reported that contract signings for existing homes declined. They were up only in the South. However, the level is still quite high, so look for home sales to be strong, even if the growth in demand isn’t great.

New claims for unemployment insurance rose solidly last week. This number has been noisy lately, so don’t take too much away from the increase. The level is still low, indicating that the labor market continues to tighten.

MARKETS AND FED POLICY IMPLICATIONS: It looks like tomorrow’s GDP report could be very disappointing. After today’s durable goods orders numbers, the Atlanta Fed thinks growth could come in essentially flat. The surging household and business optimism has not translated into growing economic activity. People are optimistic, but are taking the Jerry Maguire approach: Show me the money! The greatest tax cut in the history of the solar system may have been proposed yesterday, but its passage is well into the future. Indeed, it is hard to know what will come of the proposal as the one-pager was purposely vague so it couldn’t be scored. At least that is what the White House budget chief indicated. That said, it can and is being scored, if only to provide a baseline from which legislators can work as they try to actually reform the corporate tax system. The numbers have started rolling in and they are pretty discouraging. The estimates of the hit to the national debt ranges from $3 trillion to $7 trillion over a decade. That means there will have to be massive loophole closings or the tax cuts will balloon the debt. The administration hasn’t shown any great willingness to detail those changes to the corporate goody-bag, leaving the heavy lifting to Congress. Unless Republicans suddenly have an epiphany and decide that deficits are wonderful, it is likely the final plan will look nothing like the one-pager the President and his men proposed. And that is good reason for businesses and households to not act until they determine if they are suffering from rational or irrational exuberance.

April Consumer Confidence, March New Home Sales and February Housing Prices

KEY DATA: Confidence: -4.6 points/ Home Sales: +5.8%/ FHFA Prices (Over-Year): +6.4%; Case-Shiller National Index (Over-Year): +5.8%

IN A NUTSHELL: “Home prices are soaring and housing sales are up, but reality is setting in and confidence is fading.”

WHAT IT MEANS: While we will not get the first reading on first quarter growth until Friday, it doesn’t look like it will be good. But that doesn’t mean we cannot get a rebound. For the economy to pick up steam the consumer is going to have to lead the way and it is not clear that will happen. Consumer confidence is starting to reflect the realities of governing, not the hopes that the swamp will be drained, whatever that means for economic policy. Not surprisingly, the Conference Board’s measure of consumer sentiment eased in April. After having soared since the election, the failure to implement any real policy changes has made people a little more uncertain about what will actually get done. Don’t be surprised if confidence retrenches for several more months or until Trump actually gets something passed.

Despite the decline in confidence, the level is still high and that has translated into growing willingness to take on debt. New home sales rose solidly in March, joining existing home sales which also rose at a strong pace last month. Compared to March 2016, sales were up an impressive 15.6%. The rise in new housing purchases occurred despite a modest slowdown in the Midwest. That portion of the country had posted a huge rise in February, so a small drop is nothing to be concerned about.

With sales up, so are prices. Both the Federal Housing Finance Agency and the S&P CoreLogic Case-Shiller home price indices jumped in February and have posted large over-the-year gains. We are not yet in a housing bubble, but the dearth of supply, which persists in both the new and existing housing segments, will likely lead to even faster price increases going forward.

MARKETS AND FED POLICY IMPLICATIONS: The markets are concentrating on earnings and the likelihood (?) or hope (?) that a moderate will win the French election. Thus, fears that France might pull out of the EU have been eased by this weekend’s first round results. And earnings have been okay despite soft growth. A weaker dollar hasn’t hurt, but that is currency translation, not necessarily real business gains and foreign earnings don’t necessarily find their way back into the U.S. But the strength in the equity markets indicate that even a soft first quarter growth number might not do much to corral the stamped. That might have to wait until the employment report is released a week from Friday. One number to watch is the wage growth. The Philadelphia Fed released its non-manufacturing report today and the eye-opener was an enormous jump in the compensation component. Nearly forty percent of the respondents indicated that they had to increase wage and benefit costs. Labor cost inflation is finally starting to show its head, though I have said that a number of times before. Still, if the Fed is to raise rates in June or July, which I expect, it is going to need something to base that increase on. Rising wages would allow Chair Yellen to say that the labor market is clearly tight and that could be enough to announce another quarter-point move.

April Philadelphia Fed Manufacturing Activity, March Leading Indicators and Weekly Jobless Claims

KEY DATA: Phil. Fed: -10.8 points; Orders: -11.2 points; Jobs: +2.4 points/ LEI: +0.4%/ Claims: +10,000

IN A NUTSHELL: “The economy continues to move forward even as the manufacturing sector slows.”

WHAT IT MEANS: The more data we get, the clearer it becomes that the slowdown in consumption and the cautious spending on capital goods is taking its toll on manufacturers. The Philadelphia Fed’s Business Outlook Survey, which looks at manufacturers in the Mid-Atlantic region, dropped sharply in early April. This number is extremely volatile, so don’t read too much into the decline. Indeed, the level of activity is still quite solid. But, as can be seen in the moderation in the growth of new orders, the manufacturing is no longer accelerating as fast as it had been. But there were some good numbers in this report. Hiring is improving and worker hours are expanding. Also, expectations on capital spending were quite strong, with much of the funds being directed toward non-computer equipment and software. Firms are taking a wait and see approach, though, as most of the new investment is expected to occur in the second half of the year.

Looking forward, we could see a pick up in activity. The Conference Board’s Leading Economic Index rose solidly in April after even bigger increases in February and March. The gains were in most components, another sign that conditions could be firming. But it will still take more consumer and business spending if we are to shake off the first quarter lethargy.

Jobless claims jumped last week but that was not the big news in the report. The number of people on unemployment insurance was the lowest in seventeen years. Adjusting for the size of the labor force, we are closing in on historic lows set in the 1960s, when benefits were much less generous and less long lasting. In other words, there just are not a lot of people in the reserve army of the unemployed.

MARKETS AND FED POLICY IMPLICATIONS: While there are lots of numbers to come out over the next two weeks, we really need to focus on just two: The first quarter GDP report, which will be released on Friday, April 28th, and the April jobs report, which will come on the following Friday, May 5th. A first quarter growth rate below 1% cannot be ruled out, though I think it will be closer to 1.5%. Regardless, a low increase would set us up for another year of trend growth, which is pretty mediocre. The April jobs report should be a good measure of what are sustainable job gains. The January and February increases were excessive and the soft March number moved the three-month average to a more normal level. If the April increase is in the 150,000 to 175,000 range, we should assume the economy is not likely to accelerate sharply. That is something that will play on the minds of the FOMC members when they meet May 2-3. Don’t expect much to come out of that meeting, though a hint on when the Fed might start shrinking its swollen balance sheet could create a stir. Today’s numbers shouldn’t move investors one way or the other. Investors do have earnings reports, which continue to dribble out, to mull over.

March Employment Report

KEY DATA: Payrolls: +98,000; Revisions: -38,000. Retail: -30,000; Unemployment Rate: 4.5% (down from 4.7%); Wages: +0.2%

IN A NUTSHELL: “Well, it turns out a sluggish economy really doesn’t create large numbers of new jobs.”

WHAT IT MEANS: I have been commenting this week that I was surprised by some of the high estimates for job gains. Economic growth was tepid in the first quarter yet the January and February payroll increases were robust. I warned that the jobs number would disappoint, but even my pessimism was not nearly as great as it should have been. Companies didn’t go out and hire lots of workers in March and the large increases reported for the previous two months were not as strong as initially thought. But before we get too worried, the economy added an average of 178,000 new workers each month during the first quarter and that is pretty good, especially since most firms are complaining they cannot find qualified workers. This was a rather nondescript report as there were no sectors where hiring was robust and only one that posted a truly disappointing one. Retailers continue to retrench, as we all know, and the growing number of store closings led to a large drop in payrolls. The cold March weather probably didn’t help much either. That was pretty much it.

On the unemployment front, the rate dropped and is now the lowest since May 2007. The so-called real (or really stupid) unemployment rate fell to 8.9%, the lowest since December 2007. In other words, we are back to before the Great Recession. The decline occurred for all the right reasons: Falling unemployment, rising employment and increasing labor force.

Wages rose moderately and they are up a solid 2.7% over the year. However, with inflation increasing at a similar pace, household spending power continues to go nowhere and that is likely to restrain consumption going forward.

MARKETS AND FED POLICY IMPLICATIONS: As I visit clients and try to explain that there are limitations to growth even if corporate taxes are cut, I keep getting push back. But the reality is that you have to do the math. Businesses cannot find qualified workers – without bidding them away from competitors and driving up costs – because most of them are already working. Even if you add in discouraged workers and those working part-time for economic reasons, the labor supply is limited because many of those are either in seasonal industries, don’t live where the demand exists, don’t meet hiring profiles because of drug or background checks, are too old or simply don’t have the skills. You can argue all you want that the welfare system is too generous and is keeping people out of the workforce, but the research on the subject doesn’t support the view that the participation rate is significantly low. Indeed, the Bureau of Labor Statistics and private sector researchers forecast furthers decline in the participation rate due to demographic forces. So going forward, it may be hard to match the job gain monthly average posted during the first quarter. But anything over 125,000 or so should be enough to slowly drive down unemployment, making it even harder to hire and expand. And if you are assuming robots will solve the labor problem, the Republicans are now say a tax bill may not be in place until the end of the year. Given the lag between orders and the time it takes to make them operational, labor-saving capital investment will do little to ease the labor shortage before the end of next year – if it does at all. What am I saying? The economy is likely to expand a little faster this year than last and with tax cuts, somewhat faster in 2018. But it is hard to see how we get to robust growth with labor shortages that will only intensify going forward.