Weekly Special: Happy Thanksgiving

11-22-2017

Note to my readers: Following are some nuggets I’ve been gathering for this holiday-shortened week. I’ll be back in full force next week.

Talking tax reform

Might 2003’s tax cuts be instructive? In 2003, yields were falling as Congress began debate on the tax bill. But when the subsequent tax cuts were delivered almost immediately, financial markets re-priced for higher growth, causing the 10-year Treasury yield to jump 140 basis points in six weeks! Given the similarity of the current proposal (lower tax rates, new investment incentives, etc.), 2003 may make for a good—not perfect—example. The major difference: the jobless rate was over 6% then and today it’s hovering around 4%. But just like 2003, we’re stuck in a low-growth environment. And just like 2003, liberal economists Larry Summers and Paul Krugman will lead the argument that these tax cuts will not create growth. In 2003, the Blue Chip/CBO forecast for real GDP growth was 2.2%. Over the next three years, nominal GDP growth exceeded that forecast by more than $600 billion.

Might tax reform boost inflation? The Republican tax plan is designed to give a significant boost to business spending and hiring, with subsequent increases in capacity and productivity raising the likelihood the economy can grow at a sustained 3% pace. The challenge is the package may be implemented at a time the jobless rate is around 4%, raising risks it may result in more inflation than GDP growth. Why? Companies looking for more workers when there’s already full employment won’t create new jobs as much as start a bidding war for already employed workers. This could boost wage and price inflation—and a Fed response.

Where are we in the cycle?

Unemployment is relative The unemployment rate varies based upon level of education of the worker—no surprise there—as job-seekers with less than a high school degree have the highest jobless rate at 5.7%. What may be surprising is this rate is the lowest for this group since detailed data collection started in 1992. By contrast, the 2% unemployment rate for job-seekers with a college degree and up is higher than the post-1992 low of 1.5% in 2000. Similarly, the rate for job-seekers with some college or an associate degree is 3.7% versus a low of 2.4% in 2000.

Pay is relative, too Deutsche Bank ranked 622 industries according to October’s average hourly earnings and divided them into three buckets: low-wage, medium-wage and high-wage industries, each with about 200 in their category. Wage growth was strong for the low- and middle-income earners, fitting with the anecdotes that minimum wages are going up and many industries are struggling to find workers. For the high-wage group, however, wage inflation is not rising despite its 2% jobless rate. Put differently, wage growth for low- and middle-income earners is rising in response to a tight labor market. But wage inflation for high-income earners is surprisingly low at this point in the cycle.

A little R&R (restaurants & retail)

McDonald’s delivers? Increased demand for delivery could mean fewer freestanding restaurants, eat-in and counter-carry establishments in coming years. For example, 75% of people live within 3 miles of a McDonald’s, where a growing number of its customers prefer to take delivery of their burgers and fries. Already, 60% of McDonald’s delivery orders are placed online or via an app in the evening or late at night and arrive, on average, within 30 minutes. The potential shuttering of brick & mortar outlets could have a major impact on the U.S. labor market, where restaurants have accounted for 1 out of every 7 new jobs since 2000.

I prefer to flip pages, myself It’s been nearly 10 years since Amazon introduced its Kindle e-book reader, destabilizing publishers and challenging their well-honed business models. Now, e-book sales are declining and make up a fraction of publishers’ revenue, while traditional book sales are rising. According to the Association of American Publishers, e-book sales were down about 17% last year while printed book revenue rose 4.5%.

Talking about my (children’s) generation

Millennials sure are different An influential group of landlords believe millennials are increasingly concerned with how their work life impacts their physical and mental well-being. Crain’s New York Business reports that, earlier this year, one of New York’s largest commercial landlords rolled out Zo—a dedicated 2,500 square-foot space with a nurse practitioner and menu of services geared toward enhancing wellness. There also are private rooms where tenants can take yoga or even book time to take a nap.

Here come the first-time buyers With employment of millennials outpacing overall employment gains—it doubled the pace of October’s payroll gains—this generation is beginning to build the financial foundation for homeownership. We already are getting a taste of this, as Q3’s slight increase in the home ownership rate was driven in part by the youngest household groups. With homeownership rates still close to 50-year lows, this suggests there’s plenty of potential longer-term demand for housing as millennials start making their move.

What else

Capex, finally This year’s average growth rate of capital expenditures has been the best since 2014, with significant increases in mining structures and both IT and industrial equipment suggesting it’s likely to remain on an accelerating path well into 2018. This strengthen­ing, also reflected in the past week’s NFIB and Equipment Leasing & Finance surveys, has the potential to lift productivity growth, which in turn could drive real compensation higher.

Plus we have great football and hockey Forget balmy weather, white-sand beaches and manicured golf courses. Bankrate.com’s new ranking of the nation’s 50 largest metro areas as retirement havens gives less weight to such iconic hallmarks and more to practical attributes that can add up to a better overall quality of life, such as high-quality health care, a low crime rate and lots of other seniors. That put my hometown of Pittsburgh on at the top of this nation’s best places to retire, followed by Boston and Los Angeles.

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