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Posts by Theodore Cangero, Data Scientist

Why Auto Sales Are Up

Increased sales of both cars and light trucks have been supported by improvements in both the labor market and financing conditions.

Cars and light trucks in the U.S. sold at an annual rate of 17.7 million in November, according to information released by Autodata last week. That marks a solid increase from the spring, when vehicles sold at an annual rate of 16.5-17.1 million.

The U.S. economy has added an average of 188,000 jobs each month over the past year. Even with brisk hiring, data on job openings released this morning remains elevated, suggesting continued job gains. Layoffs are subdued, with initial claims for unemployment insurance as a share of employment are at an all-time low. The unemployment rate fell to 4.6 percent in November, its lowest point since the recession. Solid employment prospects have helped some consumers qualify for auto loans.

According to the Federal Reserve’s Senior Loan Officer Survey, auto financing conditions have improved. Over the past three months, loan officers reported that credit score requirements and down payment requirements for auto loans are little changed. Loan officers also reported that maturities for auto loans were lengthened. Loan officers at small banks reported offering lower interest rates. Auto loan delinquency rates have been stable at 3.4 percent, markedly improved from the 5 percent rate in recent years.

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What Sales and Inventories Tell Us About the Economy

sales-to-manufacturing-oct-2016-ted

In any given month, if sales outpace inventories, then firms are seeing strong demand. If inventories rise by more than sales, then demand is likely weak.

The fact that sales outpaced inventories in October helped push our index of leading indicators further into positive territory. Our Leaders Index stands at 58, up from 54 in September, with 50 being neutral. We view that as a further indication that the risk of recession in the coming months has diminished somewhat.

After declining since the beginning of the year, the manufacturing sales-to-inventory ratio improved to neutral in September, and remained neutral in October. In the latest month, manufacturers’ sales increased by $1.8 billion, led by a jump in sales of non-durable goods including food and textiles.

During the same time period, inventories rose less than sales, increasing $483 million. With manufacturers’ sales increasing by more than inventories, the trend in the ratio improved from negative to neutral.

Taken with other improvements in the leading indicators, including housing permits and debit balances in margin accounts, our index shows a slightly improved economic outlook.

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Manufacturing Employment Shows Some Resiliency

Manufacturing has been one of the challenging areas of the economy this year, but this morning we received data that shows a more positive outlook.

The Institute for Supply Management this morning released its Purchasing Managers’ Index, or PMI, a survey of purchasing managers at U.S. manufacturers. This summer this index indicated some weakness, but the composite PMI increased from 51.5 in September to 51.9 in October. Readings above 50 suggest expansion in the manufacturing sector, and readings below 50 suggest contraction.

Production accelerated from 52.8 in September to 54.6 in October. However, new orders slowed from 55.1 in September to 52.1 in October, while backlogged orders fell for the fourth consecutive month. Rounding out the PMI, the employment index moved from contraction in September at 49.7 to 52.9 in October, indicating expansion.

The positive reading is good news for manufacturing employment, which has been sluggish over the past year. Manufacturing payrolls have declined by 47,000 over the past 12 months while job openings have declined from their post-recession peak in April.

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Today’s Chart: Consumer Confidence and Job Quits

Consumers have been confident about the state of the labor market in recent months. The Conference Board, a private research organization, reported on Tuesday that more consumers feel that jobs are plentiful, as opposed to hard to get. In October, 24.3 percent of consumers responded that jobs are plentiful, in contrast to 22.1 percent of consumers that believe jobs are hard to get, a differential of 2.2 percent.

The differential between the share of consumers that feel jobs are plentiful and the share of consumers that believe jobs are hard to get has been above zero since July, the longest positive trend since the Great Recession. At the same time, consumers are quitting jobs at a faster pace, presumably for a better job.

The quits rate, which is the number of workers who quit their job as share of total employment, has been trending higher since the end of the recession. When the recession ended in 2009, the quits rate was 1.3 percent. Today the quits rate is 2.1 percent. Looking ahead, it is likely that consumers will remain confident about the labor market because firms have an elevated number of job openings. As of August, the number of job openings stood at 5.4 million, slightly off their all-time high of 5.8 million in July.

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Best of 2015: An Economist Approach to Car Shopping

This week, as we recharge for the new year, we highlight a few of our best-read blogs of 2015. This piece originally ran in September.

ted car 2Like for most Americans, buying a car has always been a stressful but necessary personal finance decision for me. This time around, now with the backing of an education and work experience in economics, I was able to take a more methodical, informed approach to one of life’s bigger expenditures

First I needed to figure out the basics. I decided on a new car because I drive almost 25,000 miles a year commuting to work, so I couldn’t be starting with a car that already had miles on it. Running up the mileage causes rapid depreciation, so I needed to find a car that holds its value. Driving that much also meant I needed a ride with good gas mileage.

The other top priority was style and handling. I consulted Kelley Blue Book and Consumer Reports and narrowed the decision down to a Honda Civic and a diesel engine Volkswagen Jetta. I opted for a manual transmission because it’s more fun and was almost $1,000 cheaper than the automatic transmission.

The next step was creating a financial plan. I immediately ruled out leasing because of my high annual mileage; most leases have an annual mileage limit of only 12,000. I had to figure out financing. This required I determine the value of my trade-in, the down payment, and monthly payment. As for the trade-in, I inherited a financed Nissan and had built substantial equity in the car. I used Kelley Blue Book again to determine the value of my trade-in. I shopped around and made dealers compete for my trade-in.

The process of saving for a down payment involved creating a medium-term plan. I created a monthly budget and savings plan for my down payment using AIER’s budget book. Knowing my budget also helped me know the monthly payment I could afford. Every choice involves a trade-off; I did not want a high monthly car payment and have to give up other things.

The last piece of the financial puzzle was financing. I needed to know what interest rates were, so I consulted AIER’s Business Conditions Monthly. The other important piece was obtaining my credit report. AIER intern Joshua Ibanez pointed out earlier this summer that you can get three free credit reports a year, one from each of the three national bureaus: Equifax, Experian, and Transunion, by visiting www.annualcreditreport.com.

Before going to the dealership I took a step back and looked at the big picture. In economics everything is a market with supply, demand, and price. Dealerships are facing strong demand while supply isn’t an issue, but competition is still tough. Dealerships have thin profit margins and need to move volume to pad their bottom line. So I knew that I could wait for a sales event or manufacturer incentive.

I showed up at a Honda sales event ready to implement my plan, not the salesman’s plan for me. I kept negotiations short because I knew what I could afford and what I wanted. I drove a 2015 Civic off the lot and been nothing but happy with gas mileage, handling, and style.

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We Can’t Burn Gasoline Fast Enough

It appears to defy economic logic: Large numbers of American oil rigs have gone idle, and thousands of oil workers have lost their jobs.

Nevertheless, the price of gas has stayed low. Even with far fewer working rigs, production remains only slightly off its peak, and inventories are at their highest point in recent memory. We can’t burn gasoline fast enough to keep pace with ever-increasing supplies.

So why is that?

First, let’s put the impact of low gas prices on American consumers in some perspective. Here at the American Institute for Economic Research, we publish a monthly report called the Everyday Price Index. It starts with the catch-all Consumer Price Index, and then we strip out expenses that remain fixed, like home mortgage costs.

In November, our Everyday Price Index – essentially, the cost of living — decreased 0.6 percent. In contrast the Consumer Price Index decreased 0.2 percent on a not-seasonally-adjusted basis. AIER’s EPI is not-seasonally adjusted.

Over the past year, the EPI has fallen 2.3 percent while the CPI has increased 0.5 percent. The difference between the two is largely due to a drop in energy prices. The EPI assigns a greater weight to energy.

Everyday prices have been restrained by gasoline prices, which decreased 4.2 percent in November, and have decreased 24.1 percent over the past year. Gasoline prices have been held back by crude oil prices, which have declined significantly over the last 12 months (see chart below).

As prices fall, oil production would, at least theoretically, tend to decline in response. So oil rigs have shut down in large numbers, as you can see from the chart below. The U.S. rig count is down by 1,184 over the past year.

But many of these were low productivity wells. Those that remain in use tend to be those that extract more crude. Thus, production remains only slightly off its peak, as you can see from the chart below.

So even as rigs shut down, inventories keep piling up (see chart below).

Higher inventories mean that consumer demand is easily met. Consumer demand for gasoline has increased 1.5 percent over the last year. Demand pressure on gasoline has been coming from strong sales of light trucks

… and more miles driven on America’s roads:

Eventually, lower U.S. production should begin to put upward pressure on prices.  However, the more important factor may be global crude production, and that is much more difficult to predict.

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Sources: Commodity Research Bureau, Bureau of Labor Statistics, Baker-Hughes, U.S. Department of Energy, Bureau of Economic Analysis, U.S. Department of Transportation.

Aaron Nathans contributed to this report.

The Tale of Two Food Prices

Agricultural commodity prices, the inputs to finished foods, have declined notably over the last year, but consumers are only experiencing the beneficial effects of that at the grocery store – not at restaurants.

That’s one finding of the Everyday Price Index, a monthly report by the American Institute for Economic Research. The EPI starts with the Consumer Price Index, then strips out prices that are contractually fixed, like mortgage payments, to provide a closer look at things people buy more frequently.

One of the major everyday costs people face, besides gasoline, is groceries. Read more

Increasing Competition May Curb Restaurant Prices

As consumers gradually show a willingness to spend, the cost of one indulgence – eating out at a restaurant – has been getting more expensive over the last year.

Prices of food-away-from-home increased 0.5 percent in September, according to the new edition of the Everyday Price Index by the American Institute for Economic Research. Over the past year, prices at full-service food-away-from-home establishments have increased by 2.6 percent, and prices at limited-service food-away-from-home establishments increased by 3 percent.

A full-service restaurant has amenities beyond food, drink, and seating such as wait staff and entertainment. For example, Read more

An Economist Approach to Car Shopping

ted car 2Like for most Americans, buying a car has always been a stressful but necessary personal finance decision for me. This time around, now with the backing of an education and work experience in economics, I was able to take a more methodical, informed approach to one of life’s bigger expenditures

First I needed to figure out the basics. I decided on a new car because I drive almost 25,000 miles a year commuting to work, so I couldn’t be starting with a car that already had miles on it. Running up the mileage causes rapid depreciation, so I needed to find a car that holds its value. Driving that much also meant I needed a ride with good gas mileage.

The other top priority was style and handling. I consulted Kelley Blue Book and Consumer Reports and narrowed the Read more

Why You’re Paying More for Eggs

Egg prices were up 7.7 percent in December, and 10.7 percent over the past year, according to the Bureau of Labor Statistics. Two key causes for the jump in prices are the spread of avian flu in Mexico and new regulations for egg producers in California.

Demand for U.S. eggs from Mexico has picked up recently because avian flu in that country’s birds has culled hen flocks, reducing Mexico’s domestic supply.  The jump in demand comes despite a strengthening U.S. dollar, which makes U.S. eggs even more expensive for Mexican importers.

Looking ahead, the extra demand from Mexico may be offset by bans implemented in the past few weeks on U.S. poultry products by China, the European Union and South Korea, despite the fact that no avian flu cases have been reported in the U.S.  In addition, Mexico will likely be replenishing their hen flocks as quickly as possible. These developments suggest the surge in egg prices may be short lived.

The second cause of the recent surge in egg prices are new standards implemented by California, the fifth-largest egg-producing state in this country. California now requires that hens have enough space to get up and turn around. The new regulations have required many farmers to retrofit their henhouses; this increase in production costs has translated to higher prices, but is also likely to be temporary as these one-time retrofits are completed.