RCF co-authors study on Postal Mail “Advertising Mail: Mail Mix Matters.”

RCF economists Peter Bernstein, Stephanie Burr, and Mihai Sturdza, in collaboration with the Office of the Inspector General of the US Postal Service, recently co-authored a study, Advertising Mail: Mail Mix Matters.

Their analysis found that recipients’ treatment of advertising mail depends on the mix of mail they receive.  An increased presence of non-advertising mail was found to increase the likelihood that a household would read its advertising mail, react positively to it, and consider responding to the advertisement.  In addition to the impact of mail mix, the study identified key characteristics of households, advertising mailers, and individual mail pieces that significantly affected the likelihood that a household will read, react positively to, and respond to Marketing Mail.  For a copy of the report, click here.

RCF economists are experienced experts in postal mail analysis, postal economics, and domestic and international mail forecasting.  For more information, contact:  Mr. Peter Bernstein, RCF Vice President, 312-431-1540 ext. 1515, pbernstein@rcfecon.com.

What Can a Carbon Tax Actually Accomplish?

Carbon taxation as a policy to rein in global climate change has been a favorite of economists and anathema to politicians. RCF Vice President, Donald Jones, Ph.D., investigated the power that a carbon tax might have to reduce carbon emissions.  Using derived demand models for electricity and gasoline his preliminary findings suggest that these carbon pricing policies would have limited effects on gasoline consumption but could noticeably reduce electricity consumption.  While further investigation is warranted, he states that “more aggressive fuel mileage targets as well as alternative-fueled vehicle adoption may be more effective in the long run in reining in CO2 emissions from transportation.”

For the PDF version of the full report please click here: https://www.rcfecon.com/wp-content/uploads/2019/02/The-CO2-Emission-Reduction-Potential-of-a-Carbon-Tax-Feb-2019.pdf

For additional information or questions, please contact:

Donald Jones, Ph.D.

RCF Vice President & Senior Economist

djones@rcfecon.com, 312-431-1540 ext. 1528.

Trouble with the Curve

Historically, an inverted yield curve, specifically one in which the 2-year interest rate is higher than the 10-year interest rate, has been a signal that a recession is on the horizon.  As of this writing, the 2-year interest rate remains just below the 10-year rate.  Still, as Chart 1 shows, the yield curve has gone from substantially upward sloping to more or less flat.  In fact, the 2-year rate has recently risen above the 5-year rate, so the curve is inverted, though not with respect to the 2-year vs. 10-year rates, often noted as a recession signal.

The expectation of lower future interest rates is often a signal of a future recession because interest rates tend to decline when the economy enters a downturn.  The recent flattening of the yield curve could well be a move toward an inverted curve.  The 5-year rate is lower than the 2-year rate reflecting expectations of falling interest rates in the future, which may be a valid signal of a future recession, regardless of the level of the 10-year rate.

Is This Time Different?

But before we surrender to the power of the curve, consider some other facts.  First, while all recent recessions have followed an inverted curve, not all inverted curves have been followed by recessions.  Throughout 1966 the yield curve was inverted but a recession didn’t begin until 1970.  And in 1998, the yield curve briefly inverted but the economy continued to grow strongly for almost three more years.  So it is a good, but not perfect, predictor of a turn in the business cycle.

A second fact to consider is that one reason why the yield curve is so flat is because 10-year interest rates remain quite low, particularly given the current strength of the economy and gradual increases in the inflation rate.  One reason why long-term U.S. Treasury rates remain low is that the bond market is a global market and “low” U.S. rates are much higher than rates on 10-year German bonds (0.27 percent) or Japanese bonds (0.06 percent).  International investors have been buying U.S. Treasuries, keeping interest rates from increasing in the U.S.  Perhaps then the inversion of the U.S. yield curve is saying more about the outlook for global interest rates and growth than about conditions in the U.S.

Our View

Reflected in the forecasts we provide to the Philadelphia Federal Reserve, the economy is expected to slow substantially in 2019 and 2020.  Whether this slowdown results in a recession remains unclear, but in any case, an economy that grows only 0.5 percent is not much better than one that shrinks 0.5 percent.  Hopefully, any future inversion of the yield curve will be one of those “false positives” as in 1998.  But with the current expansion approaching a record 10-year length, it is probably best to be aware of the trouble with the curve.

For additional information or questions, please contact Mr. Peter Bernstein, RCF Vice President, 312-431-1540 ext. 1515 or by email: pbernstein@rcfecon.com

For the PDF version of this report please click here: Trouble with the Curve 12 10 18

The Good, the Bad, and the Ugly from the 2018Q3 GDP Report

The Good

Real GDP grew at annualized rate of 3.5 percent in the third quarter, a solid top-line number following the 4.2 percent growth rate in the second quarter.  GDP was boosted by strong growth in real consumer spending which expanded at a 4.0 percent clip during the quarter.

A better measure of economic growth is the annual percent change from a year ago, which smooths out short-term quarterly variations.  By this measure, the economy grew 3.0 percent versus a year ago, the best performance in four years.  Whether this strength is due solely to the “sugar-high” from recent tax cuts and increases in government spending, or evidence of a more sustainable improvement in the economy’s upward trend remains to be seen.  But for now, the GDP numbers are good news.

The Bad

Real business investment spending expanded at a 12 percent rate in the third quarter.  What’s bad about double-digit growth in investment?  The fact that it was entirely due to an increase in business inventories, which are included in the calculation of investment.  Excluding inventories, fixed investment actually declined in the third quarter.  Residential investment – mostly construction of new housing – declined at a 4 percent rate.

It is true that the increase in inventories reverses an unusual inventory decrease from the second quarter.  But that is mostly beside the point.  The decline in fixed business investment suggests that the positive impact from the cut in corporate taxes is waning.  The stock market seems to think so, as the S&P 500 has dropped 10 percent from its recent all-time high.

The Ugly

Exports declined at a 3.5 percent rate in the third quarter while imports rose at a 9.1 percent rate.  The result was a huge increase in the trade deficit.  In fact, adjusted for inflation the quarterly trade deficit hit an all-time high in 2018Q3.  One might think that this is evidence that the focus on tariffs and trade wars is not working.  But given President Trump’s emphasis on reducing the trade deficit don’t be surprised if he doubles-down on his protectionist policies.

The Bottom Line

As shown in Chart 2, the economy has been gradually gaining strength over the past two years.  But Chart 2 also shows that an earlier period of stronger growth (in 2014) was followed by a slowdown.  We expect this pattern to repeat itself going forward.  As noted, the gains from the recent tax cuts are waning and the Federal Reserve will continue to increase interest rates.  The current weakness in the housing sector is concerning; sales of new homes are down 13 percent from a year ago which explains why new housing starts have dropped 10 percent since the start of the year.  Slower growth doesn’t mean a recession, though that cannot be ruled out for the not-too-distant future.  For now, however the labor market is strong and inflation seems to be stabilizing at a little more than 2.0 percent.  That suggests that workers’ real wages will start to grow, the one ingredient that has been mostly missing from the nearly decade-long economic recovery.  If somewhat slower growth is what is needed to keep inflation in check, it might be a price worth paying.  Boom and bust – that’s the scenario we’d rather not see.

For additional information or questions, please contact Mr. Peter Bernstein, RCF Vice President, 312-431-1540 ext. 1515 or by email: pbernstein@rcfecon.com

For the PDF version of this report please click here: RCF Analysis of 2018Q3 GDP Report (002) pdf

RCF Study on Property Values and Tax Rates Near Spent Nuclear Fuel Storage

RCF announces the upcoming publication of “Property Values and Tax Rates Near Spent Nuclear Fuel Storage” in the December 2018 issue of Energy Policy.  The study, conducted by RCF President George Tolley and RCF Associate Kirstin Munro, Assistant Professor of Economics and Finance at St. John’s University, considers the impact on property values of proximity to spent fuel at the site of a former nuclear power plant, as well as what happens to local property values following the shutdown of a nuclear power plant.  Using geospatial analysis and hedonic modeling, individual home characteristics, tax rate, distance from nuclear site and time of sale were analyzed to estimate the effects of the closed plant and spent nuclear fuel on residential property values in a 10 kilometer radius surrounding the former Zion Nuclear Plant located in Zion, Illinois.

Major decisions are being made with respect to the country’s nuclear power generation facilities in response to current short-run electricity market conditions, including the recent announcements of several plant retirements. The North American Electric Reliability Corporation and ISO New England have expressed concerns that multiple nuclear power plant retirements will threaten the reliability of the North American power grid.  Findings of the study indicate that negative perceptions of nuclear power plants and spent fuel storage do not translate into market behavior from home buyers and sellers.  The study fails to find evidence that proximity to the spent nuclear fuel affects residential property values.  Further, results provide evidence that operating nuclear facilities have a positive impact on surrounding communities by helping reduce property tax burdens on local residents.  A copy of the complete study can be found here: Property values and tax rates near spent nuclear fuel storage JEPO 123.

2018Q3 Forecasts for the Philadelphia Federal Reserve Survey of Professional Forecasters

RCF Vice President Peter Bernstein is a member of the Philadelphia Fed’s Survey of Professional Forecasters.  Below are his 2018Q3 forecasts and analysis.

The economy grew at a 4.1 percent rate in the second quarter of 2018 and at a 3.0 percent rate for the first half of 2018.  While individual quarterly growth rates can be volatile there is clearly an upward trend in growth dating back at least two years.  A key contributor to faster growth has been strong business investment spending supported by recent cuts in corporate taxes and more favorable treatment of depreciation.  Solid job growth has pushed the unemployment rate below 4 percent and despite growing trade tensions exports grew solidly in the first half of 2018.  All in all, the economy is on solid footing and we expect the good times to continue the rest of year and into 2019.

Nonetheless, there were some areas of concern which cause us to believe growth will eventually slow. The housing market seems to have stalled and housing has often been a harbinger of things to come.  More important, inflation is on the rise so much so that all of the increase in worker’s hourly pay has been offset by increases in prices. Only last year the Federal Reserve was troubled because inflation remained below its 2 percent target.  Now all measures of inflation exceed 2 percent, and several are on their way to 3 percent.  As a result, we expect the Fed to continue to raise short-term interest rates throughout 2018 and 2019.

For the PDF version of this report please click here: RCF 2018Q3 Forecasts for the Philadelphia Federal Reserve Survey of Professional Forecasters



2018Q1 Forecasts for the Philadelphia Federal Reserve Society of Professional Forecasters

RCF Vice President Peter Bernstein is a member of the Philadelphia Federal Reserve Society of Professional Forecasters.

Near Term Outlook is Solid; Longer-Term Things Get Dicey

The economy grew at a 2.3 percent rate in 2017, an improvement from 2016’s 1.5 percent growth but not much more than the 2.0 percent average growth since the Great Recession.  However, if one excludes the weak first quarter of the year, the economy grew close to 3.0 percent for the remainder of 2017, a pace that we expect to continue into 2018.  In addition to cyclical momentum and solid growth around the world, the US economy will be boosted by tax cuts received by most individuals and businesses.

The tax cuts come at a cost, namely, higher budget deficits.  And stronger consumer spending is likely to push up inflation.  The hope is that both of these negatives can be mitigated by increases in economic output.  For that to happen, one of two things must grow faster – employment or productivity.  We are skeptical that employment will grow faster than it has and in fact project it to slow for the simple reason that low unemployment means there are fewer and fewer unemployed people to put to work.  While there are many workers who have dropped out of the labor force and are not included in the official definition of employment, we have our doubts as to whether many of them will return to work after, in many cases, years removed from the labor market.

There is a greater chance of increases in productivity which has been notably weak in the last few years.  Increases in business investment could boost productivity gains though it could also cause firms to substitute machinery for labor offsetting some of the contribution to economic growth.  In sum, we are not convinced that the economy can really sustain long-term growth of 3.0 percent.

Instead, we see the fiscal stimulus from tax cuts providing mostly a short-term boost that will be
“paid for” with slower growth in the future.  Accordingly, we project the economy to grow 2.9 percent in 2018 and 2.6 percent in 2019 but see only 1.1 percent growth in 2020.  Moreover, we wouldn’t be surprised if the economy slipped into recession by then. The big concern for us is higher interest rates.  The 10-year Treasury yield has already climbed to its highest level in four years and we see further increases in the future.  Eventually, we think these higher rates will substantially dampen consumer and business spending.

2018Q1 Forecasts for the Philadelphia Federal Reserve Society of Professional Forecasters Feb 2018

2017Q4 Forecasts for the Philadelphia Federal Reserve Society of Professional Forecasters

RCF Vice President Peter Bernstein is a contributor to the Philadelphia Fed’s Survey of Professional Forecasters.

Positive Signs for Economy Continued in 2017Q3

The economy continued its solid performance in the third quarter of 2017, growing at a 3.3 percent rate, somewhat above our Q3 forecast of 2.8 percent growth.  Business investment was a bit stronger than projected though much of that was due to a build-up in inventories which often provides only a temporary boost.  Consumer spending was a little weaker than we had projected, but this also resulted in drop-in imports.  Inflation, unemployment, job growth, and housing starts were all very close to our projections while interest rates were slightly lower than we expected.

RCF 2017Q4 Forecasts for the Philadelphia Federal Reserve Society Dec 17


2017Q3 Forecasts for the Philadelphia Federal Reserve Society of Professional Forecasters

RCF Vice President Peter Bernstein is a member of the Philadelphia Federal Reserve Society of Professional Forecasters.

Second Quarter Rebound Puts Economy Back on Trend

After growing at only a 1.2 percent annual rate in the first quarter of 2017 the economy rebounded to grow at 3.0 percent in the second quarter.  For the first half of the year, real GDP increased at a 2.1 percent rate, in line with the post-Great Recession trend.  Positive signs going forward include stronger business investment and solid growth in exports, helped in part by the weaker dollar.  One area of concern, however, is consumer spending which has been growing faster than consumer’s disposable income for some time.  The added spending has resulted in a notable drop in household savings which ultimately could put a damper on spending unless income growth increases.  Yet, despite continued growth in employment, wages are still not increasing much faster than inflation.

The Trump administration is in the process of revealing its tax plans, which presumably will call for reductions in both corporate and personal tax rates.  Lower taxes would be expected to boost growth, but in all likelihood they will increase the government’s budget deficit.  Fiscal concerns may ultimately limit the scope of any tax cuts, and any increased government borrowing could siphon away funds from the private sector.  As such, we are not expecting much of a boost from tax cuts and as a result and we have not altered our long-term forecast of moderate economic growth over the next two years.

More important to the economy’s performance could be the impact of international trade.  Despite anti-trade/protectionist rhetoric from the President, U.S. exports and imports have grown solidly so far in 2017.  As noted earlier, a weaker dollar has helped exports, which have also benefitted from a pick-up in growth in Europe and China.  But perhaps the deeper message is that international trade has become so integrated within the U.S. economy, and become so important to American businesses both here and abroad, that on this issue, the administration’s bark may be worse than its bite.

Economic growth is projected to improve during the rest of 2017 and into 2018.  We see the economy slowing in 2019, as higher interest rates and slower growth in employment take effect. Already shortages of qualified workers are showing up in some industries.  One area where we have become less optimistic is housing.  While we still expect new residential construction (housing starts) to rise, the increase is now expected to be slower than previously projected.  Sales of new homes tumbled in July, 10 percent below their level a year ago.  As long as people aren’t buying new homes, builders will be less inclined to add more to the housing stock.

RCF 2017Q3 Forecasts for the Phildelphia Federal Reserve Society Sept 2017 







RCF Special Report – Fewer People and More Jobs Lead to Large Gains in Per Capita Income in Illinois

RCF’s new report examines population and employment changes in Illinois.  The full report can be found here: RCF Illinois Per Capita Income May 2017.

Illinois is one of only two states to lose population from 2013 to 2016. From 2013 to 2016, the population of Illinois declined by 0.6 percent while the population in the U.S. increased 2.2 percent. Other nearby states saw increases in their population, though all these states saw slower population growth than occurred nationally. Some of this population loss is a continuation of a decades-long trend of people moving to southern and western states. However, given that other Midwest states have seen population gains, it is likely that the decline in Illinois’ population means that many Illinois residents have a negative outlook regarding the state’s future. Moreover, population losses in Illinois have been widespread, with 91 of the state’s 102 counties seeing a decline in population over the past three years.

Yet, despite the population loss, Illinois has added almost 200,000 workers over the past three years. Although much of this job growth is in the Chicago area, 79 of 102 counties in Illinois had an increase in employment from 2013 to 2016.

The combination of increased employment and decreased population means that there has been a meaningful increase in the proportion of the state’s residents who are employed. In fact, the employment-to-population ratio in Illinois has grown more rapidly than for the nation as a whole.

Furthermore, the increase in the proportion of the state’s population that is employed has contributed to an 11.7 percent increase in per capita personal income from 2013 to 2016. This is actually somewhat greater than the 11.4 percent increase in per capital personal income across the entire U.S. during the same period.

Even more significant, per capita personal income has grown faster in Illinois than in virtually all of its neighboring states.

Thus, while many have left Illinois, the economic conditions of those who remain are much better than commonly believed.

A more detailed analysis of county changes in population and employment will be available in our forthcoming report, “Illinois: Fewer People and More Jobs.”

For additional information or questions, please contact Mr. Peter Bernstein, RCF Vice President, 312-431-1540 ext.1515 or by email: pbernstein@rcfecon.com.