Economic Insights - December 4 - 8, 2017
- Quick takes: A strong employment report will keep the Federal Reserve (Fed) on track to hike rates in December. Single-family housing starts have reached a cycle high.
- A bitcoin for your thoughts? Bitcoin has captured investors’ imaginations because of its skyrocketed value.
The U.S. payroll report had a great headline and solid details. U.S. employment leapt higher in November, a good sign for the first report not affected by hurricanes. Nonfarm payrolls rose 228,000, according to the Bureau of Labor Statistics (BLS). That was an excellent number given the ultra-low unemployment rate of 4.1%. The report details were robust with nothing to deter the Federal Open Market Committee (FOMC) from raising the fed funds rate another notch this week.
Hurricanes made the last two employment reports hard to interpret, even though the details were strong in both months. It was good to see that the November report was so strong. Manufacturing payrolls were up by 31,000, government added 7,000 jobs, and revisions tacked on 3,000 additional workers to the prior two months.
The unemployment rate held steady at 4.1%, a 17-year low and down from 4.7% in December 2016. The broadest measure of underemployment, the U-6 rate, ticked up a tenth to 8.0%. However, it’s down from 9.2% last December and over 17% in 2009. These improvements are probably what the FOMC will focus on most when judging labor market strength. Both suggest a December hike is appropriate.
Solid economic growth and a tightening labor market have increased wage growth over the past few years. Average hourly earnings for all employees rose 2.5% year-over-year on a three-month smoothed basis. This continues the nice acceleration that started in early 2015. This measure was below 2.0% in December 2014. Average hourly earnings growth has plateaued recently, but low unemployment and robust growth should auger for higher wages as businesses bid for workers.
The hurricanes hurt housing starts in September, but the effect was temporary. Single-family housing starts matched a cycle high in October, at an annualized 877,000 rate, according to the U.S. Census Bureau. Single-family starts in the South Census region containing Texas and Florida saw a huge drop in September. But, the data has completely rebounded. Puerto Rico is not included in those numbers.
Multi-family construction was a relative bright spot at the beginning of this housing cycle. After the financial crisis, confidence was low, fear was rampant, and more people wanted to rent a home rather than buy. We expect to see a shift back towards home purchases because of stronger confidence and robust job gains encouraging buyers back into the housing market. Higher home prices mean repeat buyers have more equity when they sell their current house. Two popular measures from the Federal Housing Agency and S&P CoreLogic Case-Shiller show that national house prices have risen above their prior peaks of late last year. The solid job growth and rising wages that we expect should push single-family housing starts to new cycle highs.
One reason to be optimistic about the overall housing picture is the labor market. In general, only people with jobs qualify for home mortgages. The number of people employed full-time didn’t reach the 2007 cycle high until late 2015, according to the BLS. That is the longest time for employment levels to reach the prior peak since the data began in the 1960s, and was a massive headwind to housing starts. That drag is fading now since the economy is shaking off many encumbrances from the financial crisis of 2008. We expect a solid and growing housing market in 2018.
A bitcoin for your thoughts?
When bitcoin first broke into public consciousness less than five years ago, some thought it would become a new medium of exchange or replace a traded currency. That hasn’t happened. But, it has become a vast medium of speculation. Everyone’s talking about bitcoin today because it’s risen 2,163% in the last 12 months, according to Bloomberg data. The interest has been so strong that futures trading for bitcoin followers started December 10 on the Chicago Board Options Exchange Futures Exchange and will begin on the Chicago Mercantile Exchange on December 18.
For an item that still has questionable legitimacy, it has an incredibly large valuation. The value of a single bitcoin shot over $15,000, for a total value of $308 billion for the 20.5 million existing bitcoins, dwarfing the recent US$3.5 million in initial currency offerings (ICOs) by would-be competitors. The valuation of bitcoin, plus the other ICOs, brought warnings from securities regulators around the world, but no one really knows who has the authority to regulate cryptocurrencies. And by the way, just what is the business?
Bitcoin is a cryptocurrency, essentially a computer code or string of bits that are digitally “signed” by someone as being valid and can be duly transferred to another owner; blockchain is the name of the technology that makes it work. Bitcoin is the focus because it was the first and most well-known iteration. The blockchain is a global, running ledger of every bitcoin transaction ever made. Transactions are anonymous with users, known only by a public key which they, in turn, access by secret, private key; this ledger of transactions, called a blockchain, is collected and verified constantly by the network of bitcoin participants.
In January 2009, a bitcoin network was formed with the first release of bitcoins. They are created by solving an incredibly complex and repetitive puzzle to arrive at one solution. This solution is combined with data from recent transactions into a verified and confirmed batch known as a “block.” Once confirmed by other participants, the block becomes recorded and part of the chain in which every bitcoin transaction can be viewed by every bitcoin user. The individuals or companies that work on solving the puzzle and confirming transaction are called “miners” and work competitively. The first miner to solve the puzzle receives new bitcoins; this is the only way the total number of bitcoins outstanding grows.
There has been no shortage of critics labeling bitcoins as fraudulent; there is no recognized issuer, no administrator, no creator, and no regulator, since bitcoins are not issued or supported by any central entity, government, or bank. The blockchain system that supports bitcoin can be used for other purposes apart from bitcoin and is one type of what’s called “distributed ledger technologies.” That’s a digital ledger that is replicated, shared, and synchronized across different geographical sites. It is independent of any large central database and operates anonymously across global boundaries.
Regulation always struggles to keep up with technology. And perhaps that’s the attraction of cryptocurrencies to some: the ability to bypass regulation or to have a currency outside a government’s ability to alter its value. If a digital currency is ever to become widely used, several hurdles must be overcome, beyond regulation. Its anonymity creates problems for tracking, taxation, and legal contracts and lends itself to illegal activities.
The true value of bitcoin as it evolves may be as a proof of concept for a new type of secure payment or transfer system, one not reliant on banks or credit card companies. The blockchain technology has the capacity to deliver transactions in a decentralized, shared, and highly secure fashion. The issue of cryptocurrencies has already captured the attention of central banks. The Fed, the Bank of Canada, and the Monetary Authority of Singapore all have groups studying cryptocurrency issues with the idea that payments would someday be internet based, but somehow supported by governments and central banks.
Is it money?
Well, yes and no. It can be used for transactions, which is one of three typical functions of what’s called money. Besides a currency’s use as a medium of exchange, money should be a store of value and a unit of account. With the enormous volatility regarding its value, bitcoin is not at all useful for the latter two.
Questioning the safety of bitcoin as a store of value might seem ridiculous given its skyrocketing price over the last few weeks. But, speculative frenzies of other kinds and at other times have often come to naught. Another problem is the safety of one’s digital “wallet” that stores one’s bitcoin: those websites are vulnerable to hacking; a bitcoin mining website recently lost tens of millions of dollars in bitcoins when hackers broke into its payment system. According to a recent Reuters article1, more than 980,000 bitcoins have been stolen from exchanges over time. Few have ever been recovered, and there is little way to recoup those losses.
For a digital currency to be useful, it will need to be backed by some centralized authority and offer the same speed and efficacy of transactions that the currencies of major countries offer. The promise of cryptocurrencies and the radically new technologies that underlie their use were likely overstated in the short-run. Over the long-term, though, many new, useful applications may evolve.
1 Jim Finkle and Jeremy Wagstaff, "Hackers steal $64 million from cryptocurrency firm NiceHash," Reuters, December 6, 2017