Thursday, January 19, 2017

Strong Retail Sales, Job Growth in 2017?

Financial FAQs

The prospects for 2017 growth are confusing, to say the least. For instance, will Prez-Elect Trump initiate multiple trade wars by pushing through tariffs on foreign imports to bring manufacturing jobs home to the U.S.? And will this cause the dollar’s value to continue to rise, thus harming the resulting exports, which could cancel out much of the benefits of bringing manufacturing jobs home (since manufacturing sector depends largely on exports)?

But retail sales should benefit from the post-election rise in consumer confidence, though mostly via online sales (since prices are generally lower for online goods). Econoday reports non-store sales rose 1.3 percent in December for a year-on-year rate of 13.2 percent, among the very best showings and last exceeded in November 2011. So, taking in the whole and not just ecommerce or autos, there's more off notes than on notes in the December retail sales report, per Econoday. Consumer spirits may be very high and if this benefited retail sales in December, it was mostly isolated to vehicles when looking at in-store sales.

And there's already plenty of jobs out there, exactly 5.522 million of them in November, as I said last week. This against only 5.160 million hires in the month, a wide gap over the last couple of years as employers find it difficult to fill slots.

But get this, Econoday also says if each of those 5.522 million jobs were immediately filled, the number of unemployed would fall to 1.887 million for an unemployment rate of 1.2 percent, which will never happen. There are too many working-age adults who either won’t or can no longer work due to disabilities, lack of employable skills and the like.

Widening out the definition of unemployment (i.e., to those not even looking for work) does soften the view of labor slack but even here the pool of available workers, at 13.2 million in December, is shrinking, down from 14.0 million as recently as September.

Graph: Econoday

So the 2017 growth picture is still too fuzzy to see clearly. Consumer and business optimism can change to pessimism in a flash; or a Tweet.

Harlan Green © 2016

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Monday, January 16, 2017

Who Killed Our Middle Class?

Popular Economics Weekly

It’s becoming clear that our Middle Class—the midsection of U.S. earners and consumers—has shrunk alarmingly. And this is the main reason for the political polarization today that in the words of journalist Christopher Hedges, has driven the Republican Party “insane”.

Our society has become so polarized that Donald Trump needed the support of the Ku Klux Clan, white nationalists, and Vladimir Putin to become President-Elect. Whereas it has been the Middle Class values of probity, honesty and a belief in science, first satirized in Moliere’s Le Bourgeois Gentilhomme, (The Middle Class Gentleman), that has been the stabilizing influence in American politics since WWII.

The main difference between poverty and middle class and between middle class and wealthy, noted one researcher, “is belief in, and planning for, moving up as a working assumption.” A report from the Pew Research Center found that, for the first time since the 1970s, families defined as “middle income” are actually in a minority in the US – squeezed from both ends by an enlarged poverty-stricken group below them, and an enriched group above them.

This graph shows the shrinkage of those defined as middle class from 1979 to 2014—from 38.8 percent (gray line) to 32.09 percent (blue line), according to a Pew research study. The shrinkage reads like a textbook example of the future that French economist Thomas Piketty predicts for the world in his best-selling, Capital in the Twenty-First Century.

In 1971, there were 80 million households in the US defined as middle income – compared with a combined 52 million in the groups above and below. Now, there are 120 million middle-class families, but 121 million rich and poor – “A demographic shift that could signal a tipping point,” says Pew.

So who or what is at fault for the result; record income inequality last reached in 1929 that led to the Great Depression? We can fault President Reagan, who was first to break the unions with his firing of all federally employed Air Traffic Controllers that belonged to PATCO, the traffic controllers union.

Or conservatives’ espousal of the Reagan motto, “government is the problem,” which caused massive downsizing of government regulation, as well as regulators, and the ensuing de-regulation of whole industries, such as the airlines, telecommunications, and financial markets.

But the truth may be much closer to the present—in fact, from the Presidency of Bill Clinton. For it was President Clinton who veered so far to the right in his 1966 reelection campaign (thanks to Republican strategist Dick Morris) that he preempted the Republican platform by continuing to deregulate the financial markets with the repeal of the Glass-Steagall Act that separated FDIC depositor-insured banking from higher risk investment banking, financing the addition of 100,000 more police to combat the drug epidemic, and downsizing poverty programs with welfare reforms that took tens of thousands off the welfare rolls, which required them to take low-paying menial jobs to receive even a limited amount of financial support.

The Republicans, as Chris Hedges said, were thus driven politically insane into the waiting arms of Trump's rascist, anti-immigrant voting block. President Clinton had preempted the bread and butter issues (such as law and order, smaller government, family) that were once their own, which led to formation of the Tea Party, and a new political civil war declared on Big Government ruled by the northern elite that had ruled for so long. It was our 150 year-old Civil War taking a new form, in other words, but with almost the same mix of combatants.

Hillary Clinton, unfortunately, wasn’t able to break away from the Clinton mix of conservative economics (e.g.,balancing the federal budget) and social liberalism that resulted. The culture wars against abortion, civil rights, and welfare (including Obamacare) were the only issues the Republican Party had left. The result was and is President-elect Trump, an ideologist of neither party. Trump is an advocate of no government, where possible, who can count on the loyalty of only his most trusted associates and family.

Sound familiar? It is politics of the tribe, the close=knit family, held by gangsters and oligarchs, with everyone else to be treated with obfuscation and outright deceptions.

Even more significant is the record inequality since 1979, resulting from the loss of those policies that built up the middle class after WWII, policies from the New Deal, such as social security and Medicare, entitlements, unionization of whole industries, leading to the unparalleled prosperity of the 1950s and 60s.

So let us hope a majority of our politicians realize, as a majority of Americans still do, that our prosperity and stability rest on a middle class that hasn't given up hope for a better life.

Harlan Green © 2016

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Wednesday, January 11, 2017

Boom Times For Consumers In 2017?

Popular Economics Weekly

Here are more signs that economic growth will increase in 2017. There’s a large increase in revolving credit, one of the largest of the cycle, reports the Federal Reserve, a sign that retail sales are booming (with retails sales report due out Friday). And the National Federation of Independent Business reported its small business optimism index soared 7.4 points in December to 105.8, the highest reading since December 2004.

Revolving credit jumped $11.0 billion in data for November to indicate that consumers are increasingly running up their credit-card debt. Non-revolving credit, up $13.5 billion, is also positive, here reflecting demand for vehicle financing and student loans (which are tracked in this report). Total credit rose $24.5 billion in the month, well above the consensus of economists. Retail sales for December, to be posted Friday as we said, will offer more definitive data on the strength of holiday spending.

The outsized increase in small business optimism far exceeds expectations and follows a robust 3.5-point rise in November. NFIB said business owners who expect better economic conditions accounted for about half of the overall increase, with a net 50 percent of respondents expecting that the economy will improve, a 38 point leap up from November. 

And even more importantly for small businesses, plans to increase capital spending jumped 5 points to 29. An increase in capital expenditures usually means increased productivity, a plus for increased economic growth. Earnings trends were also up 6 points, but remained in negative territory at minus 14, which is why more capex spending is so necessary to boost small business profits.

And lastly, the Labor Department just released its JOLTS report, the Job Openings and Labor Turnover Survey, which showed Jobs openings increased in November to 5.522 million from 5.451 million in October. Quits rose to 3.1 million (a sign more workers are finding better jobs), and new hires rose to 5.2 million.

This tells us the actual size of the U.S. jobs market that ‘churns’ so many millions of jobs every month, and which gives US the best picture of employment. The above graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Over the month, hires and separations were also little changed at 5.2 million and 5.0 million. It is the difference between hires and separations that determines the actual number of new jobs created, says the Labor Department’s Bureau of Labor Stats (BLS).

The number of job openings (yellow) are up 6 percent year-over-year. This is big and says and says our economy continues to expand, but there aren’t enough skilled workers to fill those jobs. Quits are up 7 percent year-over-year. These are voluntary separations, as we said, and are the reason incomes are now rising faster than inflation.

What should we take away from this? No wonder it is so difficult to forecast future job trends. But with 300,000 more Job Openings than actual Hires, U.S. businesses must find more ways to train and promote their own workforce.

Harlan Green © 2016

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Monday, January 9, 2017

Real Estate In 2017—Good Time To Buy?

 The Mortgage Corner

Surging mortgage rates, dwindling inventory, and soaring home prices are taking a toll on Americans’ attitudes toward ownership, according to a home purchase sentiment survey released Monday. But that may be misleading, as mortgage rates have barely budged from post-WWII lows. And the construction industry and homebuilders’ sentiments are soaring, which means many more new homes will be coming into the housing market.

December 2016 Index
Change since last month Change since last year
Good time to buy 32 +2 -3
Good time to sell 13 0 +5
Home prices will go up 35 0 -5
Mortgage rates will go down -55 -4 -3
Confidence about not losing job 68 +4 -4
Household income is significantly higher 10 -5 -5
Overall index 80.7 -0.5 -2.5

The home purchase sentiment index compiled by mortgage finance provider Fannie Mae fell in December, its fifth straight monthly decline. Fannie’s index has six components. In December, two were lower compared to November, two were unchanged, and two increased. The increases were because respondents were more confident about not losing their jobs, and thought it a better time to buy. The biggest negative was their belief interest rates would rise this year. But it may be a small rise due to market uncertainties. Stocks are already oversold and interest rates still at historic lows, as I’ve said.

Construction had been lagging through most of 2016 but, like the factory sector (i.e, auto sales ended 2016 at record high of 18.5 million sold vehicles), appears to have picked up steam going into year-end, says Econoday. Spending rose 0.9 percent in November and is now up 4.1 percent annually. And non-residential construction’s boost is particularly heartening with its emphasis on infrastructure projects, up 0.9 percent with most categories showing gains led by office construction and transportation construction. Public spending was also solid including a 3.1 percent monthly jump in Federal spending (which boosts public infrastructure spending).

Residential spending rose 1.0 percent in the month on top of October's 1.6 percent gain. The gain here is concentrated in single-family homes which offset a monthly dip for multi-family units which otherwise have been leading the residential sector. Home improvements added to the spending in November.

The 30-year fixed conforming mortgage rate quoted by Fannie Mae is back down to 3.75 percent for one origination point. And what with the future uncertainty of the stock market (with indexes already at historic highs), much of the excess savings will remain in bonds, the major determinate of mortgage rates.

That is, unless worldwide growth picks up. But that won’t happen if Trump carries out his promise of trade wars to promote American workers first. That promise may be difficult to carry out, however, since his Republican colleagues have historically been free-traders.

Harlan Green © 2016

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Friday, January 6, 2017

156,000 Payroll Jobs, 4.7% Employment

Popular Economics Weekly

The highlight of the December unemployment report was that wages rose 2.9 percent annually. And nonfarm payrolls rose a lower-than-expected 156,000 in December but added a net 19,000 to the two prior months (November now at 204,000 and October at 135,000) in revisions, said the U.S. Bureau of Labor Statistics.

The unemployment rate rose slightly to 4.7 percent from 4.6 percent because 184,000 more jobseekers entered the workforce. The biggest job gains were in Education and health services (70,000), followed by Leisure and hospitality (24,000), and Manufacturing (17,000), which was a big surprise, according to consensus predictions.

But manufacturing’s employment surge shouldn’t be a surprise, as both the service and industrial sectors showed strong growth in December. The ISM manufacturing composite index hit 54.7, up a sharp 1.5 points from November for the best score in 2 years.

New orders were the clear highlight of the report, at 60.2 for another 2 year high and up 7.2 points which is the sharpest monthly jump of the entire cycle. The good news continues with production up 4.3 points to 60.3, employment up 8 tenths to 53.1, and export orders at 56.0 which is a 2-1/2 year high. The strength, like it was in the manufacturing PMI posted earlier on Tuesday, is being reflected in prices with input costs up 11.0 points to 65.5 which is a 5-1/2 year high.

Hiring in the December ISM non-manufacturing survey also showed that new orders are unusually strong where the index, at 57.2, matches November as 2016's best. New orders are up 4.6 points to 61.6 to signal the strongest rate of monthly growth since the middle of last year. Business activity is also very strong, at 61.4.

But the rise in interest rates may slow down growth in 2017, as Econoday reports the rise in the dollar is affecting export prices and a consequent slowdown in exports. The worst economic news of late comes from the international trade in goods report where the deficit widened sharply in November to $65.3 billion from October's $61.9 billion, reports Econoday. Goods exports fell 1.0 percent in the month to $121.7 billion as tracked in the blue columns of the graph. Food exports have been especially soft as have vehicle exports, and capital goods exports fell very sharply in a reminder that the lack of business investment is a global issue.

But business investment may rise, when and if tax reform happens for the $ trillons held overseas by U.S. corporations. The monies for the proposed $1 trillion in infrastructure improvements have to come from somewhere, and corporations may be induced to invest some of those profits domestically.

Harlan Green © 2016
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Wednesday, January 4, 2017

Why The Years of Slow Growth?

Popular Economics Weekly

Pundits have decried it. Donald Trump has criticized the ‘lousy’ U.S. economy in many of his Tweets, and economists have lamented the 2.4 percent GDP growth rate since 2000, at the time of the dot-com bubble bust. This is when prior recoveries have averaged 3-4 percent growth—at least in the early years.
The agonizingly slow pace of recovery from the Great Recession is easy to explain, say most economists. The Economic Policy Institute (EPI), a labor think tank, recently said it best. It is the result of austerity policies championed by Republican policymakers at the federal and state levels.
“Like every other postwar recession before it, the Great Recession was caused by a shortfall in aggregate demand, meaning that the spending of households, businesses, and governments was not sufficient to keep the economy’s resources fully employed,” said the EPI.

Per capita government spending in the first quarter of 2016—27 quarters into the recovery—was nearly 3.5 percent lower than it was at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3 percent higher than at the trough; 23 quarters following the early 2000s recession (a shorter recovery), it was 10 percent higher; and 27 quarters into the early 1980s recovery, it was 17 percent higher.

What is aggregate demand, and how is it increased? FDR’s incredibly intelligent Fed Chairman Marriner Eccles explained it in his memoir Beckoning Frontiers (1951):
As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
He understood our U.S. economy was entering the era of mass consumption, and unless consumers plus businesses plus government spent and/or invested enough money in it, there would be little or no growth. If fact, it was the severity of the contraction in spending that caused both the Great Depression and Great Recession.

And because there was record income inequality in 1929—only equaled again in 2007—consumers ran out of money to spend, which meant in turn businesses stopped investing. So it had to be government that injected sufficient demand into the U.S. economy to keep it from collapsing completely. That was the reason for the New Deal that employed millions in government-paid jobs, as well as social security, unemployment insurance and all the social programs that enabled US to win WWII.

The pickup in government spending in the early 2000s recession and 1980s recovery were during Republican administrations (i.e., during GW Bush and Reagan presidencies), which meant they had no problem spending public monies to boost economic growth. But when it came to Obama’s term, every attempt was made by the mostly Republican House in particular to cause him to fail.

It began with the election of some 80 Tea Party members to the House in 2010, then government shutdown in 2011 when they refused to ok a budget, so that the U.S. government almost ran out of operating funds, resulting in the first loss of AAA rating for U.S. debt by a bond rating agency in modern history.

That is why real annual GDP growth during Reagan’s term peaked at 7.3 percent, and GW Bush’s term at 3.8 percent. The highest modern growth rate was achieved during FDR’s New Deal and WWII, which boosted U.S. growth to a peak of 18.9 percent in 1942. Real GDP growth (i.e,, after inflation) has been downhill ever since.

As CBS News recently wrote in a report entitled, Obama May Become First President Since Hoover Not to See 3% GDP Growth: “The last year that real GDP grew by 3.0 percent or more, according to BEA, was in 2005, when it grew by 3.3 percent. Since then, the United States has gone a record ten straight years (2006-2015) without a year in which the growth in real GDP was at least 3.0 percent.”

So in fact without government spending to boost demand during slow times our economy has suffered. And now President-elect Trump has proposed a $1 trillion infrastructure spending plan that is sure to boost growth again.
“Despite the Great Recession being the sharpest and longest on record since World War II,” wrote the EPI, “and despite monetary policy reaching its conventional limits to boost spending early in the recession, policymakers made damaging decisions to limit public spending following the recession’s trough in 2009. This growth has been historically slow relative to other business cycles even as the economy needed substantially faster-than-average growth to mount a full and timely recovery.”
So let the record show, government has never been the problem when Republicans needed to boost growth, only when Democrats do. What is wrong with this picture?

Harlan Green © 2016

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Thursday, December 29, 2016

Case-Shiller Home Prices At New Highs

Financial FAQs

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.6 percent annual gain in October, up from 5.4 percent last month. The 10-City Composite posted a 4.3 percent annual increase, up from 4.2 percent the previous month.

Prices have now returned to 2003-4 levels, according to CoreLogic. That is when housing prices began double-digit increases for several years. The 20-City Composite reported a year-over-year gain of 5.1 percent in October, up from 5.0 percent in September. These are same-home price rises averaged over 3 months to make them less volatile.

But the price rises have leveled off at 5.1 percent on average over the past 2 years, a sign that rising housing inventories are beginning to have an effect on prices after prices soared during the housing bubble years. Portland and Seattle housing prices are still rising at 10 percent per year, with Dallas and Denver close behind.

Rising interest rates may also affect next year’s market, though the 30-year fixed conforming rate is still available @3.875 percent for one origination point in California. But Pending Home sales are the lowest in a year, which are contract signings scheduled to close in approximately 60 days, according to the National Association of Realtors chief economist Lawrence Yun.

“The budget of many prospective buyers last month was dealt an abrupt hit by the quick ascension of rates immediately after the election,” Yun said in NAR’s latest report. “Already faced with climbing home prices and minimal listings in the affordable price range, fewer home shoppers in most of the country were successfully able to sign a contract.”

What about housing’s contribution to economic growth? It is still below trend, at close to 4 percent, whereas it has averaged 5 percent historically. So that’s an additional $18 billion that can be added to GDP growth over the next years if housing sales and construction return to more normal times—but only if interest rates continue to rise gradually.

Trump supporters and Republicans believe the housing market will return to more normal times once they reduce the regulatory burden on housing, which they continue to blame on Dodd-Frank and the Consumer Finance Protection Bureau, for some reason. But these entities have been mostly responsible for the massive settlements with banks that sold falsely advertised AAA rated mortgage securities that created those negatively amortized liar loans, the main cause of the housing bubble.

These settlements should deter lenders from making such risky bets in the future, but what if those Dodd-Frank regulations are abolished by a Republican controlled Congress? Who will then stand in the way of future lending abuses that could once more put tax payers at risk?

Incoming Treasury Secretary Steve Mnuchin has been making noises about resuscitating Fannie Mae and Freddie Mac, the main guarantor of conforming mortgages as private entities, albeit with some revisions to pass part of the lending risk onto banks and other lenders. This may be a good thing in that it could ease the strict qualification standards that have hampered some mortgage lending.
But will that confidence in the Trump administration’s efforts to cut red tape translate into a better (and more affordable) housing market? “NAHB expects an increase in single-family home construction next year, fueled by a growing economy and solid job growth,” said NAHB Chief Economist Robert Dietz. “Moreover, builder confidence has risen on anticipation of reductions in regulatory costs, which is good news for home buyers and renters. However, the pace of construction will continue to be restricted by shortages of lots and labor in some markets.”
So though hopes have risen for more housing, all this remains to be seen, in other words.

Harlan Green © 2016

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