Tuesday, May 3, 2016

Is Bernie’s Economic Platform Impossible?

Financial FAQs

It looks like Hillary Clinton’s nomination as the Democratic candidate is assured, but are Bernie Sander’s economic proposals impossible to achieve, as many mainstream economists maintain? Bernie wants to be able to introduce them into their platform at the Democratic convention.

He has some good ideas—such as tuition-free public universities, universal health care for all, a $15/hour national minimum wage, as well as achieve record economic growth, such as happened from 1950’s through the 1970’s.
“As President, I will invest $1 trillion to rebuild our crumbling infrastructure to put 13 million Americans to work in good jobs, says Bernie on his website, “invest $5.5 billion to employ 1 million young Americans and provide job-training to hundreds of thousands of others, and create a Clean-Energy Workforce of 10 million good jobs through a 100 percent clean energy system.”
Not possible, say economists like Nobelist Paul Krugman: “On health care: leave on one side the virtual impossibility of achieving single-payer. Beyond the politics, the Sanders “plan” isn’t just lacking in detail; as Ezra Klein notes, it both promises more comprehensive coverage than Medicare or for that matter single-payer systems in other countries, and assumes huge cost savings that are at best unlikely given that kind of generosity. This lets Sanders claim that he could make it work with much lower middle-class taxes than would probably be needed in practice.”
Actually, yes, Bernie’s goals are attainable, and have been achievable in the past. In fact, they mirror much of what was done in President Roosevelt’s New Deal, when conditions were worse (i.e., 25 percent unemployment), and government the employer of last resort. Bernie based his proposal on University of Massachusetts economist Gerald Friedman, a full-blown Keynesian economist who believes in government intervention to pull the U.S. out of its present economic malaise. Unfortunately Bernie is no FDR, able by himself to sell his program beyond union blue collar workers and our youngest, more educated generation that is looking for another new deal.
“While economists from different perspectives will differ on these fundamental issues,” says Professor Friedman in an initial response to mainstream economists that rejected his new deal plan almost outright (such as Krugman), “we have experience in the United States that demonstrates the lasting effect of government stimulus spending. Emerging from the depths of the Great Depression, New Deal stimulus spending (including monetary easing) nearly doubled the GDP growth rate from pre-1929 levels to 7 percent per year, 1933-40, and nearly 10 percent a year from 1933-44; between the 1929 peak and 1944, output grew to a level 25 percent higher than it would have been at the pre-1929 growth rate.”
Paul Krugman, a student of the New Deal, should know. He was one of the first economists to unmask conservatives’ attempt to unravel New Deal legislation—including their attempts to dismantle social security and Medicare—in his best-selling book, The Great Unraveling, yet he doesn’t seem to believe another New Deal is possible.

“The Republican candidates have been widely and rightly mocked for their escalating claims that they can achieve incredible economic growth,” said Krugman, “starting with Jeb Bush’s promise to double growth to 4 percent and heading up from there. But Mr. Friedman outdoes the G.O.P. by claiming that the Sanders plan would produce 5.3 percent growth a year over the next decade.”

However, Professor Friedman wasn’t talking about the Republican agenda to cut government programs—just the opposite. “Active Keynesian policy maintained faster growth rates for the next quarter century as well. From 1947-73, the unemployment rate averaged 4.7 percent and annual GDP growth averaged 4.0 percent; output in 1973 was 13 percent higher than it would have been at earlier growth rates."

Much of that growth was due to massive infrastructure spending like our public freeway system, NASA’s moon landing, and other public works programs. It was massive government spending, in a word, that was possible with higher revenues from a maximum tax rate of 92 percent during the Eisenhower era, and an exploding baby boomer generation that gradually began to decline, until the ‘Reagan revolution’ cut the maximum tax rate to 40 percent.

Then we had the 1970s Arab oil embargo and skyrocketing inflation, due to the resultant gasoline shortage. Americans adopted conservative ways and began to believe government was the problem, at a time of greatest prosperity and a very low federal budget deficit.

It had also happened in 1937, when Roosevelt was convinced the Depression was over, and a Republican Congress called for a balanced budget and tax cuts. The result was a second depression that wasn’t over until WWII and government spending resulted in the full employment of women as well.
“Only when we abandoned Keynesian policies after 1973 did growth rates fall, says Friedman. “From 1973-2014, annual growth has averaged only 2.6 percent, almost a full percentage point below the pre-1929 rate, while unemployment has risen to 6.5 percent. Because of the slowing of growth rates after jettisoning Keynesian policies, output in 2007 was almost 30 percent less than it would have been at the growth rates of the 1947-73 period.”
Why the confusion over economic policy? The main disagreement seems to be the duration of government stimulus benefits. Krugman and other mainstream economists (some former Obama economic advisors) believe it is short term, only, whereas Friedman and some British Keynesians say history should be the final word. Spending on improving infrastructure, education, Research and Development (such as funded DARPA and the Internet), health care, not only improves lives, but also labor productivity, which stimulates more growth.

So it’s really a matter of history repeating itself, and its lessons being forgotten. Higher growth happened until the 1970s, and we don’t (yet) have another World War to bring US together, which is when we seem to realize the importance of government policies that boost growth.

Harlan Green © 2016

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Friday, April 29, 2016

Consumers Boost Q1 GDP Growth

Popular Economics Weekly

Consumer spending, largely on services, helped hold up first-quarter real GDP which came in at just 0.5 percent rate, but is still up 2 percent Year-over-Year. Consumer spending (personal consumption expenditures) rose at a 1.9 percent rate, down only 5 tenths from the fourth quarter. Most of spending was on in the service sector, which rose a respectable 2.7 percent to offset a 1.6 percent decline in durable goods (i.e., manufacturing) which were hit by weak vehicle sales.

Even durable goods ticked up slightly, as reported by the Bureau of Economic Analysis last Tuesday. The factory sector posted a respectable March with orders for durable goods up 0.8 percent which follows a revised downswing of 3.1 percent in February and a very solid 4.3 percent gain in January. This is a sign that the manufacturing sector may finally be recovering from last year’s too strong dollar (when the Fed said it was going to raise interest rates up to 4 times) which hurt exports.

Strength was mainly in defense goods which helped offset a downward swing for commercial aircraft. A negative in the report is a 3.0 percent decline for motor vehicle orders reflecting weakness at the retail level. But light vehicle sales in particular are predicted by auto industry pundits to exceed even last year’s rate of 17.5 million vehicles.

We mentioned last week that moderate wage growth, declining gasoline prices and continued low interest rates on auto loans could drive new car and light truck sales higher in 2016, according to Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show. 
“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”
And, residential investment is up 14.8 percent, a highlight of the report that helped offset a sharp 5.9 percent decline in nonresidential investment where weak energy drilling is taking a big toll. Inventories rose in the quarter but at a slower rate which is a negative for GDP while exports, reflecting weak global demand.

Government purchases were a small plus in the quarter, which will rise as more infrastructure spending kicks in this spring due to the renewed $305B gas tax and surface transportation bill. Government spending is still the weak link in GDP numbers, as tax revenues are only now growing again.

And today’s Personal Income and Outlays report showed consumer spending was still weak in March, though net weakness in the quarter was tied largely to what is a positive for the consumer, lower fuel prices. Spending on non-durables (i.e., services) is a clear weakness in the report, up an unusually low 0.1 percent in the month.

But stronger consumer income is an important positive for the economic outlook, offsetting weakness in spending and stubbornly low inflation. Though the gain for wages does hint at emerging pressures, this report doesn't turn up the heat for a June rate hike, since PCE inflation is still below the Fed’s inflation target of 2 percent.

Bottom line is the Federal Reserve predicts that consumer spending will eventually pick up this year, and so retail sales, as consumers begin to spend some of the savings from lower gas and commodity prices. But if spending doesn’t pick up, the Fed may not raise interest rates further this year at all.

Harlan Green © 2016

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Wednesday, April 27, 2016

Fed Stays in Accommodative Mode

Popular Economics Weekly

It looks like Janet Yellen’s Fed will continue to keep interest rates low this year, based on the latest FOMC press release. This is great news for the housing market, in particular, but not necessarily for consumers that continue to save more than they are spending, for fear of another economic slowdown.
“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” said the press release; “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
And sure enough, the NAR’s gauge of future closings, the Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 1.4 percent to 110.5 in March from an downwardly revised 109.0 in February and is now 1.4 percent above March 2015 (109.0). After last month’s slight gain, the index has increased year-over-year for 19 consecutive months and is at its highest reading since May 2015 (111.0).
Lawrence Yun, NAR chief economist, says last month’s pending sales increase signals a solid beginning to the spring buying season. “Despite supply deficiencies in plenty of areas, contract activity was fairly strong in a majority of markets in March,” he said. “This spring’s surprisingly low mortgage rates are easing some of the affordability pressures potential buyers are experiencing and are taking away some of the sting from home prices that are still rising too fast and above wage growth.”

Why are consumers cutting back on spending, per latest retail sales figures that show lower auto sales, in particular? Consumer confidence has declined, is one reason. The Conference Board’s index slipped more than 2 points to 94.2 when it is 100 plus during normal growth periods (but is roughly in line the 6-month trend). Weakness in the report is centered in the expectations component which fell 4.3 points to 79.3, said Econoday. Here, in contrast to the assessment of the current jobs market, there's outright pessimism with 17.2 percent seeing fewer jobs ahead vs only 12.2 percent seeing more ahead.

Pundits aren’t sure why confidence in future jobs and growth has declined, when more than 200,000 new jobs per month have been created over the past 2 years, and 11 million jobs during Obama’s presidency. But incomes are still not rising fast enough for the majority of consumers, though the Fed maintains household incomes will eventually rise faster, as the unemployment rates falls further.

What is usually overlooked, however, are the almost deflationary times we consumers currently live in. Believe it or not cheaper gas and energy prices are just one of the factors causing this uncertainty about future prospects.

Graph: Econoday

History shows that consumers spend less when prices are falling, because they expect prices to fall further. Whereas consumer spending picks up when prices are rising, in an attempt to save money by getting ahead of the next price increase. This is Japan’s history during its 2 decades of deflation.

What will cause retail inflation to return to its historical 2 percent plus level? Economists say it is greater aggregate demand, or the demand for goods and services by both consumers, businesses, and governments.

The sectors are related, of course, with rising household incomes the main driver of growth, since ithis stimulates more investments in plants and equipment—so-called capex spending, that in turn stimulates more job growth.

But in fact, governments have been the least spendthrift due to falling tax revenues, hence the huge backlog in deferred infrastructure maintenance and construction (more than $2 trillion per the American Society of Civil Engineers), as well as public investment in schools, new research, protecting the environment, social security and Medicare, and so forth.

Harlan Green © 2016

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Tuesday, April 26, 2016

Financial FAQs

Many Realtors and economists have been asking this question. Why such a low housing inventory? Total existing-home sales jumped 5.1 percent to a seasonally adjusted annual rate of 5.33 million in March from a downwardly revised 5.07 million in February, as we reported last week.

But though total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, it is still 1.5 percent lower than a year ago (2.01 million). And unsold inventory is at just a 4.5-month supply at the current sales pace, up from 4.4 months in February, but much below the 6 month’s supply during normal times.

We are running out of homes for sale with the 2016 selling season about to begin, in other words. And new, replacement home sales are still at historic lows, when only more new homes can keep up with population growth, especially of millennials, the most populous generation of all that outnumber even their baby boomer parents.

For instance, home prices in the Dallas metro area, historically one of the nation’s most stable and affordable markets, have climbed at one of the fastest rates in the U.S. since 2014, reports Calculated Risk. And inventories of houses on the market are under two months’ supply, the lowest in 25 years.

The major answer to the housing shortfall has to be that many homes are off the market because they are rented—to millennials, above all, who can’t afford to buy a home, in part because their incomes have declined due to the Great Recession and many are heavily indebted from soaring education costs.

Sales of new single-family houses in March 2016 were at a seasonally adjusted annual rate of 511,000, said the U.S. Census Bureau and the Department of Housing and Urban Development, far too low to replenish housing inventories.

This is still below the 600 to 800,000 new-homes sold annually that prevailed during the 1970s and 1980s. New-home sales then took off in the 1990s to reach 1.4 million annualized units at the height of the housing bubble in 2005, per the above graph. In comparison, current sales are 1.5 percent below the revised February rate of 519,000, but 5.4 percent above the March 2015 estimate of 485,000.

What will it take to bring new-home sales back to historical levels? There is a “Distressing” Gap between new and existing-home sales, says Calculated Risk, whereas they matched during more normal times and only began to diverge in 2006 at the top of the housing bubble.

So more new homes must be built, of course. But builders have to offer homes in the moderate price range for that to happen, with home prices rising 5 to 7 percent at present. New-home construction is beginning to pick up. Currently, privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent below the revised February estimate for new construction of 1,194,000, but is 14.2 percent above the March 2015 rate of 954,000, according to the Census Bureau.

Starts are improving, but still far from historical levels. For instance, total starts of both single family and multi-unit rental housing averaged between 1.5m to 2m units from the 1970s to 1990s, before soaring to 2.5 million during the housing bubble.

This means that housing construction has to double just to bring it back to historical levels, and we are adding some 80 million millennials from the ages of 18 to 35 years to those needing housing.

Stay tuned, as the Fed has to cooperate by keeping interest rates as low as possible for as long as possible to make those new and existing homes affordable, what with today’s much more restrictive qualification requirements, and the future of Fannie Mae and Freddie Mac, guarantor for the majority of home loans, still uncertain.
Harlan Green © 2016

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Friday, April 22, 2016

Who Opposes Overtime Pay Increase?

Financial FAQs

That’s a no-brainer—Republicans in Congress, of course. Who else would oppose updating the safeguards against working more than 40 hours without overtime pay, part of the New Deal that President Roosevelt called the most important part of the New Deal legislation since the Social Security Act of 1935?

Lawmakers in the House and Senate this week introduced the Protecting Workplace Advancement and Opportunity Actlegislation that will ensure the Department of Labor pursues a balanced and responsible approach to updating federal overtime rules, according to their press release. The sponsors of the legislation—members of the House Committee on Education and the Workforce and the Senate Committee on Health, Education, Labor, and Pensions—released the following statements upon introduction:

“In the 21st century workplace, we need to encourage policies that increase flexibility, reduce regulatory burdens, and create more opportunities for workers to pursue their dreams. Our nation’s outdated overtime rules are in need of modernization, but it must be done in a responsible way that doesn’t stifle opportunities for working families to get ahead. Unfortunately, the administration’s overtime proposal fails this test and should be sent back to the drawing board,” said House Subcommittee on Workforce Protections Chairman Tim Walberg (R-MI).

Sure, this when corporate profits have doubled from 6 percent of gross domestic product to 12 percent and more over the last 30 years, while wages have fallen by almost exactly the same amount, said former Labor Secretary Robert Reich in a recent NYTimes Oped.

Graph: EPI

 It is Repub’s reaction to the Labor Department’s proposal for new overtime rules that are expected to be introduced this summer—rules that require no congressional approval. 

According to the Economic Policy Institute, says Professor Reich, it would give 13.5 million more workers a new or stronger right to overtime pay — substantially increasing both middle-class incomes and employment. “It’s not as high as the $69,000 threshold it would take to return to 1975 levels, after adjusting for inflation, but it’s a courageous step in the right direction. It’s like a minimum wage hike for the middle class,” said Reich.

And opposing any boost to the minimum wage is of course the real target of Republicans. But minimum wages are rising, anyway. California, New York, and several cities have already enacted a $15 per hour minimum wage to be phased in over several years.

This tells us just how out of the mainstream are Republican lawmakers that have little, if any, interest in bettering living conditions of 80 percent of the workforce that are wage and salary earners.

Harlan Green © 2016

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Thursday, April 21, 2016

Motor Vehicles, Housing Will Power 2016 Economy

Popular Economics Weekly

Even though Q1 2016 GDP growth looks weak for a number of reasons (such as lower exports and slumping oil prices that depress energy sector earnings), there are reasons it can go higher in 2016. Oil prices have stabilized, for starters, and exports are rising again as the dollar has weakened against other currencies when the Fed signaled it wouldn’t raise interest rates further until later, if at all this year, due to the worldwide slowdown in growth.

Firstly, auto sales, a major component of retail sales, should surpass last year’s 17.5 million total, according to industry pundits. Moderate wage growth, declining gasoline prices and continued low interest rates on auto loans will drive new car and light truck sales higher in 2016, said Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show.
“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”
There is a temporary weakness in motor vehicle production because of a slowdown in current vehicle sales, according to the Fed’s March Industrial Production figures. But production has climbed steadily higher in the last five years and been the strongest component in the Fed’s Manufacturing Index.

And housing sales are picking up, beginning with the just released existing-home sales, up 5.1 percent to a 5.33 million annual rate in March. Existing sales rose in all four major regions last month and are up modestly (1.5 percent) from March 2015. Total housing inventory at the end of March increased 5.9 percent to 1.98 million existing homes available for sale, but is still 1.5 percent lower than a year ago (2.01 million).

The above graph shows that existing sales have been rising steadily since 2008 the end of the Great Recession. Unsold inventory is at a 4.5-month supply at the current sales pace, up from 4.4 months in February, but still far too low to stimulate more buying in the lower price ranges, where inventory is most lacking. In fact, inventory has fallen back to 2000 levels, even before the housing bubble that doubled the housing inventory.

Another window into the housing market is the volume of mortgage applications that depend on interest rates, and rates are back to historic lows with the 30-year conforming fixed rate down to 3.25 percent for a 1 point origination fee in California.

Applications increased 1.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 15, 2016. The Refinance Index increased 3 percent from the previous week. The unadjusted Purchase Index increased 1 percent compared with the previous week and is 17 percent higher than the same week one year ago.

Another sign of future growth is the Conference Board Leading Economic Index® (LEI) for the U.S., which increased for the first time in 3 months, up 0.2 percent in March to 123.4 (2010 = 100), following a 0.1 percent decline in February, and a 0.2 percent decline in January.
“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”
Manufacturer’s new orders, higher stock prices (now above 2015 indexes), and the fact that weekly jobless claims fell to the lowest level since 1973 were the strongest signs of future growth in the Conference Board’s LEI.

Still, it consumer spending that powers most economic activity these days, and consumers will only spend when there’s more market stability, hence certainty in such things as energy prices, which have been fluctuating wildly of late, and an adequate supply of new housing that keeps housing prices within reach of prospective home buyers.

Harlan Green © 2016

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Tuesday, April 19, 2016

Builder Confidence Holds, But Household Formation Still Weak

The Mortgage Corner

Builder confidence in the market for newly-built single-family homes remained unchanged in April at a level of 58 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).
“Builders remain cautiously optimistic about construction growth in 2016,” said NAHB Chief Economist Robert Dietz. “Solid job creation and low mortgage interest rates will sustain continued gains in the single-family housing market in the months ahead.”

And privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,089,000. This is 8.8 percent below the revised February estimate for new construction of 1,194,000, but is 14.2 percent above the March 2015 rate of 954,000, according to the Census Bureau. This is the main reason builders’ confidence remains solid.

But for it to go higher, (and housing starts return to historical levels)—the formation of new households would also have to increase to historical levels, and that will take some time, given all those millennials aged between 18-36 years that either cannot afford to live alone, or choose to rent rather than purchase a home, according to the Census Bureau.

Graph: Bloomberg

This manifests itself in in the number of 25- to 34-year-olds of working age living at home. The rate began rising in 2003, fell briefly after the recession (perhaps because of first-time buyer-assistance programs), says Bloomberg’s Barry Ritzholtz, and then started rising again. As of last year, those still of working age still at home was at a record high.
It isn't merely living in their parents’ basements;” says Ritzholtz, “more young adults are doubling up in apartments. Census data has identified this as a fast-growing living arrangement. The central theme is that expensive housing, along with a dearth of economic opportunities, forces young adults into less-than-desirable living arrangements.”
Unfortunately, there is still a shortage of homes on the market, especially entry-level housing that most millennials can afford. Single-family housing starts in March, for instance, were at a rate of 764,000; this is 9.2 percent below the revised February figure of 841,000. The March rate for units in buildings with five units or more was 312,000.

And privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,086,000. This is 7.7 percent below the revised February rate of 1,177,000, but is 4.6 percent above the March 2015 estimate of 1,038,000.

What is the current level of new household formation? Speaking on the country’s economic outlook and monetary policy at the Economic Leadership Forum in Somerset, New Jersey, Federal Reserve Bank of New York President Bill Dudley said the U.S. economy has its strengths and weaknesses—but he expects household formation to receive a boost in 2016.

“Housing starts are still well below the rate consistent with the nation’s population growth rate, and the fundamentals of housing demand remain positive,” Dudley said. “Rising employment is likely to boost the household formation rate and low mortgage interest rates should keep housing relatively affordable, despite the ongoing recovery in home prices.”
Harlan Green © 2016

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