Monday, September 15, 2014

Retail Sales Much Stronger?

Financial FAQs

The jump in retail sales was huge, plus upward revisions to past months that made more sense with other indicators of a growing economy. It seems the consumer can afford to spend more with lower debt levels and jobs more available. Much of it was back to schools purchases, though, so will it hold up during the holidays when sales are traditionally strongest?

Retail sales jumped 0.6 percent in August after a rise of 0.3 percent the month before. Analysts projected 0.6 percent for August. The July upward revision was significant-previous estimate of zero.

retail

Graph: Econoday

Excluding autos, sales gained 0.3 percent in both August and July, matching expectations. Excluding both autos and gasoline sales were quite healthy, increasing 0.5 percent, following a rise of 0.3 percent in July. Expectations were for 0.4 percent.

autos

Graph: Econoday

Not surprisingly, motor vehicles increased 1.5 percent. Incentives helped feed a record 6.4 percent jump in car and light truck sales to an annual rate of 17.53 million vehicles. Next, building materials & garden equipment gained 1.4 percent-suggesting a large improvement in the housing sector. Food services & drinking places sales were up 0.6 percent, showing healthy improvement in discretionary spending. This is a good sign for the consumer sector, as I said.

construction

Graph: Econoday

And sure enough, housing construction also gained broadly in July. Construction spending rebounded 1.8 percent after a 0.9 percent dip in June. While all broad categories advanced, July's increase was led by the public sector—up 3.0 percent, following a 1.8 percent decrease in June.  This is a big thing as government spending has been a big drag on growth until now. Private nonresidential spending (i.e., commercial/industrial) rebounded 2.1 percent in July after slipping 0.8 percent the month before.  And private residential outlays gained 0.7 percent, following a 0.4 percent dip in June.

All-in-all, the revisions to retail sales and surge in construction and vehicle sales should confirm a 3 percent plus GDP growth rate for the rest of this year,and maybe into next year, in sharp contrast to Europe and Japan. Europe is slipping back into recession, in large part because of its austerity policies that cut government spending at a time of falling consumer and export demand.

Harlan Green © 2014

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Friday, September 12, 2014

Minimum Wages vs. Maximum Profits?

Financial FAQs

Corporate profits are at all-time highs, and workers compensation at all-time lows, as fast food workers continue to strike for higher minimum wages. Yet business interests still maintain maximum profits have to be a corporation’s primary consideration. In fact, it would be breaking their corporate charters to operate otherwise!

Actually, not so. Maximizing corporate profits at the expense of everything else—such as environmental pollution—is no longer allowed. And workers have some protections, such as safety regulations under OSHA, and limitations on the number of work hour’s minimum compensation. Then why has the glorification of profit maximization enriched stockholders and CEOs, but not their employees?

One answer is the resistance of businesses to raising the minimum wage. Some states have raised the minimum wage, such as California, and cities such as Seattle. But it’s still $7.25 per hour for most states. This is even though many studies show that higher wages create greater prosperity overall. For instance, Australia, where the minimum wage for adult, full-time workers is $16.87 per hour, currently has a 3.1 percent annual GDP growth rate, vs. 2.5 percent in the U.S.

Nobelist Joseph Stiglitz, an advocate of greater income equality has said, “Our current brand of capitalism is an ersatz capitalism. For proof of this...we have monopolies and oligopolies making persistently high profits. C.E.O.s enjoy incomes that are on average 295 times that of the typical worker, a much higher ratio than in the past, without any evidence of a proportionate increase in productivity.”

epi

Graph: EPI

The hourly compensation of a typical worker grew in tandem with productivity from 1948–1973. But after 1973, productivity grew strongly, especially after 1995, while the typical worker’s compensation was relatively stagnant. This divergence of pay and productivity has meant that many workers were not benefitting from productivity growth—the economy could afford higher pay but it was not providing it.

A new survey of Harvard Business Alumni by the Harvard Business School entitled A Troubling Divergence in the U.S. Economy highlighted several of the reasons. Business leaders in America are reluctant to hire full-time workers. Instead, many prefer investing in technology to perform work, outsourcing to third parties, or hiring part-time workers. Only 27 percent of respondents reported that their firms engage with institutions like community colleges to prepare students with workforce skills.

And when it comes to updating the public infrastructure that would support greater productivity, forty-two percent of Business School respondents reported that the condition of infrastructure like airports, ports, and roads had declined over the past three years. For every respondent who thought infrastructure had improved, nearly five felt it had worsened.

In fact, private sector growth has been lacking in both job creation and investment in plants and equipment over the past 5 years since the official end of the Great Recession. Private sector capital stock, at 22 years of age, is the oldest it has been since 1958, said economist David Rosenberg, and is strongly suggestive of an upgrade cycle (not to mention the fact that America's spending on public infrastructure at a 20-year low!).

pubsector

Graph: Calculated Risk

The Calculated Risk graph pictures public sector jobs of both the national and state governments. It grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However the public sector has declined significantly since Mr. Obama took office (down 682,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level.  Needless to say, this has been a significant drag on overall employment.

Is it all due to the Great Recession? We think not. The voices of wage and salary earners have been drowned out since then, and raising the minimum wage has not been made a priority by either party in Congress, or the White House to date. That is the tragedy, and the real solution to this continuing economic malaise.

The most recent protests are part of a two-year campaign to raise awareness of the plight of the fast-food worker, the latest having taken place in May. While the demonstrations haven’t led to an increase in the federal minimum wage, some states and localities have upped the minimum wage. Seattle raised the minimum wage to $15 an hour and Massachusetts residents will soon see an $11-an-hour minimum wage, according to NBC News. McDonald's Corp. is on record saying it supports a federal minimum wage increase, but not to $15 an hour, as demanded by its workers.

Harlan Green © 2014

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Wednesday, September 10, 2014

Government Wasn’t the Problem

Popular Economics Weekly

If the latest unemployment report tells us anything, it is that government isn’t the problem that has caused the weak U.S. recovery, but a private sector that is focused solely on maximizing profits for their investors and CEOs, rather than creating more jobs. And private sector corporations have succeeded in maximizing their record profits, as a percentage of GDP.

Friday’s Labor Department report showed just 142,000 net nonfarm payroll jobs created, far below the estimates, while the unemployment rate barely fell to 6.15 percent. There were 134 private payroll jobs (vs. 213 private sector jobs in July) and just 8,000 government jobs added. But stay tuned for revisions when seasonal corrections are made, as we said.

profits

Graph: Econoday

Nor was government the problem that caused the Great Recession and housing bubble in the first place; but the lack of it—of government legislation and regulations that could rein in the excesses of a shadow banking system that hid so much debt.

In fact, growth did surge just as the Great Recession officially ended in June 2009, because of the $835B 2009 American Recovery and Reinvestment Act (ARRA), but it wasn’t enough, and the economy soon reverted back to its ‘new normal, 2 percent GDP growth rate.

growth

Graph: Trading Economics

A majority of economists now agree ARRA did create jobs and prevented a Greater Recession, or even another Great Depression, which Europe is currently going through for a third time since 2008.

The Initiative on Global Markets at the University of Chicago — hardly a hotbed of liberal or Keynesian thought — regularly surveys a number of the leading American economists about a variety of policy issues. And the results from their 2014 survey, as reported by economist Justin Wolfers, overwhelmingly conclude that government ARRA stimulus spending was beneficial to both growth (benefits exceeded its costs) and jobs (more jobs were created or saved).

In fact, it is private sector growth that has been lacking in both job creation and investment in plants and equipment over the past 5 years since the official end of the Great Recession. Private sector capital stock, at 22 years of age, is the oldest it has been since 1958, said economist David Rosenberg, and is strongly suggestive of an upgrade cycle (not to mention the fact that America's spending on public infrastructure at a 20-year low!).

But will that happen? It seems the private sector would rather create jobs overseas than in the USA that has caused the weak recovery. The so-called ‘underemployment rate’ of part timers and those who quit looking for work dropped to 12 percent from12.2 percent in the August report—big deal.

u-6

Graph: Econoday

There is much evidence of the out sourcing of jobs. U.S. multinationals shifted millions of jobs overseas in the 2000s, says data from the U.S. Department of Commerce. “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million,” said a recent report by the Center for American Progress.

That is why ARRA worked, and similar government stimulus programs would work. The bottom line is there are certain times, as well as sectors that only governments can fund and so create jobs.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Friday, September 5, 2014

Labor’s Day Not Celebrated?

Financial FAQs

It looked like August’s unemployment report would celebrate this year’s Labor Day in a big way. We know it because most employment indicators point to many more jobs this year that also pay more. Starting with the August ADP survey, the estimate for private payroll growth is 204,000, whereas predictions for the Labor Department’s report was 230,000 nonfarm payroll jobs, with most of those jobs in the higher paying Professional Services category (up 160,000 in August, according to ADP).

But, alas, today’s Labor Department report showed just 142,000 net nonfarm payroll jobs created, far below the estimates, while the unemployment rate barely fell to 6.15 percent. But stay tuned for revisions, as the seasonal adjustments were draconian (payrolls rose 327,000 July-August before seasonal adjustment), so the ADP report may turn out to be a more accurate portrayal of August employment. And monthly payrolls have increased to 215,000 in 2014, vs. 194,000 in 2013 on average.

Graph: Calculated Risk

Then there is the best predictor of employment. The ISM Purchasing Manager’s service industry report registered 59.6 percent in August, 0.9 percentage point higher than the July reading of 58.7 percent. This represents continued growth in the Non-Manufacturing sector, which is the largest business sector. The August reading of 59.6 percent is the highest for the composite index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 65 percent, which is 2.6 percentage points higher than the July reading of 62.4 percent, reflecting growth for the 61st consecutive month at a faster rate. This is the highest reading for the index since December of 2004 when the index also registered 65 percent.

ism

Graph: Calculated Risk

The New Orders Index registered 63.8 percent, 1.1 percentage points lower than the reading of 64.9 percent registered in July. The Employment Index increased 1.1 percentage points to 57.1 percent from the July reading of 56 percent and indicates growth for the sixth consecutive month.

And manufacturing growth is very strong based on the ISM manufacturing index where the composite index jumped to 59.0 from 57.1 in July, which also means more job creation. New orders headline August's strength, rising to an exceptional 66.7 vs an already very strong 63.4 in July. Production is at 64.5, vs July 61.2, with employment steady and strong at 58.1 vs 58.2.

jolts

Graph: Calculated Risk

Lastly, the Labor Department’s latest JOLTS report of job Quits and Hirings is telling us the number of job openings continues to grow. Jobs openings (yellow line in graph) increased in June to 4.671 million from 4.577 million in May and are up 18 percent year-over-year compared to June 2013. The number of Hires (blue line) rose to 4.8 million from 4.7 million, the highest since 2006.

We therefore see a falling unemployment rate for the rest of this year. It could be as low as 5.5 percent come December, as more return to the workforce. This is turn will continue to boost incomes and so economic growth, as consumers are able to spend more. This is a terrific way to celebrate this year’s Labor Day. .

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Tuesday, September 2, 2014

Pending Sales Up, Mortgage Delinquencies Down

The Mortgage Corner

U.S. home buyers signed more contracts to buy existing homes in July, rebounding from a drop in June. This is in line with declining delinquency and foreclosure rates that portend a healthy real estate market for the rest of this year, and maybe into next year, if interest rates hold at their current lows. Today’s 30-year fixed conforming rate has fallen to 3.75 percent for 1 origination point in California.

The National Association of Realtors' monthly Pending Home Sales index rose 3.3 percent in July over June but is still 2.1 percent below its level in July 2013. It’s rising again because both consumer confidence measures have been rising of late, buoyed by rising incomes and low inflation.

pending

Graph: Econoday

"Interest rates are lower than they were a year ago, price growth continues to moderate and total housing inventory is at its highest level since August 2012," said Lawrence Yun, NAR's chief economist. "The increase in the number of new and existing homes for sale is creating less competition and is giving prospective buyers more time to review their options before submitting an offer."

michigan

Graph: Calculated Risk

And consumer sentiment is up in the final August reading, to 82.5 vs 79.2 at mid-month, along with the Conference Board’s Confidence index, the second reading of consumer optimism that is rising this week. The gain is centered in current conditions as it was in Tuesday's consumer confidence report, and underscores the improvement this month in unemployment claims, which once again fell below 300,000 for the second consecutive week. The current conditions component in this report is at 99.8 vs 99.6 at mid-month and 97.4 in final July. A rise in current conditions points to general month-to-month strength for consumer activity.

foreclosures

Graph: Calculated Risk

Lastly, home prices continue to rise and delinquencies to fall. A total of ​​3,785,000 loans were delinquent or in foreclosure in July. This is down from 4,599,000 in July 2013. Calculated Risk reports Black Knight Financial Services (BKFS) released their Mortgage Monitor report for July today. According to BKFS, 5.64 percent of mortgages were delinquent in July, down from 5.70 percent in June. More importantly BKFS reports that 1.85 percent of mortgages were in the foreclosure process, down from 2.82 percent in July 2013.

Both delinquencies and foreclosures are finally approaching historical levels, which means that housing sales—including new-home sales will do the same. The rate of monthly new problem loans has now fallen to 2005-06 levels, reports BKFS. Many foreclosure sales were held up by lengthy court proceedings in many of the eastern and Midwestern state that did judicial sales, rather than the western states with Trust Deed liens that could be auctioned off on courthouse steps.

Harlan Green © 2014

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Wednesday, August 27, 2014

Consumer Confidence Surging, Why Not Spending?

Popular Economics Weekly

Consumer confidence is up led by strength in the current assessment, which points to gains for consumer readings in August. But why aren’t consumers spending more, if so? Auto sales are up, but retail sales overall are flat at the moment. The answer may be consumers are waiting for better results in next Friday’s jobs report—maybe an unemployment rate below 6 percent, anyone?

Consumer confidence rose 2.1 points to a new recovery high of 92.4 reflecting a 6.7 point surge in the present situation component to 94.6. The gain in this component reflects improvement in August employment with substantially more consumers saying jobs are now plentiful, at 18.2 percent vs July's 15.6 percent, and a bit fewer saying jobs are currently hard to get, at 30.6 percent vs July's 30.9 percent.

retail

Graph: Econoday

The problem with retail sales seems to be that households want to save more and spend less for the moment. Spending jumped in March that had been suppressed by the severe winter, so it may be an evening out of overall sales, still rising at 4 percent per annum. And ICSC-Goldman just reported sales up for the week of August 23, signaling strong back-to-school buying. Same-store sales rose 0.6 percent in the August 23 week for a very strong year-on-year rate of plus 4.2 percent. The report cites strength across most categories and general strength for back-to-school demand. So it may be seasonal factors causing the month-to-month fluctuations.

jolts

Graph: Calculated Risk

What do consumers really want, is the larger question? Next week’s jobs’ report may tell us more, as I said. If job creation continues to grow, we can see increased optimism. The Labor Department’s latest JOLTS report of job Quits and Hirings is telling us the number of job openings continues to grow. Jobs openings (yellow line in graph) increased in June to 4.671 million from 4.577 million in May and are up 18 percent year-over-year compared to June 2013.

The number of Hires (blue line) rose to 4.8 million from 4.7 million, the highest since 2006. It’s therefore only a matter of time before workers begin to fill those job openings, then look out for increased consumer spending, the main driver of economic growth and so job creation.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Tuesday, August 26, 2014

Yellen + Jackson Hole = Higher Growth

Popular Economics Weekly

New Fed Chairman Janet Yellen plus a few other major central bankers at their annual Jackson Hole conference seem to have committed a heresy by advocating full employment as the goal of central bank policies, above and beyond fighting inflation. That may be an easier call today, of course, given inflation is low and unemployment still high after the Greatest Recession since the Great Depression.

But you can depend on the Wall Street Bankers and conservative economists who don’t like Central Banks controlling economic growth to call for restricting credit before the labor market—and economic growth—has become self-sustaining.

What is self-sustaining? It’s enough GDP growth to sustain not only full employment, but maintenance of a healthy social safety net. We know from past history that GDP has to exceed 3 percent growth, and has exceeded 3 percent on average since the Great Depression, for this to happen. That is what has made America and many Americans prosperous. But it is now averaging just 2 percent since the end of this Great Recession—in fact, over the past decade.

And this is mainly because not enough consumers have rising incomes, while housing prices are just beginning to recover—no surprise, as I’ve said. So the news from Jackson Hole was welcome, as it signaled that the Central Bankers of the EU, Japan, and the U.S. are serious about returning to full employment.

The New York Times Benyamin Applebaum just reported on the Jackson Hole conference of central bankers. “Twenty years later, heresy has become gospel. Leaders of the world’s major central banks made clear in speeches at this year’s conference, which ended Saturday, that they were focused on raising employment and wages. The pursuit of lower inflation has been replaced by a conviction that inflation is actually too low for the good of the economy.”

There is no question that economic activity is heating up. The Conference Board’s LEI just surged again and has been positive since February. Even housing seems to be growing again, though existing and new-home sales aren’t yet up to last year’s levels. But housing construction is growing again, with almost 1 million units being started to add to current low inventories.

leading

Graph: Econoday

But the real cure to what ails the U.S. economy is the creation of more jobs. And that is something the Fed has only limited power to do. It can hold down interest rates for an extended period by buying securities, which enables consumers to afford more, and banks to lend more.

This has helped the U.S. outdistance both Japanese and European growth, but once again the upper limit seems to be in the 2 percent growth range without fuller employment and a recovered housing market—the basis of much of middle class wealth, let us not forget.

Thomas Piketty in his epochal Capital in the Twenty-First Century highlighted the dilemma of mature developed countries with declining and aging populations, a major determinate of economic growth. Developed countries’ populations have declined to a 1.5 percent growth rate, whereas the U.S. population growth after WWII soared as high as 5 percent, which gave us 5 percent growth for a while.

So population growth will continue to be a problem, which is why a larger workforce is so important. But the truth is that consumers power 70 percent of economic activity, and governments another 20 percent. And with consumers still hampered by record debt loads mainly incurred by the housing bust, and governments hampered by austerity policies that limits their spending and cuts revenues on badly underserviced public services, this cannot happen without another exploding another heresy, that higher taxes can be beneficial.

Many have said it, and research is beginning to prove that governments do add to economic growth. Tax expert David Cay Johnston is one such who has been saying higher taxes can stimulate growth, using California’s economic resurgence, one of the highest tax states, as an example.

“Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30,” said Johnston. “Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.

“Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. California is home to 12 percent of Americans, but last year it accounted for 17.5 percent of new jobs, Bureau of Labor Statistics data shows.”

This not only benefits much needed public services, but actually boosts GDP growth, since much of government-financed work now employs private industry. George W Bush in his push to privatize government services put more than 800,000 private sector employees under government contracts just during his watch.

So the evidence is mounting, if not already there, that some higher taxation—including a streamlining of the various tax codes that eliminates perks—is needed to spur continued growth.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen