Monday, July 6, 2015

What Would Save the Euro?

Popular Economics Weekly

Now that Greece has voted NO on the latest European Commission-European Central Bank-IMF proposal (the so-called troika), will Greece stay in the Eurozone? If so, Greece may save the euro.

Why is this choice even necessary when most economists know the solution to their problems—something that would be a combination of easing the most draconian conditions that have really been imposed on all EU and Eurozone members, and a European version of our Marshall Plan that would reinvest in productive capacity to bring back growth to those countries suffering most from the worst recession since the Great Depression.

And isn’t just Greece. As Paul Krugman’s most recent Op-eds have asserted, countries from Finland to Spain to the Netherlands are also suffering from too much austerity—austerity in the sense of focusing too much on cutting spending and raising taxes to pay down the debt accumulated mostly from the Great Recession, when more spending is needed to speed up economic recovery—which is the only proven way to pay down debts.

image

Graph: Trading Economics

“The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.”

It is a dilemma brought on mostly by the EU’s massive bureaucracy that rules almost every facet of EU life. One commentator said the regulations that must be satisfied to join the EU would rise to 5 feet if stacked vertically.

Included in those requirements are economic policies—such as budget deficits cannot exceed three percent. Another condition even more draconian is an inflation target of 2 percent. It is mainly a German condition from their past. It brings back the horror of economic collapse that led to Hitler and the Holocaust. Yet without a higher and more flexible inflation target, sustainable growth cannot happen. The recovery from GW Bush’s first recession only happened with massive deficit spending and a 5 percent inflation rate at one time.

The horror of hyperinflation is really no longer possible in a modern world so interlinked by trade and finance (and modern technology that produces anything required cheaply and quickly). We suffer from oversupply of goods and services, in other words, that makes deflation the most real danger.

In fact, Japanese-style deflation has been more the norm since the 1980s, since then Fed Chairman Volcker’s focus on austerity (in the form of sky-high interest rates) to bring down America’s sky-high inflation of the early 1980s.

Then why isn’t there more discussion among the ‘troika’ of debt relief, which seems to be Greece’s main problem? The austerity policies foisted on Greece by the troika has put Greece into a major depression, with 25 percent unemployment and a 25 percent reduction in its economic growth. And nothing but higher and sustained growth can ever pay down the huge mountain of debt—some $323 billion at last count—owed to its creditors. But to allow that to happen Greece’s debt load must be eased in some way.

Columbia University economist Jeffrey Sachs, a specialist in economic development, has lamented Germany’s insistence on adhering to agreed upon ‘rules’, rather than allowing more flexibility in Greece’s debt repayment terms.

“Sovereign debts have been restructured hundreds, perhaps thousands, of times – including for Germany. In fact, hardline demands by the country’s US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of Adolf Hitler in 1933. After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world. Yet Germany has failed to learn the lessons of its own history.”

And we know what happens when history repeats itself. Even Germany has to know. So saving Greece is important for a number of reasons--not just European unity. Foremost is the need to reform an unworkable system, to make it more flexible, with plans that would be already in place to aid countries that have suffered the most from the Great Recession--which lest we forget, was almost a repeat of the Great Depression.

Harlan Green © 2015

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

Thursday, July 2, 2015

A Good Jobs Report

Financial FAQs

Should we push back the first Fed rate hike to the presidential election year of 2016, because of June's softer-than-expected employment report? Nonfarm payroll growth came in at 223,000 vs expectations for 230,000 and above. It included downward revisions totaling 60,000 to the two prior months (May revised to 254,000 from 280,000 and April to 187,000 from 221,000), said the Bureau of Labor Statistics report.

I doubt the Fed will wait that long, as the most recent economic data shows boom times—from rising home prices, as well as construction spending, and manufacturing activity on the rise again. This could be a temporary softness, in other words, as the US economy approaches full employment.  And it is a good jobs report, given all the uncertainties affecting economic growth these days.

Softness in payroll growth was combined with softness in wage pressures with average hourly earnings unchanged in the month and the year-on-year rate moving down to 2.0 percent from 2.3 percent. But that can be deceptive. Median household wages are now rising 3 percent, which means the income ‘bar’ for 50 percent of the families doing well is rising faster than inflation.

image

Graph: Marketwatch

But there is still a lot of labor slack in our job market that Fed Chair Yellen has been talking so much about. This is most evidenced by part-timers who would rather work fulltime, according to the BLS. Their numbers are declining, from 6.65 million to 6.51 million in one month, but would still have to drop by one-third to return to the range that prevailed from the 1970s until the start of the Great Recession in this Calculated Risk graph.

image

Graph: Calculated Risk

And the labor force participation rate just declined to 62.6 percent, from its historical 67 percent in the Calculated Risk graph that dates from 1960. Economists are not sure of the reasons. It may be the working age population is not growing as fast—just 0.5 percent, instead of historical 1 percent, according to the latest census figures, but that shouldn’t affect the participation rate of those actually looking for work.

It could be that while more of the older workers are dropping out, the newest generation aged 16 to 35 years, now the largest segment, is just entering the work force. This is why the actual unemployment rate fell to 5.3 percent. More dropped out of the labor force (432,000 seasonally adjusted) than were newly employed, according to the household survey that also tracks the self-employed.

So look for a Fed rate increase before the end of 2015—but only one—maybe in September. That means 2016 might be a wild year, with both economic growth and politics dependent on so many factors—such as the dollar strength, inflation, the price of oil, the Eurozone, and even geopolitical uncertainty.

Harlan Green © 2015

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

Tuesday, June 30, 2015

It’s Time For the 30-hour Week

Popular Economics Weekly

Don’t look now, but we should soon have the 30-hour work week as the standard, instead of the 40-hour work week last enshrined during FDR’s New Deal. Why, when Americans now work more hours than any other developed country?

There are a number of good reasons, and they have little to do with the ACA, or Obamacare, which has decreed that 30 hours per week is considered to be full time employment for large businesses that are required to offer insurance coverage to their employees.

But it has a lot to do with the labor slack in our job market that Fed Chair Yellen has been talking so much about, and the declining health and welfare of American workers. Thanks to the tech revolution and huge productivity gains of those past 30 years, fewer workers are needed to do the same amount of work in the digital world. So if fewer workers are needed to do the same work, then why are more employees working overtime?

Maybe because no one in America has thought through the consequences. What would it mean to share the workload with more people? The Germans certainly have done something about it. Rather than fire employees when times were tough in Germany’s last recession, firms hit hardest by the reduction in demand reduced their employees’ working hours to spread the pain.

And, the four-day workweek is nearly standard in the Netherlands, especially among working moms, according to a CNN Money article. Overall, the entire workforce averages around 29 hours a week -- the lowest of any industrialized nation, according to the OECD.

Some 86 percent of employed mothers worked 34 hours or less each week last year, according to Dutch government statistics, as reported by CNN. Among fathers, about 12 percent also worked a shortened workweek. Denmark is close behind with a 33 hour average work week and five weeks of paid vacation.

“Dutch laws promote a work-life balance and protect part-time workers,” said the report. All workers there are entitled to fully paid vacation days, maternity and paternity leave. A law passed in 2000 also gives workers the right to reduce their hours to a part-time schedule, while keeping their job, hourly pay, health care and pro-rated benefits.

Whereas in a U.S., a Gallup survey last summer found that the average for full-time employees was actually 47 hours—or 46 if you isolate those workers with just one job. Either way, that's almost the equivalent of an extra business day on top of the usual five-day workweek. And it’s affecting our health and longevity.

Of the more than 1,200 adults surveyed by Gallup, 21 percent said they worked 50 to 59 hours while 18 percent said they worked 60 or more. Another 11 percent estimated 41 to 49 hours. It is an insanity that American workers have become such workaholics at the expense of their health, their families, and their own sanity.

The Centers for Disease Control and Prevention cites studies that found "a pattern of deteriorating performance on psycho physiological tests as well as injuries while working long hours."

It also cited four studies that found "that the 9th to 12th hours of work were associated with feelings of decreased alertness and increased fatigue, lower cognitive function, [and] declines in vigilance on task measures."

Wouldn’t this be the least painless way for workers to catch up to the incomes of their bosses that now earn on average 303 times their average employees’ income, according to a recent EPI study? Where have most of the productivity profits since the late 1970s gone, as illustrated by the BLS graph? To those executives and their stockholders, as this graph illustrates.

image

It’s no longer a secret that America is the most over-worked country in the developed world, according to the Center For American Progress, a progressive think tank. It is the only developed country with no mandated vacation, sick leave or parental work leave allowances, which even many third world countries like Afghanistan and Ethiopia have.

In fact, it is already beginning to happen among high tech firms that allow flex hours and even work at home. A 4-day -- or compressed -- workweek is offered as an option to at least some employees at 43 percent of companies, according to the Society for Human Resource Management. But only 10 percent of those companies make it available to all or most of their employees.

And there are roughly two dozen local union contracts that include a compressed workweek option for public-service employees working in municipalities, universities and institutions such as prisons, according to the American Federation of State, County and Municipal Employees.

So there is no good reason America, the richest country in the world, should remain an underdeveloped, overworked country anymore.

Harlan Green © 2015

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

Monday, June 29, 2015

Consumers Earn and Spend More This Year

Financial FAQs

The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. The spending surge will also boost housing, already showing much better numbers, and the rest of the economy this year.

This is while the gains are not inflationary, at least yet, based on the very closely watched core Personal Consumption Expenditure (PCE) price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

Also, consumer optimism is absolutely as strong as it gets well beyond forecasts to 96.1, according to the University of Michigan consumer sentiment index. The expectations component, reflecting strong optimism for the jobs market, is an absolute standout, at 97.8 for a 12-year high and an 11.0 point surge from mid-month and a 13.6 point surge from final May, said Econoday. The survey is now back to early 2000 levels in this graph that dates back to 1978 and five recessions.

image

Graph: Calculated Risk

And such increased household incomes and employment have boosted housing construction and permits, which in turn boosts lots of ancillary sectors, such as Professional Services, Insurance, and Banking. Housing starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate, as we reported – but the April rate, which was already one for the record books, was revised even  higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March.

image

Graph: Econoday

Increased consumer optimism has to be why we see the gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April, which means future construction growth. Permits are the leading indicator in the report and the latest permit rate is the best since way back in August 2007. Based if nothing else than on permits, the housing sector, following the heavy weather of the first quarter, is moving to the top of the economy.

For home buying, the 30 to 39 age group (blue line) is important in this Calculated Risk graph.  The population in this age group is increasing, and will increase significantly over the next 10 plus years.   From roughly 2020 this predominately home buying age group will outnumber all the other age groups in this graph that projects out to 2060.

image

Graph: Calculated Risk

This increase in the demand for goods and services, including housing, is in fact because of the millennial generation, as I’ve said in past columns. Its numbers have now surpassed their parents’ baby boomer generation, and will continue to expand as more become adults, enter the workforce, and raise families.

Harlan Green © 2015

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

Wednesday, June 24, 2015

Why Lower Growth, but Higher Corporate Profits?

Popular Economics Weekly

First-quarter economic growth wasn’t as bad as expected, yet corporate profits were much better than expected. So what are corporations doing with their profits, rather than investing in future growth?

The second revision to first-quarter GDP came in at minus 0.2 percent. Exports were near the top of the negative side, reflecting the strong dollar's negative effect on foreign demand. A rise in imports was the quarter's biggest negative, and consumer spending on services the biggest positive. Personal Consumption (PCE) grew 2.1 percent annually, reflecting happier consumers, and residential investment surged to 6.5 percent, as growing new and existing-home sales show the housing market in recovery.

image

Graph: Econoday

This is while corporate profits continued their record ways, up 9 percent annually. So where are the profits going, with most Fortune 500 corporations paying much less than the nominal fed tax rate of 35 percent? Analyst estimates show total S&P 500 capex (i.e., capital expenditure) spending could dip 11 percent to $641.6 billion in 2015 from actual 2014 spending of $718.1 billion, marking the lowest level since 2011's $591.5 billion, according to Thomson Reuters data.

image

Graph: Econoday

“U.S. corporate spending on capital projects could fall this year to the lowest level since 2011, with steep reductions by the energy industry and companies in other sectors cutting spending amid broad concerns about global growth,” said the Thomson Reuters report. That could translate to lower job growth and weakness in the technology and industrial companies that typically benefit from capital spending.

So then what do corporations do with their excess cash? S&P 500 companies still have record levels of cash on their balance sheets—somewhere between $3.5 to $5 trillion from 2012 to 2014, according to the St. Louis Fed—as spending on stock buybacks and dividend payments has come at the expense of capex for many companies.

image

Graph: St. Louis Fed

In fact, this has been to the detriment of both profits and growth of those companies that have hoarded their cash reserves, according to a Deloitte LLP report, The Cash Paradox: How Record Cash Reserves Are Influencing Corporate Behavior . “Critically, a divergence in share price between the cash hoarders and the spenders has emerged,” says Iain Macmillan, partner and head of M&A and New Growth for Deloitte LLP in the U.K.

“Since 2000, the share price performance of the small cash holding companies has outperformed their large cash holding counterparts, growing by an astonishing 632 percent compared to 327 percent for their larger cash holding counterparts. Remarkably, the gap widened even more after the financial downturn. This suggests that in the long run, the markets are rewarding companies that take a more bullish attitude toward growth.”

image

Graph: Deloitte LLP

That should be a no-brainer for corporate heads (large corporation growth is red line on graph). So it seems that cash buybacks and dividend payments are not the way to spend profits to increase market share and overall growth. Corporate CEOs now make on average 300 times their employees’ average income, much of it in stock options that tend to increase in value with stock buybacks and increased dividends.

It is no longer a secret that CEO compensation has reached stratospheric levels. The AFl-CIO Union website catalogues those compensation levels—with the majority from stock holdings, rather than outright salaries. JP Morgan Chase CEO Jamie Dimon earned a $1.5 million salary in 2014, but more than $20 million in stock compensation, for example.

The Economic Policy Institute revealed Monday that the average total compensation of CEOs at the 350 largest firms was $16.3 million in 2014, roughly 303 times the average pay of their workers, reports CNN. The divide between CEO and worker pay has increased every year since 2009, when CEO salaries dropped to 196 times the average work, according to the report. While CEO pay has risen 997 percent since 1978, the average employee pay has grown 10.9 percent.

So why not raise their employees’ wages and benefits with some of the cash hoard—for instance, retirement and healthcare benefits? Then, instead of enriching themselves, those CEOs would see an increase in demand for their products and services.

This is standard aggregate demand theory, and once again obvious to those concerned with our poor economic growth record, economic growth that has been steadily declining since 1980. Consumers make up some 70 percent of economic activity these days, ergo if corporate CEOs paid their employees more, consumers wouild spend more, thereby further enhancing corporate balance sheets, needless to say!

Harlan Green © 2015

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

Tuesday, June 23, 2015

Housing Beginning to Bloom

The Mortgage Corner

Ultra-low interest rates are finally beginning to pay off.  The housing season is beginning to bloom—for first-time homebuyers, in particular. The National Association of Realtors reports total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 5.1 percent to a seasonally adjusted annual rate of 5.35 million in May from an upwardly revised 5.09 million in April, largely because of the surge in first time buyers. Sales have now increased year-over-year for eight consecutive months and are 9.2 percent above a year ago (4.90 million).

And new-home sales also soared. New single-family homes in the U.S. sold at an annual rate of 546,000 in May, hitting the fastest pace since February 2008, with growth in two of four regions, reports the U.S. Census Bureau this morning. And it revised April's rate to 534,000. May's sales rate was up 19.5 percent from a year earlier, signaling a healthy pick up, though recent sales rates remain below long-term averages.

image

Graph: Calculated Risk

This graph shows existing-home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in May (5.35 million SAAR) were 5.1 percent higher than last month, and were 9.2 percent above the May 2014 rate.

Lawrence Yun, NAR chief economist, says May home sales rebounded strongly following April's decline and are now at their highest pace since November 2009 (5.44 million). "Solid sales gains were seen throughout the country in May as more homeowners listed their home for sale and therefore provided greater choices for buyers," he said. "However, overall supply still remains tight, homes are selling fast and price growth in many markets continues to teeter at or near double-digit appreciation. Without solid gains in new home construction, prices will likely stay elevated — even with higher mortgage rates above 4 percent."

The percent share of first-time buyers rose to 32 percent in May, up from 30 percent in April and matching the highest share since September 2012. A year ago, first-time buyers represented 27 percent of all buyers.

"The return of first-time buyers in May is an encouraging sign and is the result of multiple factors, including strong job gains among young adults, less expensive mortgage insurance and lenders offering low down payment programs," said Yun. "More first-time buyers are expected to enter the market in coming months, but the overall share climbing higher will depend on how fast rates and prices rise."

The huge jump in existing-home sales means more demand for new homes, as we said last week. The median price of new homes fell 1 percent to $282,800 compared with May 2014, also a good sign for the first-time homebuyers. But there are still not enough homes for sale. The supply of new homes was 4.5 months at May's sales pace, down from 4.6 months in April.

New Home Sales

Graph: Calculated Risk

This is also why housing starts came in at a 1.036 million rate in May. Though down 11.1 percent from the April rate, which was already one for the record books. But April is now revised higher to 1.165 million, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April.

And this is buttressed by builder confidence in the market for newly built, single-family homes in June up five points to a level of 59, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since September 2014, and in fact returns the index to pre-bubble (2001-02) levels.

Why the huge construction increase in June? This is while mortgage rates are rising, up some 0.375 percent since their most recent lows to 3.875 percent for 0 points in origination fees for a 30-year fixed rate conforming loan.

Firstly, it means consumers are confident enough in their future to begin to look for housing to support their growing families.  And the millennial generation aged 18 to 36 years has already surpassed their parents’ baby boomer population size, and will exceed it by 2020, according to demographers. This has to be why household formation is finally returning to normal levels of 1 million plus new households being formed per year, as the so-called echo boomers move out of their parents’ homes and or leave college to make their own nests.

So forecasters will probably be revising their second-quarter GDP estimates higher following the better housing numbers, not to mention their estimates for Thursday's index of leading economic indicators where permits are one of the components, as we said last week.

Harlan Green © 2015

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

Thursday, June 18, 2015

Janet Yellen and Interest Rate Futures

Financial FAQs

The consensus of economists from Fed Chairperson Janet Yellen’s press conference was that the Fed is in no hurry to raise interest rates. Why should they with employment growing, but not wages? Because workers aren’t getting their fair share of the economic pie (i.e., of increases in productivity and profits), and future economic growth still looks dicey.

“I did say when we agreed that labor markets slack has diminished to some extent, in the inter-meeting period and clearly over a longer span of time over the last several years, obviously we have made considerable progress in moving towards our goal of maximum employment,” said Dr. Yellen. “So in spite of the fact that there is some progress on that front the committee wants to see some further progress before feeling that it will be appropriate to raise rates.”

For starters, economic growth is still not sufficient to boost salaries. First quarter U.S. GDP growth was negative -0.7 percent, though it may eventually be revised upward with more data. This is while wage growth in the first quarter was just 2.3 percent, when it is above 3 percent with normal full employment.

image

Graph: Trading Economics

And there is very little if any inflation because of low wage growth, which takes up two-thirds of product costs. The Consumer Price Index has had zero growth over the past year—yes zero retail inflation, as the Econoday graph makes abundantly clear.

image

Graph: Econoday

So what is Janet Yellen’s Federal Reserve to do in such a case? It has to continue to wait for a number of economic factors and trends to develop. For instance, Europe is teetering on the edge of its third recession since 2009, and Greece about to exit the Eurozone. The ensuing economic uncertainty can only hurt exports, since Europe accounts for 25 percent of U.S. exports, and our strong dollar is making U.S. exports less competitive everywhere (though it has meant cheaper oil and gas prices, and a lower trade deficit).

image

Graph: Trading Economics

Europe is definitely hurting, in other words. “The Gross Domestic Product (GDP) In the Euro Area expanded 0.40 percent in the first quarter of 2015 over the previous quarter,” says Trading Economics. GDP Growth Rate in the Euro Area averaged 0.36 percent from 1995 until 2015, reaching an all-time high of 1.30 percent in the second quarter of 1997 and a record low of -2.90 percent in the first quarter of 2009.

“We can only do what is in our power to attempt to minimize needless volatility that could have repercussions for other countries or financial stability more generally and that is to attempt to communicate as clearly as we can about our policy decisions, what they will depend on and what we are looking at,” said Yellen.

She couldn’t be clearer on the need to pay attention to what is happening in the rest of the world as well as with US, in other words.

Harlan Green © 2015

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