Inequality and the Destruction of Our Wealth

Popular Economics Weekly

This is making the case for a higher growth rate and greater prosperity, not the ‘new normal’, post-recession slow growth malaise so many pundits are predicting. And it has little to do with cutting government spending, or the recent Great Recession, but everything to do with the righting the tremendous inequality caused by current economic policies in place.

An illustration is the budget “compromise” being worked out in Congress—cutting spending without increasing tax revenues. It just continues policies that have contributed to the wholesale destruction of most Americans’ incomes and wealth. It does not even reduce the deficit but grows it, and so reduces the main source of our prosperity, our standing as the world’s superpower. It also continues the downward slide in household incomes by continuing to divert the tax dollars that would most improve our standard of living to the richest, whose standard of living hasn’t suffered.

The destruction of middle class wealth and income by Republicans, in particular, has been prolonged and systematic for decades. This standard of living has already declined for most of us, and will continue to decline if this “compromise” doesn’t include reversing the drain in tax revenues, for starters.

Don’t take my word for it. Check out CIA reports on how we compare with the wealth of other countries. We now rank 97^th in income equality below all developed countries, Iran, and Russia. In fact, the U.S. is now just above Jamaica and the poorest African countries. Wealth—both income and assets—has become concentrated among fewer and fewer Americans, in other words.

In fact, just since the end of this recession Americans have experienced the worst income inequality since the Great Depression. And most economists agree the inequality of that era, in which the top 1 percent income bracket had corralled almost a quarter of national income, destabilized financial markets to such an extent that it was a major cause of the Great Depression. It was also an underlying cause of the Great Recession and could soon tip us back into another recession if such inequality is not reversed.

This is the real casualty of the current budget gridlock. Instead of focusing on reducing the deficit by reducing or closing tax loopholes of the wealthiest, the budget cutting crusaders of the Republicans’ extreme right wing want to preserve their wealth. That is, in the name of ‘freeing’ private capital by reducing government expenditures, a huge amount of wealth has been ‘freed’ from the gainfully employed to their supporters on Wall Street and Big Business.

This has always been the rationale of modern conservatives for downsizing government. Yet such extreme inequality lowers the standard of living for all in several ways. For starters, it decreases opportunity. There is less opportunity to access the ever more expensive higher education, and so less upward mobility, which brings nurtures creativity. Studies show we are already less upwardly mobile than other industrialized countries. And it affects individual health. We already have an infant mortality rate lower than any other developed country—on a par with Cuba’s—and higher disease rates.

Greater inequality also puts more people on public welfare rolls. We already have the highest poverty rate since WWII. It also increases crime rates. With 2.3 million prison inmates, the U.S. already has the highest incarceration rate of any county in the world. This is not to speak of budget cutting effects on financial regulation, or to control environmental pollution, or to replace aging infrastructure, much less modernize industry.

How did all this happen? The decline began in the 1970s with the stagnation of household incomes. Then as Republicans became more conservative under the cry of smaller government, they began cutting incomes and benefits of the lower and middle class earners who create most of our wealth—i.e., are the real producers as well as buyers of our goods and services.

It was done under the Republicans’ supply-side theory that almost all government, collective bargaining and taxes are evil, while tax cuts pay for themselves. But lowering the highest tax bracket shifted the tax burden to the middle and lower income brackets, since payroll taxes weren’t cut. If fact, they were raised to pay for rising social security and Medicare benefits, worsening the growing inequality. Even then, President Reagan had to raise taxes 18 times when he realized the huge deficit it created.

The anti-government crusade continued with the $5.7 trillion in debt created by GW Bush’s tax cuts and unpaid wars, according to the non-partisan Center for Budget and Policy Priorities. More than 50 percent of the tax benefits in fact went to the wealthiest one percent—for capital gains and dividends, a lower maximum income tax rate, accelerated depreciation for companies, and the like.

The resultant increase in the deficit has endangered both social security and Medicare benefits, which mainly support the elderly as well as the lowest wage earners. The result is almost inevitable—the expectation of a ‘new normal’ growth rate with permanently higher unemployment, lower wages for average workers, and reduced social security and Medicare benefits.

In lowering our expectations, ultra-conservatives are having their way, in other words. And it will result in a greater social divide than ever—between the Have and Have-Not states, the educated and less educated, which will create a larger and more permanent Under Class.

But it doesn’t have to be that way. We could go back to a more progressive tax system that nurtures higher growth rates by closing the tax loopholes and raising the maximum income tax bracket back to 39 percent of the Clinton era. We know that President Clinton did it while cutting spending that resulted in budget surpluses from 1997 to 2001. In fact, a wonderful graph by Eliot Spitzer in Slate of the history of marginal tax rates shows that the GDP growth rate has been basically stagnant since 1980 with the decline in marginal income tax rates.

We can also cut entitlement expenses by continuing to implement the new Patient Protection and Affordable Care Act (PPACA, Public Law 111-148); and, following that, the Health Care and Education Reconciliation Act of 2010 (H.R. 4872), which made a number of changes to provisions of PPACA along with significant changes to the federal postsecondary education programs, will both improve preventative care and lower costs, as reported by the Congressional Budget Office.

In fact, allowing the GW Bush cuts to expire in 2012 would halve the deficit in 10 years, according to the Congressional Budget Office (CBO). While continuing the tax cuts for the 2011-2020 time period would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.

But until Republicans realize that shrinking government without policies that redistribute wealth back to the wage and salary earners who produce and spend it, very little growth will happen. And that shrinks the living standard for all of us. It shows policies which hide behind shrinking government really destroy wealth—and taking away the wealth of some takes away better economic growth and prosperity for all.

Harlan Green © 2011

Case-Shiller Index—Home Prices Rising Again

The Mortgage Corner

It’s not only the S&P Case-Shiller Home Price Index that is finally rising after falling drastically since June 2010, end of the home buyer tax credit. Both new and existing-home median prices are also rising. For Case-Shiller, 16 of the 20 metro areas were up in May.

San Francisco, Washington, Minneapolis, San Diego, and Los Angeles have risen the most from their post-bubble lows. The data through May 2011 actually showed a second consecutive month of increase for the 10- and 20-City Composite Indexes, non-seasonally adjusted, up 1.1 and 1.0 percent, respectively, over April. Sixteen of the 20 Metro Statistical Areas rose, as we said, with San Francisco up a huge 18 percent since the lows; Detroit, Las Vegas and Tampa were down over the month and Phoenix was unchanged.

New home sales fell 1.0 percent in June to an annual rate of 312,000 vs expectations for 321,000, but the median price was up 5.8 percent to $235,200 and the average price up 1.8 percent to $269,000.. Upward revisions of 13,000 to May and April sales helped, said Econoday. Year-on-year prices also jump into the positive ground in June, up plus 7.2 percent for the median price and up 4.8 percent for the average.

Sales of existing homes failed to pick up in June, slipping 0.8 percent to an annual adjusted rate of 4.770 million and following May’s 3.8 percent decline. But the median price jumped a monthly 8.9 percent to $184,300 with the year-on-year rate moving into positive ground for the first time this year at plus 0.8 percent.

And the FHFA (Federal Housing Finance Agency) purchase only house price index for homes with conforming loans rose 0.4 percent in May, following a 0.2 percent increase in April. On a year-on-year basis, the FHFA HPI is down 6.3 percent. For the nine Census Divisions, seasonally adjusted monthly price changes for month-ago May ranged from minus 1.0 percent in the West South Central Division to plus 2.0 percent in the Mountain Division. Six of the nine Census Divisions improved in May.

What is happening? It looks like more affluent buyers are beginning to buy homes. Let us hope this trend continues, since it means workers may be finding better paying jobs.

Harlan Green © 2011

Don’t Blame Our Democracy…

Popular Economics Weekly

Please don’t blame our Democracy, old as it is—in fact, the oldest in the modern world—for the slowness of this recovery. Winston Churchill on hearing his Labor Party had been defeated in 1947, said in the House of Commons, "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."

In fact, our Democracy is working, as economic growth is predicted to rise above 3 percent for the rest of the year, and job growth will get better, in spite of the worst downturn since the 1930s. Even real estate is showing signs of life with new housing construction up 14 percent in June.

The Conference Board’s index of leading indicators rose 0.3 percent in June on top of May's outsized gain of 0.8 percent, which equates to approximately 3 percent growth for the rest of the year. The top factor for June was an increase in money supply with the second factor once again the yield spread between long rates and short rates with the latter being kept near zero by the Federal Reserve. And the larger the spread between short and long term rates—a so-called ‘steep’ yield curve—the more profit for banks and other lenders willing to extend credit.

Housing construction is continuing to move up—but from near rock bottom, says Econoday.  Housing starts jumped 14.6 percent in June, following no change in May.  And this actually helps growth, since it means more jobs. June’s annualized pace of 0.629 million units came in higher than the consensus projection and is up 16.7 percent on a year-ago basis. The boost in June was led by a 30.4 percent surge in the multifamily component.  The single-family component rose 9.4 percent after gaining 0.7 percent the prior month.

Sure, Republicans and Democrats are locked in a struggle that mirrors the eternal struggle between the old and the new. Republicans want every tax break they can get for their wealthiest constituents, while Democrats want every benefits’ break for all the other income classes plus the elderly. And this is preventing both the private and public sectors from stimulating more than tepid growth, in spite of record corporate profits since the end of the Great Recession.

The problem is neither party can agree how to pay for those benefits. Democrats want to close tax loopholes, while Republicans believe putting more money into the pockets of investors and the largest corporations by lowering tax rates further will somehow generate more growth, without spelling out how that might happen. The tax cuts in fact increased the federal deficit in both the Reagan and Bush Administrations

And preserving those Bush tax cuts has increased the deficit some $3 trillion, and will increase it another $7 trillion by 2017, according to the non-partisan Center for Budget Policies and Priorities, if not allowed to lapse.

Even “Read My Lips: No New Taxes” Grover Norquist, leader of those Republicans who have signed his Taxpayer Protection Pledge—which says that he or she will vote against all tax increases—said in a recent New York Times’ Op-ed it doesn’t mean opposing sunset clauses that allow the Bush tax cuts to expire in 2012. “If there were no vote in Congress and taxes rose automatically,” said Norquist, “then no politician would have voted for higher taxes, and no elected official would have broken his or her pledge.”

New York Times Op-ed columnist Charles Blow cited a recent Pew Research poll that said a thin majority of whites are now registered Republicans, while a majority of minorities such as Blacks and Hispanics are registered Democrats. So the line between the past and future is being drawn ever more sharply for the upcoming 2012 presidential election.

As we now know, the debate isn’t really about the deficit, as we said last week, which occurred largely under GW Bush. Else Republicans would be interested in paying down the deficit, which can only be done by closing the tax loophole that have increased the deficit. The federal deficit has been broken down by many, including the non-partisan Center for Budget and Policy Priorities.

New Bush Administration policies accounted for $5.07 trillion of the $14 trillion in Federal debt, while Obama Administration policies such as ARRA accounted for $1.44 trillion. The rest has come from lost revenues of the 2 recessions since 2001. We are now at the lowest level of revenues as a percentage of Gross Domestic Product since WWII.

That is why the debt ceiling agreement has to be ‘balanced’ between cost-cutting and deficit-cutting—i.e., slowing the growth of government programs while closing the tax loopholes that are taking monies away from projects that would stimulate higher growth rates.

Harlan Green © 2011

Will New Conforming Limits Hurt Housing?

The Mortgage Corner

The new ‘high balance’ conforming limits kick in, with a single-unit $625,500 maximum in Santa Barbara County, on loans originated after October 1, 2011. In fact, it is the older super conforming maximum enacted in 2008, before the ARRA stimulus act temporarily boosted it to $729,750. That leaves less than three months to originate loans under the current higher limits, which could hurt higher end housing.

But the rental market keeps looking better for investors. One report by Calculated Risk highlighted falling apartment vacancies from Reis, Inc. “Reis, through its flagship institutional product, Reis SE, and through its new small business product, Reis Reports, provides online access to a proprietary database of commercial real estate information and analytical tools”, says its website.

“The apartment industry rebounded strongly in 2010 as demand for apartment residences outpaced the sluggish recovery in the job market nationally,” said NMHC Chief Economist Mark Obrinsky.  “These results show the apartment industry continues to do well even though the nation’s overall rate of economic growth has slowed.  This is driven largely by the increased appeal of renting generally but also by the large number of young people entering the housing market for the first time—and young people are much more likely to rent than buy.”

Reis, Inc. reported that vacancies fell in 72 of the 82 markets during the second-quarter vacancy rate to 6 percent, the lowest since 2008 and compared with 7.8 percent a year earlier. The average effective rent, the amount paid after discounting, was $997 in the second quarter of the year, up from $974 a year earlier ...Landlords filled a net 33,000 units in the second quarter, a slowdown from the 45,000 units they filled in the first quarter. Meanwhile, supply remains constrained. Roughly 8,700 new apartment units opened during the second quarter, the second-lowest quarterly tally for new completions since Reis began collecting data in 1999.

Calculated Risk shows rental vacancy rates have plunged from 11 to 9.5 percent, and probably have further to go. The most recent data show vacancies stabilizing around 8 percent. If so, that would corroborate Amy Hoak of Bloomberg Marketwatch’s contention that real estate investors are now picking up bargains.

“In fact, investors bought 20 percent of all the homes sold in April, according to the National Association of Realtors,” said Hoak. “Some of them are buying with cash.”

But even if they do finance part of the purchase, they’re able to turn around a profit much quicker than they would have been able to in the past, said William King, director of valuation services for Veros Real Estate Solutions, a supplier of housing data to the country’s largest banks, as well as government organizations. “And the return on rentals can be much better than returns on other investments these days,” he added.

This is boosting construction spending, as we said last week. Strength for the latest month was led by a 3.1 percent improvement in private residential spending, following a 0.7 percent decline the month before.  However, the gain in this component was improvements as non-new home spending (i.e., remodels) jumped a monthly 7.6 percent after a 0.1 percent slip in March.  Even though new single-family construction is still moving sideways, it appears that two other components of residential investment will increase in 2011: multi-family construction and home improvement.

Calculated Risk has tracked residential construction jobs since 2002, and sees it again turning positive. Construction jobs have turned the corner in 2011, from a 149,000 loss in 2010, to a 31,000 jobs increase to date in 2011. And rental vacancy rates have declined from an 11 percent high to 9.5 percent, as we said.

Pending sales of future existing home closings rebounded 8.2 percent in May, following a drop of 11.3 percent the month before. Led by the West and Midwest, all four regions showed respectable gains.  The pending sales numbers—based on contract signing—point to the direction of existing home sales (based on closing transactions) over the next one to three months.  Given the volatility in the data, a three-month average suggests that the underlying current trend is still flat.  The pending home sales index, however, is up 13.4 percent on a year ago basis. We will see.

And sales of existing homes failed to pick up in June, slipping 0.8 percent to an annual adjusted rate of 4.770 million. More homes are coming on the market. Certainly, some of the increased supply is seasonal but months’ supply is now back up to 9.5 months at the current sales rate versus 9.1 months in May.  This is still lower than the recent high of 12.5 months in July 2010.

The existing-home median price did jump a monthly 8.9 percent to $184,300 with the year-on-year rate moving into positive ground for the first time this year at plus 0.8 percent. But this may be based on jumbo home buyers rushing to close on the current conforming high balance limit. So dropping the high balance limit come Oct. 1 may adversely affect housing prices in the short term. This is not the time for Fannie/Freddie to cut back their conforming program, in other words.

Harlan Green © 2011

Don’t Blame Fannie and Freddie…

The Mortgage Corner

Please don’t blame Fannie Mae and Freddie Mac, guarantors of most of the housing market’s conventional mortgages and reason the housing market continues to function at all, for the housing bust. The bust was caused by the oversupply of housing built during the bubble, and aggravated by almost all commercial banks and hedge funds cooking up every kind of ‘liar’ loan they could think of to sell to Wall Street securitizers—including to themselves.

Sure, Fannie/Freddie had to be taken over by the federal government and are being subsidized with approximately $167 billion to date, but that is because banks and other commercial lenders then withdrew from financing the housing market, leaving government to clean up the mess. So the government subsidy is a very cheap price to pay to keep housing from collapsing completely.

Credit was too cheap in early 2000, as Fed Chairman Alan Greenspan’s Federal Reserve kept short term interest rates below the inflation rate to pay for the Bush tax cuts and wars. I.e., when short term interest rates were 1-2 percent and inflation in the 3 percent range at the time, it was borrowers who actually profited since inflation deflated the value of the debt. This meant it was interest free money!

Economists have estimated that below inflation interest rates were probably also responsible for the double digit housing price rises during the height of the bubble. Don’t take my word for it. Almost everyone, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, have rejected the argument of conservative think tanks such as the American Enterprise Institute that it was federal affordable housing policies designed to make housing available to a broader public, that created so many high risk loans.

Fannie and Freddie created and have always maintained the gold standard of mortgage qualification standards, with the highest income, credit, and ability to pay requirements. As a mortgage banker/broker for 30 years, I have never originated or underwritten a conforming mortgage that didn’t meet those standards.

So why do conservatives hate Fannie and Freddie so much? Because of their ties to the Democratic Party, mainly. As Gretchen Morgenson and Joshua Rosner detail in their book, Reckless Endangerment, Fannie Mae and Freddie Mac grew hugely under Democratic Administrations eager to encourage more affordable housing. And they did buy subprime mortgages from Countrywide Financial that were not underwritten to their conforming underwriting standards, thus fattening their portfolios in a bid to play catchup to the issuers of so-called ‘private label’ mortgages. But the subprime purchases were a drop in the bucket; just $60.8 billion for Freddie Mac, according to David Min of the Center for American Progress, with borrowers who had FICO scores under 620, a common definition of subprime mortgages.

In fact, current delinquency and foreclosure rates of Fannie and Freddie, guarantors of Agency Prime mortgages, are close to the historical norm. Fannie Mae reported that the serious delinquency rate decreased to 4.27 percent in March, close to the long term historical average. This is down from 5.47 percent in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent. Freddie Mac reported that the serious delinquency rate decreased to 3.57 percent in April. (Note: Fannie reports a month behind Freddie). This is down from 4.06 percent in March 2010 and Freddie's serious delinquency rate also peaked in February 2010 at 4.20 percent.

And their foreclosure rates are approaching the 1 percent historical average of all conventional loans. The Calculated Risk graph shows the latest foreclosure rates for all mortgage categories. It may not be surprising that Option ARMs (those with negative amortization that caused the principal loan balance to increased substantially in many cases) have the highest foreclosure rates, even above the Subprimes.

Sadly, Lender Processing Services, Inc. (NYSE: LPS) Mortgage Monitor report shows the number of mortgages 90 or more days delinquent, combined with the foreclosure inventory at the end of June, still totaled 4,073,00 down very slightly from its May 4,084,557 total. It looks like without additional government help, which doesn’t seem likely (see Renae Merle at Washington Post: Obama administration not planning another big housing program), most of those units will be added to the existing home inventory over the next 2 years.

So why doesn’t the Obama Administration spend more of the reportedly $11 billion set aside for the HAMP loan modification program? It may be because Timothy Geithner’s Treasury Department isn’t requiring banks holding the delinquent loans to get them off their books more quickly. And that means not much upside potential for housing prices until when, maybe 2014?

Harlan Green © 2011

Why Such Weak Jobs Numbers?

Financial FAQs

We were wondering why June’s unemployment report looked so bad—a net 18,000 nonfarm payroll jobs created, according to the Bureau of Labor Statistics? Well it looks like the BLS got it wrong this time. And understanding why may help to understand some of the pervading pessimism that is hurting economic growth—both for consumers and employers. The U.S. economy has become too complex to be understood by one set of statistics—such as the monthly jobs report. And that exaggerates the wild swings in monthly statistics that can only unnerve the general public—and even decision-makers less versed in economic terms.

Some economists are scratching their heads, because retail sales are growing 8 percent annually, both manufacturing and the service sector employment continues to expand, and another private payroll survey—the ADP Report—showed some 157,000 new private payroll jobs in June. Some of the poor report was due to Japan’s earthquake-Tsunami disruptions, of course. It turns out that lots of electronic as well as auto parts manufacturing was disrupted in Japan. But there’s more.

But it also has to do with the Bureau of Labor Statistics Seasonal Adjustment factor. That is an adjustment made to compare same month seasonal variations over several years. I.e., if hiring normally surges during June by 1 million new jobs (from lots of student entrants into the summer job market, for example), then the U.S. Bureau of Labor Statistics only counts the number above 1 million as new jobs when seasonally adjusted!

Econoday’s Sr. Economist R. Mark Rogers was one of the first to notice this anomaly. The difference, as the Econoday graph shows, is approximately 1 million jobs between not-seasonally adjusted vs. seasonally adjusted nonfarm payrolls. In fact, the not-seasonally-adjusted payrolls rose 376,000 in June, following a 631,000 jump in May, according to Econoday. So why not publicize that number, instead of the paltry 18,000 jobs number (57,000 private jobs created less 39,000 government jobs lost)?

Because economists in particular want to see the yr-to-yr differences in seasonal fluctuations. It is not difficult to see the problem. During the recession and soft recovery years of 2008, 2009, and 2010, the seasonal factors used by the BLS were significantly smaller—minus 927,000, minus 949,000, and minus 927,000, because of the Great Recession.  If last year’s seasonal factor were used for this June’s data, for instance, the overall payroll number would have been 135,000 higher and would have topped expectations, according to Dr. Rogers.

This is a serious difference. Then why were 1,060,000 ‘seasonal’ jobs subtracted in June—a number closer to the pre-recession June 2007 level, vs. the June 2010 level of 927,000 from the actual total of new jobs? And why are seasonally adjusted numbers used for the general news reports, anyway? It is calculated with an algorithm created by the Labor Dept. The fact that, say, 1 million more jobs are usual in June because schools are out can mean signs of substantial growth when it happens during an economic recovery. And it is being masked by the seasonal adjustment.

So it does look like Labor Dept. economists overestimated the June job surge, which in turn underestimates real jobs growth when some sectors like housing are still in recession! And that can cause real confusion about the direction of this economic recovery—if one isn’t an economist.

Backing up the suspicion of a faulty seasonal adjustment are the weekly initial jobless claims. They continue to fall, and would have been below 400,000 in the latest week, if Minnesota had not laid off so many state workers because of their budget standoff. This is when average weekly claims below 400,000 have historically been a sign our economy is in recovery.

Incidentally, would it make a difference if we knew the payroll report only shows the net job creation numbers? In fact, more than 4 million jobs are actually lost and created every month in the U.S. It is the difference between the two that constitutes the nonfarm payroll number. The just released May BLS Job Openings and Labor Turnover Survey (JOLTS) survey shows this. Approximately 2 million employees were laid off in May, the last month surveyed, while 2 million quit their jobs. With the May seasonal adjustment (SA), a total 4,011,000 jobs were added in JOLTS (with its smaller sample amount).

And, the number of job openings in May was 3.0 million, as the Calculated Risk graph shows, unchanged from April. The number of job openings in May was 862,000 higher seasonally adjusted than in July 2009 (the series trough) yet remains well below the 4.4 million openings when the recession began in December 2007. Of course, the JOLTS report is one month behind the unemployment report.

So which number do we believe? It may be necessary for economists to make such a distinction, but does that make sense to the general public? This probably means the economy is doing better than the pundits are saying, but it takes a very savvy reader to know the difference, and it’s certainly no confidence builder—which doesn’t help the rest of us trying to plan for the future.

Harlan Green © 2011

Consumer Debt Is Recovery’s ‘Headwinds’

Financial FAQs

Higher gas and foot prices are not the real ‘headwinds’ that threaten to stall this economic recovery. They are really a symptom of cash-strapped consumers inability to buy more than necessities two years after the end of this Great Recession.

The latest signs of consumer health show that consumers are not buying enough to kick growth higher because they still have so much debt to pay down. And they won’t be able to make much of a dent in debt, unless their incomes rise faster.

The best income measure is the Personal Income and Expenditures report of the Commerce Dept. Personal income in April did post a 0.4 percent gain equaling the pace in March.  Importantly, the key wages & salaries component increased 0.4 percent, following a boost of 0.3 percent in March. (Wages and salaries make up some 80 percent of personal income; self-employed incomes and transfer payments the rest.) However, real disposable income (after taxes and inflation) in April was flat, matching the March pace but actually topping February’s 0.1 percent decline. Consumers have had no recent improvement in real spending power, in other words.

The situation is not being helped by the push in several states to eliminate collective bargaining of public employees. Collective bargaining means union bargaining and it is the only countervailing force to Big Business lobbying for more tax breaks—which is the corporations’ method of collective bargaining—when corporations have record profits. Corporations have always been able to bargain with their dollars, in other words, whereas most employees have no bargaining power unless they belong to unions.

The mild inflation we have at present is actually a good thing. It means demand is increasing and not stagnant, even with personal incomes barely keeping up with the inflation. In fact with gas prices taken out, the Consumer Price Index is up just 1.5 percent in a year.

Consumers are shopping, having increased their credit card debt for only the second time in a year (December’s holiday shopping was the last increase.). Overall consumer credit increased at an annual rate of 2-1/2 percent in May 2011, according to the Federal Reserve. Revolving credit increased the most at an annual rate of 5 percent, and non-revolving credit increased at an annual rate of 1-1/4 percent.  Non-revolving credit (installment loans) fell because of the shortages of vehicles dependent on parts from Japan.

 

Consequently there is little pressure on employers to raise wages with so many still out of work. Since the start of the U.S. recession in December 2007, though, household debt leverage has declined. It is still 115 percent of disposable household income, down from 130 percent in 2009. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. And future growth is itself dependent on policies that increase personal incomes and wages & salaries.

Harlan Green © 2011

Jobs Decline—Fed QE3 in the Works?

The Popular Economics Weekly

It should be obvious from today’s horrid June Bureau of Labor Statistics unemployment report—just 18,000 net nonfarm payroll jobs added and the Unemployment Rate up to 9.2 percent—that we are still in some sort of a disinflationary spiral. Yes, I said disinflation, which means the rate of inflation is falling, not rising, as the holders of debt would have us believe. And because employers find it difficult to raise their prices, they won’t create more jobs.

And that is the Federal Reserve’s greatest fear.  So we will probably see a ‘QE3’ round of Fed stimulus this fall.  There is just not enough demand, folks, to create any sustained sustained hiring, and the Fed is now the only entity willing to provide more stimulus, it seems, with Obama and the Congress locked into downsizing government further. 

Their fear?  A Japanese-style deflation that has plagued Japan since its twin  real estate and stock bubbles burst in 2000. 

As Nobelist Paul Krugman noted this in his latest blog, “Let me emphasize that last point. My bottom line on the inflation-deflation issue has always been to look at wages; you can’t have a wage-price spiral if wages ain’t spiraling. And they aren’t, to say the least.”

We are in fact facing the opposite problem of the 1970s, a wage-price disinflationary spiral, at the moment, although most economists won’t call it such. Wages and salary earners that make up 80 percent of our workforce haven’t seen a real wage increase since the 1970s.

The last wage-price inflationary spiral occurred in the 1970s with inflation spiking at some 14 percent, while today we saw a brief spike of the Consumer Price Index to slightly above 3 percent, when it was above 5 percent at the height of the bubble. To most wage and salary earners it feels like inflation, because their real incomes have stagnated since the 1970s, which means not risen in relation to inflation. Real stagnant wages plus rising energy and food prices smells like inflation to those who with limited incomes.

At last, we are seeing the effects of the supply side revolution of the 1980s to date; the “reverse Robin Hood” effect mentioned by Reagan Budget Director David Stockman in a past blog. It was a revolution that said ‘government is the problem’, when it wasn’t governments that caused inflation in the 1970s. Its major causes were rising oil prices from the formation of the OPEC oil cartel and 2 oil embargos as the Vietnam War was winding down.

Another sign that we are fighting falling prices are the rock-bottom interest rates. Interest rates rise in tandem with inflation, and conversely fall with declining prices. The 10-year Treasury Bond just dropped below 3 percent again. This St. Louis Fed graph highlighted by Krugman charts the relationship of interest rates with jobs.

“ It’s important to realize, by the way, that stagnant wages are NOT good for recovery; all they do is ensure that the burden of debt relative to income remains high,” said Krugman, “keeping demand and employment down. The situation cries out for aggressively expansionary monetary and fiscal policy. Instead, however, all the political push is in the opposite direction.”

The supply-side revolution was, and still is, a cover for cutting taxes. So-called Reaganomics didn’t cut government spending, yet sought to suppress the wages and salaries of the middle class in a number of ways. Tax exemptions allow U.S. Corporations to shelter their overseas profits from U.S. taxes until repatriated, for starters, thus encouraging them to export jobs overseas. And now Republicans are attempting to take away the collective bargaining rights of government unionized employees, just as they did for private industry in the 1980s and 90s.

All of this suppresses household incomes, without lessening household debt. So we are approaching a level of income inequality close to that of Mexico and other so-called Third World countries. Any long term solution to our budget deficit has to recognize that fact. Unless real incomes begin to rise again, there is no chance of paying off our debts—neither private nor public debts.

Harlan Green © 2011

Rental Real Estate Is Reviving

The Mortgage Corner

There are signs investors are returning to the rental market as vacancy rates fall, and rents rise. The latest data is that the apartment industry’s recovery continues briskly, according to the National Multi Housing Council's (NMHC) latest Quarterly Survey of Apartment Market Conditions.

The Market Tightness Index, which examines vacancies and rents, rose to a record 90 from 78 last quarter, said NMHC.  For all indexes, a reading above 50 indicates improving market conditions.  Almost four in five respondents (79 percent) said markets were tighter (lower vacancies and/or higher rents) and—for the first time ever—not a single respondent thought conditions were looser.

“The apartment industry rebounded strongly in 2010 as demand for apartment residences outpaced the sluggish recovery in the job market nationally,” said NMHC Chief Economist Mark Obrinsky.  “These results show the apartment industry continues to do well even though the nation’s overall rate of economic growth has slowed.  This is driven largely by the increased appeal of renting generally but also by the large number of young people entering the housing market for the first time—and young people are much more likely to rent than buy.”

Calculated Risk shows rental vacancy rates have plunged from 11 to 9.5 percent, and probably have further to go. The most recent data show vacancies stabilizing around 8 percent. If so, that would corroborate Amy Hoak of Bloomberg Marketwatch’s contention that real estate investors are now picking up bargains.

“In fact, investors bought 20 percent of all the homes sold in April, according to the National Association of Realtors,” said Hoak. “Some of them are buying with cash.”

But even if they do finance part of the purchase, they’re able to turn around a profit much quicker than they would have been able to in the past, said William King, director of valuation services for Veros Real Estate Solutions, a supplier of housing data to the country’s largest banks, as well as government organizations. “And the return on rentals can be much better than returns on other investments these days,” he added.

This is boosting construction spending, as we said last week. Strength for the latest month was led by a 3.1 percent improvement in private residential spending, following a 0.7 percent decline the month before.  However, the gain in this component was improvements as non-new home spending (i.e., remodels) jumped a monthly 7.6 percent after a 0.1 percent slip in March.  For the latest month, new one-family home outlays fell 1.0 percent while new multifamily dipped 0.1 percent.  Essentially, new construction—at least for the single-family component—is still depressed.

Calculated Risk has tracked res construction jobs since 2002, and sees it again turning positive. Construction jobs have turned the corner in 2011, from a 149,000 loss in 2010, to a 31,000 jobs increase to date in 2011. And rental vacancy rates have declined from an 11 percent high to 9.5 percent, as we said.

Lastly we may see Pending Home sales jump in May. According to Calculated Risk, “I estimate that the NAR’s Pending Home Sales Index will show a seasonally adjusted gain from April to May of around 11% -- suggesting that weather, flooding, oil prices, and “other stuff” may have had a temporarily negative impact on contract signings in April and closed sales in May, as well as a temporarily negative impact on other economic data for May”.

We will see. April existing-home sales showed a big drop in inventory. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis through April. Sales in April 2011 (5.05 million SAAR) were 0.8% lower than in March, and were 12.9 percent lower than in April 2010.

Based on Calculated Risk's estimate, this will be the lowest level of inventory in May since 2006 when sales could decline 15.5 percent YoY. Of course sales in 2010 were boosted by the homebuyer tax credit.

Harlan Green © 2011