What Should We Be Thankful For?

Financial FAQs

There is still much we can be thankful for this Thanksgiving, in spite of tax raises and government spending cuts that affect mostly the poorest—whether it’s less food stamps, early child care, environmental protection, and maybe even fewer funds to fully implement the Affordable Care Act.

We finally have almost-universal health care, 92.7 percent of our workforce is employed, and we are better off than the Europeans. Europe is still in recession after 4 years of austerity policies that have resulted in sky-high unemployment rates, rather than benefiting from the quantitative easing policies that our Federal Reserve has initiated since September 2012 that has kept even long term interest rates at record lows.

So we can be thankful that Ben Bernanke is the current Fed Chairman. And in January pro-labor economist Janet Yellen will be the new Federal Reserve Chairman. I believe we can therefore look forward to continued low interest rates leading to greater job creation for some years to come.

We mustn’t listen to those Austerians that keep crying stocks and even real estate might be re-inflating asset bubbles, as happened with the recent housing bubble. Household income isn’t growing enough, and consumer debt is still too high to re-ignite any bubbles, though it is returning to more sustainable levels.

 

Graph: Calculated Risk

Consumer debts have declined to the lowest level in 30 years, according to the Federal Reserve’s just released Q2 2013 Household Debt Service and Financial Obligations Ratios report. This will boost consumer spending, and housing values. The enclosed graph dating back to 1980 shows that the overall Household Debt Service ratio (red line) is actually lower than it was in 1980, while the Homeowner Mortgage (blue line) and Consumer (yellow line) ratios are back to 1980 levels.

We can also be thankful that the housing market is in recovery, with prices up some 13.3 percent just this year, according the Case-Shiller Index, reducing mortgage default and foreclosure rates. That is largely because of the Fed’s low interest rates that are helping consumers to pay down their debts.

A good report that few see is the Bureau of Labor Statistics’ JOLTS report of job openings, layoffs and transfers. Job openings are basically back to 2005 levels. But because many more millions have joined the labor force since then, it hasn’t yet brought us closer to full employment.

Graph: Econoday

There were 3.913 million job openings in September, up from 3.844 million in August. The number of job openings decreased in arts, entertainment, and recreation and was little changed in all remaining industries and in all four regions. But it reflects the 204,000 payroll jobs created in October, which shows job creation increasing faster than previously.

The number of hires in September was 4.585 million, essentially unchanged from 4.559 million in August. The number of hires was little changed for total private and government, as well as for all industries and all four regions. There were 4.426 million total separations in September, little changed from 4.405 million in August.

So there is more to be done to boost economic growth. But I see the cup as half full, and the economic odds are it will continue to fill.

Harlan Green © 2013

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

Equality Is Good For Everyone!

Popular Economics Weekly

It looks like some states are beginning to take the equality issue seriously again. Massachusetts just raised their minimum wage to $10 per hour, California is raising it to $8.25 over 2 years, with New Jersey and other states to follow.

And just last week, the Center for American Progress launched the Washington Center For Equitable Growth, which aims to deepen the economic critique of inequality. It is being set up by Berkeley economist Emmanuel Saez, among others, who is known with his partner Thomas Piketty, as the first economists to historically research the history of income distribution over the past 100 years.

Their results show that we have the worst income distribution in the developed world; as bad as in 1929 that resulted in the Great Depression. Such inequality was again the case in the run-up to the Great Recession.

It was declining household incomes that led the Bush administration and Federal Reserve to create the housing bubble. It used very easy credit conditions and lax loan qualification standards to boost economic growth. But those declining incomes caused consumers to use up all their available credit and savings to maintain their standard of living, thus causing the Great Recession.

As the mission statement of the Center says:

“New research suggests that growing inequality in the United States may have broad social and economic effects — by reducing stable demand for goods and services, dampening entrepreneurialism, undermining the inclusiveness and responsiveness of political and economic institutions, limiting access to education, and stunting individual development.  Yet our understanding of how these mechanisms interact with the broader economy is limited.”

In December 2011 I wrote a column entitled, Equality Is Good For Everyone, when there was hope that maybe the Great Recession was finally over, and households might regain their financial footing from the busted housing bubble.

Alas, that wasn’t to be because Congress become locked in the battle over a higher debt ceiling and government spending cuts, just as the Europeans were going through their own austerity budget cuts. And so similar budget cuts were agreed to by President Obama and Congress that has reduced economic growth by as much as 1 percent per year, according to leading economists.

President Obama had just given a speech on income inequality that December at Osawatomie, Kansas, the site of Teddy Roosevelt’s “New Nationalism” speech, which signaled the beginning of the progressive era that culminated in FDR’s New Deal.

Teddy Roosevelt had given his now famous speech in 1910 that called upon the three branches of the federal government to put the public welfare before the interests of money and property.

“The new Nationalism puts the National need before sectional or personal advantage,” said Roosevelt. “It is impatient of the utter confusion that results from local legislatures attempting to treat National issues as local issues. It is still more impatient of the impotence which springs from over-division of governmental powers, the impotence which makes it possible for local selfishness or for legal cunning, hired by wealthy special interests, to bring National activities to a deadlock. This new Nationalism regards the executive power as the steward of public welfare. It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that of the representative.”

Sound familiar? Obama said the Republican ideology of laissez faire, small government, free markets that existed when Teddy Roosevelt made his Osawatomie speech had resulted in too much graft and unlimited corporate power.

“It’s a simple theory — one that speaks to our rugged individualism and healthy skepticism of too much government. It fits well on a bumper sticker. Here’s the problem: It doesn’t work. It’s never worked.”

Berkeley Professor and former Clinton Labor Secretary Robert Reich has been most vocal on the growing divide between Haves and Have-nots that has resulted from the decline in equality with his film and book, Inequality For All. He also highlights the resultant distortions—among them a declining quality of life for most Americans, and financial markets becoming more susceptible to boom and bust cycles.

Harlan Green © 2013

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Is Builder Optimism, New Home Construction Faltering?

The Mortgage Corner

Will new-home construction falter, now that interest rates are rising and consumers remain unsettled over Washington’s political gridlock that prevents any legislation being passed that would aid economic growth?

Builder confidence in the market for newly built, single-family homes was unchanged in November from a downwardly revised level of 54, reported the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This means that for the sixth consecutive month, more builders have viewed market conditions as good than poor, since any index value above 50 percent, means a majority of builders report growing activity. But that hasn’t spurred more new-home construction, which is stuck at early spring levels.

Graph: Calculated Risk

“Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

“Policy and economic uncertainty is undermining consumer confidence,” said NAHB Chief Economist David Crowe. “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.”

New-home construction has basically stalled since April and the beginning of interest rates increases due to the Fed’s hints that QE3 could end. This will hurt economic growth and employment, since new-home construction makes up a large part of economic growth these days, with other growth components are being constrained by lower government and consumer spending.

Graph: Calculated Risk

There has been a significant increase in new home sales this year.  Sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.9 percent above the revised July rate of 390,000 and is 12.6 percent above the August 2012 estimate of 374,000
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Though year-over-year increases have slowed - August only saw a year-over-year increase of 12.6 percent, but Calculated Risk’s Bill McBride still expects new home sales to be up 15 percent to 20 percent for the year.  That follows an annual increase of 21 percent in 2012.

The seasonally adjusted estimate of new houses for sale at the end of August was 175,000. This represents a supply of 5.0 months at the current sales rate. It means that new home construction has not taken up the slack in supply, and might slow new-home sales.

The initial third Quarter GDP growth was 2.8 percent, up from 2.5 percent in Q2. And residential real estate activity was a large part of that increase. So we will need more new-home construction to keep growth at that level.

Harlan Green © 2013

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

Why Do We Have Two Countries?”

Popular Economics Weekly

 

Former CIA assistant director Mike Morell lamented on a recent CBS 60 Minutes that he didn’t understand why congressional Democrats and Republicans couldn’t work together to boost economic growth for “the good of the country” when our weak economy was the greatest problem facing US, above even terrorist threats.

“I don’t understand the inability of our government to make decisions that push our economy and society forward,” he said. “Our national security is more dependent on the strength of the economy and society than anything else.”

The real answer is that we are living in two countries at the moment, mainly divided into anti-government Republican Red states and pro-government Democratic Blue states. And the Red states are suffering, with the lowest per capita incomes, education levels, and everything else that modern economies need to thrive.

To be sure it’s about politics and Republican ideological intransigence. But in the Old South it’s also about fighting the last Civil War—which means preserving racism. They are getting their wish to secede from the union, but it’s economically rather than politically.

This is while those states depend on government most for their social safety needs, whether it is farm subsidies or food stamps and Medicare for their poorest populations. More government monies flow into their states than flow back to the federal government, in other words.

This is a little-known fact that puzzles economists. Why are the states most dependent on government aid most opposed to it, particularly to Obamacare and the expansion of Medicare?

“A South Carolina legislator put it bluntly earlier this year,” in a recent Huffington Post column. “State Rep. Kris Crawford told a business journal that he supports expansion, but said electoral math is the trump card. "It is good politics to oppose the black guy in the White House right now, especially for the Republican Party," he said.”

Most of the Red states also adamantly oppose the expansion of voters’ rights, union collective bargaining, better healthcare, immigrants’ rights, environmental regulation, abortion and women’s rights, as if they want to turn the clock back to the last century.

Government gridlock not only endangers our security, but the resultant inequality—greatest in the Red states—endangers our democratic system itself, needless to say. The CIA should know, as it has kept track of the economic well-being of nations in its World Factbook, with the U.S. now ranked below other developed countries in income equality, birth-death rates, longevity, and health outcomes.

The problem today is the huge amount of damage gridlock is doing to economic growth, from downgrades of government debt by Standard & Poor’s rating agency to reluctant consumer spending. Even Moody’s has put U.S. debt on credit watch. The Red and Blue states seem to still be fighting the Civil War all over again after 150 years, as I’ve said in past columns.

So the question is, government and the Congress should work for the good of whose country? Tea Partiers and southern politicians in particular want to take back “their” country. If that is their sentiment, we will have two countries living one century apart.

Harlan Green © 2013

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

Thanks For Nothing, Washington!

Financial FAQs

Democrats have bought the Republican lie that Democrats were the big spenders, it seems, with the draconian federal budget cuts enacted over the past 2 years. But recent statistics show it’s been the Republicans since 1980 that created the most state and federal government jobs—4,289,000 under the Reagan and 2 Bush administrations, whereas Clinton created 1,934,000 jobs, while 752,000 government jobs have been lost to date during the Obama Administration.

The result of the huge cutbacks in government spending and hiring since the Great Recession has been an economy still stalled—especially in overall jobs and lost output.

WSJ Marketwatch’s economist Rex Nutting highlighted this recently. Though we are out of the Great Recession, and the just announced Q3 2013 GDP growth is 2.8 percent, above Q2’s 2.5 percent, our economy lost some $5 trillion in income and output since the end of the Great Recession. Our unemployment rate is stuck at 7.2 percent with millions of jobs lost, median household incomes have been falling steadily, and our infrastructure continues to crumble with some $2.2 trillion in deferred maintenance and upkeep, according to the American Society of Civil Engineers.

“And we’re falling behind the Chinese in investing in the future,” said Nutting. “Last week, the Treasury Department announced that federal spending fell 2.3 percent to $3.45 trillion in fiscal 2013 after dropping 1.8 percent in 2012,” he wrote. “It was the largest annual decline in federal spending since 1955, and the first time spending had fallen two years in a row since 1954-55, at the end of the Korean War.”

Graph: WSJMarketwatch

“We can’t blame Obama alone,” said Nutting. “Congressional Republicans must take the bulk of the responsibility because they insisted that supposed out-of-control federal spending was our paramount economic problem, despite stagnant wages, the glaring scarcity of jobs and the glaring lack of out-of-control spending. Obama and congressional Democrats fought back, but only half-heartedly.”

Gross Domestic Growth picked up in Q3. However there was underlying weaknesses. Personal consumption expenditures (PCE) that power most consumer spending increased at a 1.5 percent annualized rate - the slowest rate since Q2 2011.
It looks like state and local governments are spending more, but the Federal government isn’t.  Federal government actually subtracted 0.13 percentage points in Q3, whereas state and local governments added 0.17 percentage points.

Graph: Calculated Risk

That means the U.S. economy isn’t operating anywhere near its full potential, not to speak of an unemployment rate that was predicted to drop to 6.5 percent by the end of this year. Now it looks like we will be lucky to reach 7 percent.

Graph: Calculated Risk

Government has actually lost jobs during Obama’s tenure to date, as we said. Calculated Risk reports that 752,000 jobs have been lost, mostly due to the Great Recession, but also because Republicans have succeeded in their message that government spending is out of control.

“Even Herbert Hoover, the president who has gone down in history as the man who did nothing to stop the Great Depression, wasn’t this bad,” said Nutting. “Under Hoover, real federal spending rose at an 18 percent annual rate. And Hoover built stuff we still use. Our fiscal policy has been awful. We needed government to step up and fill some of the gap left by the private sector, and instead we got literally nothing. Thanks for nothing, Washington!”

Harlan Green © 2013

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

Are Consumers Losing Confidence in Housing??

The Mortgage Corner

The unanswered question to date is how the debt ceiling impasse and government shutdown has affected economic activity.  Both the industrial and service sectors have shown stronger growth, according to the Institute of Supply Management (ISM).  But real estate is another story.  Pending home sales in the NAR’s Pending Home Sale Index doesn’t look good. The index that measures home sales under contract, but not closed, has been declining for 4 months, a sure sign that housing sales, at least, are faltering.

This is in part because consumer confidence is faltering, as consumers lose confidence in government’s ability to function.  The shutdown endangered much more than 800,000 furloughed defense workers.  Combined with huge cuts in food stamps, no farm aid bill, and a not yet functioning Affordable Care Act, the shutdown and debt ceiling impasse has spooked consumers big time.

Graph: Econoday

Year-on-year, the index is down 1.2 percent for the first negative reading in nearly 2-1/2 years. The National Association of Realtors (NAR), which compiles the report, cites as a major factor the government shutdown which it says pushed government workers and contractors to the sidelines of the housing market.

NAR chief economist Lawrence Yun wasn’t optimistic about the near future, either. “Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity’” he said. (But) “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”

The government shutdown really weighed on confidence indexes.  The Conference Board’s confidence index fell to 71.2 from a revised 80.2. With an 11 point drop, the dip is the largest since 12 points in January, a month that was also hit by a fiscal standoff in Washington.

Graph: Econoday

But the drop was mainly in expectations, which could reverse if some agreement is reached on a new federal budget by the December 15 deadline.  The component for present situations continued to show much less volatility, at 70.7 versus 73.5 for what is a 4th straight reading over 70—“a trend that is consistent with steady and soft month-on-month growth for the economy,” said Econoday. 

A negative on the present situation side was a sharp 2.2 percentage point rise to 35.8 percent for those that said jobs fewer jobs were available. This suggests another month of weakness for monthly payroll growth.

Consumer confidence powers much more than home sales, of course.  Retail sales are also growing just 4 percent per annum with the holiday season approaching, when 6 to 8 percent is the normal sales’ rate if consumers feel more confident.  Retail sales don’t adjust for inflation, so ‘real’ retail sales after inflation are rising just over 2 percent. This has to mean government dysfunction is definitely affecting consumer spending overall that powers some 70 percent of economic activity.

Harlan Green © 2013

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

Mortgage Delinquencies Continue to Decline

The Mortgage Corner

The good news is that foreclosure rates continue to fall, though delinquencies more than 90 days late are fluctuating with the season, according to Lender Processing Services (LPS) in their Mortgage Monitor report for September. According to LPS, 6.46 percent of mortgages were delinquent in September, up from 6.20 percent in August. But LPS reported that 2.63 percent of mortgages were in the foreclosure process, down from 3.86 percent in September 2012, in this graph that begins in June 1995.

This is great news, and due mainly to the increase in housing values that has allowed many homeowners to either refinance or sell their homes.

Graph: Calculated Risk

This gives a total of 9.03 percent delinquent or in foreclosure. It breaks down as, according to Calculated Risk:
• 1,935,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,331,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,328,000 loans in foreclosure process.

Meanwhile, CoreLogic reports that home prices nationwide, including distressed sales, increased 12 percent on a year-over-year basis in September 2013 year over year. This change represents the 19th consecutive monthly year-over-year increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.2 percent in September 2013 compared to August 2013.

Graph: Calculated Risk

Excluding distressed sales, home prices increased on a year-over-year basis by 10.8 percent in September 2013 compared to September 2012. On a month-over-month basis, excluding distressed sales, home prices increased 0.3 percent in September 2013 compared to August 2013. Distressed sales include short sales and real estate owned (REO) transactions.

The bottom line is that housing values should continue to increase, in spite of the shutdown, because overall business activity continues to improve in both the manufacturing and non-manufacturing (service industries) sectors. The October Purchasing Managers’ Non-Manufacturing Business Activity Index increased to 59.7 percent, which is 4.6 percentage points higher than the 55.1 percent reported in September, reflecting growth for the 51st consecutive month. Though the New Orders Index decreased by 2.8 percentage points to 56.8 percent (maybe because of the government shutdown), the Employment Index increased 3.5 percentage points to 56.2 percent, indicating growth in employment for the 15th consecutive month.

Harlan Green © 2013

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

Consumer Debt At Record Lows

Financial FAQs

The Federal Reserve just released the Q2 2013 Household Debt Service and Financial Obligations Ratios. The overall Debt Service Ratio decreased in Q2 2013, and is just above the record low set in Q4 2012 thanks to very low interest rates. The homeowner's financial obligation ratio for consumer debt increased slightly in Q2 (omitting mortgage debt), and is back to levels last seen in early 1995.

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households, says Calculated Risk.

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

Also, the financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

This is a very good sign for higher employment and economic growth in 2014, which shows the Fed’s QE3 quantitative easing program that is keeping interest rates at record lows is bearing results.

Graph: Calculated Risk

Also the homeowner's financial obligation ratio for mortgages (blue line in graph) is at a new record low.  This ratio increased rapidly during the housing bubble, and continued to increase until 2008. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined to an all time low, said the Federal Reserve report.

This is while Fannie Mae also just reported that the Single-Family Serious Delinquency rate declined in September to 2.55 percent from 2.61 percent in August, while Freddie Mac’s serious delinquency rate declined in September to 2.58 percent from 2.64 percent in August.

Fannie Mae’s serious delinquency rate is down from 3.41 percent in September 2012, and this is the lowest level since December 2008. Its serious delinquency rate peaked in February 2010 at 5.59 percent, believe it or not.

Graph: Calculated Risk

So can we say that real estate is out of danger of falling back into recession? Probably, but Congress and Obama haven’t resolved the fate of Fannie and Freddie that guarantee some 90 percent of mortgages originated today. The U.S. Treasury is still holding them in conservatorship when they are making record profits, and putting those profits into general coffers, rather than paying off the $180 billion in debt incurred by them during the Great Recession and busted housing bubble.

That is not a good sign, what with the Consumer Finance Protection Bureau now policing mortgages with ever more stringent regulations, such as Qualified Mortgages, that is restricting mortgage lending. So indications are good for more growth in consumer spending this year, but prospects for housing in 2014 are still questionable.

Harlan Green © 2013

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