What Happens in 2014??

Popular Economics Weekly

Next year could start with a bang. U.S. third quarter Gross Domestic Product expanded at 4.1 percent, revised up from 3.6 percent, with consumer spending a main driver of growth. This has to mean consumers are feeling prosperous again, and if employment continues to rise as predicted by the Fed, and others, so will consumers’ incomes and spending.

Retail sales are also strong with the holidays looking good.  Overall retail sales in November jumped 0.7 percent, following a rise of 0.6 percent the month before (originally up 0.4 percent).  Autos were a big part of the November boost, gaining 1.8 percent after a 1.1 percent increase in October, so that annual sales are approaching 5 percent, and 6 percent is closer to a normal sales rate, and full employment.

Graph: Econoday

The Kansas Federal Reserve Bank just released a study that says single family starts could increase by 150 percent from 2012 to their peak in 2021 (Chart 1). The annual level of starts at this peak is about the same as in 2002, one year into the single-family construction boom. Single-family construction is then projected to fall over the subsequent decade.

Graph: Calculated Risk

Demand in particular was raised in the GDP report, and increasing demand for goods and services is what induces businesses and economies to grow. Final sales of domestic product were revised up to 2.5 percent, compared to the second estimate of 1.9 percent and 2.1 percent in the second quarter. Final sales to domestic purchasers (which exclude net exports) were bumped up to 2.3 percent versus the second estimate of 1.8 percent and 2.1 percent in the second quarter.

Graph: Econoday

The best news of all was the bipartisan budget agreement that put off any talk of indiscriminate sequester cuts for the next 2 years. It will add back a total of $85 billion to government spending and will give an additional boost to growth in 2014. It has been the decline in government investments and employment in particular that have been the largest roadblock to increased growth.

Under the terms of the deal, spending for the Pentagon and other federal agencies would be set at $1.012 trillion for fiscal 2014, said the Washington Post, midway between the $1.058 trillion sought by Democrats and the $967 billion championed by Republicans. The Pentagon would get a $2 billion increase over last year, while domestic agencies would get a $22 billion bump, clearing space for administration priorities such as fresh investments in education and infrastructure.

Harlan Green © 2013

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

Where is The Inflation??

Financial FAQs

The answer, in a nutshell, is it’s nowhere to be found. All current worldwide and domestic inflation indicators show depressed demand for goods and services, hence there is little incentive to raise prices. Therefore businesses are spending little on expanding capacity—with the exception of housing and autos. For instance, Ford just announced it will be hiring 5,000 additional workers and introducing 16 new models, while GM will spend $1.3 billion to expand 5 existing factories.

Graph: Calculated Risk

In fact, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased just 1.2 percent before seasonal adjustment.

Why such a weakness in demand? It’s because consumer incomes are barely rising, and consumers account for some 70 percent of economic activity. The income side of the October report is especially soft, at minus 0.1 percent following two very strong months at plus 0.5 percent, said the Commerce Department. The decline is the first since January and may be related to the impact of the government shutdown on private wages. Wages & salaries are especially soft, up only 0.1 percent following gains of 0.4 and 0.6 percent in the two prior months, as the Econoday graphs shows.

Graph: Econoday

So is it any wonder that consumers are spending less, with the Federal Reserve keeping interest rates at record lows? Spending has been increasing just 2 percent annually. Housing in particular has been boosted by those low rates, with conforming 30-year fixed mortgage rates still at 4.375 percent for zero origination points.

And housing starts are at 5-year high. Construction surged in November-and this time it was not just the multifamily component. Starts in November jumped 22.7 percent after rising 1.8 percent in October. The November starts annualized level of 1.091 million units topped expectations for 0.952 million units and was up 29.6 percent on a year-ago basis. September starts were 0.873 million and October was 0.889 million.

Low interest rates go with low inflation rates, which in turn are due to barely rising wages and salaries. Only a lower unemployment rate will boost consumers’ incomes, and that means a commitment by both political parties and the White House to policies that encourage greater growth.

Harlan Green © 2013

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

Home Equity Increasing

The Mortgage Corner

CoreLogic, a real estate analytics firm, today released new analysis showing approximately 791,000 more residential properties returned to a state of positive equity during the third quarter of 2013, and the total number of mortgaged residential properties with equity currently stands at 42.6 million.

This is helping November home sales in the South Coast, with closed transactions holding strong and huge price increases year-over-year, reports Gary Woods for MLS.

“Year over year sales are up just slightly from 2012 with the median sales price up to about $940,000 for approximately a 19 percent rise. The average sales price is also up going from about $1.36 million in 2012 to approximately $1.43 million in 2013 for a 5 percent rise while the numbers of escrows are down with 1,203 in ’12 to 1,168 in ‘13 with the median list price on those escrows up about 15 percent to approximately $960,000.”

The CoreLogic analysis indicates that nearly 6.4 million homes, or 13 percent of all residential properties with a mortgage, were still in negative equity at the end of the third quarter of 2013. This figure is down from 7.2 million homes, or 14.7 percent of all residential properties with a mortgage, at the end of the second quarter of 2013.

Graph: Calculated Risk

This is a result of the sharp rise in housing values this year. Of the 42.6 million residential properties with positive equity, 10 million have less than 20 percent equity. Borrowers with less than 20 percent equity, referred to as “under-equitied,” may have a more difficult time obtaining new financing for their homes due to underwriting constraints.

Under-equitied mortgages accounted for 20.4 percent of all residential properties with a mortgage nationwide in the third quarter of 2013, with more than 1.5 million residential properties at less than 5 percent equity, referred to as near-negative equity. Properties that are near negative equity are considered at risk should home prices fall.

“Rising home prices continued to help homeowners regain their lost equity in the third quarter of 2013,” said Mark Fleming, chief economist for CoreLogic. “Fewer than 7 million homeowners are underwater, with a total mortgage debt of $1.6 trillion. Negative equity will decline even further in the coming quarters as the housing market continues to improve.”

California has the twelfth worst negative equity with 13.2 percent of those homes holding mortgages. Nevada had the highest percentage of mortgaged properties in negative equity at 32.2 percent, followed by Florida (28.8 percent), Arizona (22.5 percent), Ohio (18.0 percent) and Georgia (17.8 percent). These top five states combined accounted for 36.4 percent of negative equity in the U.S.

Harlan Green © 2013

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

The Great Divergence

Popular Economics Weekly

The so-called “minimalist” budget deal just reached by Congress is another illustration of the great divergence in wealth distribution of recent years that has eclipsed the middle class. The Great Divergence is not a term usually associated with inequality, but a term coined my historian Samuel Huntington to explain Europe’s explosive economic growth in the 19^th century that left the rest of the world behind. But today, it best explains what has reduced domestic economic growth and job formation over the past 30 years.

Until 1970 wealth had been fairly evenly distributed so that the rising tide of economic growth lifted most boats, but then something happened. The middle class began to disappear, with wealth flowing upward, so what was left was either the poorest or richest among us.

The results of such a ‘divergence’ of wealth from what was its distribution since World War II has not been well documented, and ultimately resulted in the Great Recession (which some have called the Lesser Depression). Middle class consumers in particular saw their accumulated wealth disappear with the busted housing bubble, and income growth that did not keep up with inflation. Both household and government revenues declined to record lows as a percentage of overall economic activity.

What happened since then is conservative economic policies begun under Presidents Carter and Reagan, have gradually shifted most of U.S. wealth created to the wealthiest individuals and corporations, resulting in money flowing to those who either hoard it (such as record corporate cash assets of more than $2.2 trillion), or play the financial markets, causing speculative bubbles that have resulted in 5 recessions since 1980.

There has also been a gradual reduction in economic growth since then, with GDP growth averaging 2.5 percent, whereas it averaged 3.5 percent up to 1980, including the Great Depression. It is even worse today, averaging 2 percent since the end of the Great Recession, with the unemployment rate stuck at 7 percent.

This is not new news. It has been well documented by such as Professors Thomas Piketty and Emmanuel Saez’s research on income inequality, and Robert Reich in his book and movie, Inequality for All. But we are now just beginning to understand its effects.

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1 percent of Americans grew by an average of 275 percent. During the same time period, the 60 percent of Americans in the middle of the income scale saw their income rise by 40 percent. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392 percent and their average tax rate reduced by 37 percent. In 2009, the average income of the top 1 percent was $960,000 with a minimum income of $343,927

And now, the brutal cuts to federal spending known as the sequester have wreaked havoc on important programs for mostly the poor, cutting off hundreds of thousands from Head Start and low-income housing assistance, setting back scientific research and environmental protection, and costing more than a million jobs. Getting rid of the sequester for domestic programs was a high priority for Congressional Democrats, yet very little was achieved in a budget deal reached last Tuesday to right this great divergence of wealth from the have-nots to the haves.

Lowering the maximum income tax rates for the wealthiest to 36 percent from as high as 48 percent during the Reagan era, lowering capital gains, inheritance tax rates, as well as giving energy companies and major corporations huge tax loopholes to drive through, has transferred most of the wealth created since then to the top 1 percent, while corporations have amassed record amounts of cash reserves, much it held overseas where most growth has occurred for the multinational corporations.

And corporations have used their increased economic power and profits to cement their economic dominance; by suppressing collective bargaining, minority voting rights, and a great number of environmental regulations in state legislatures via ALEC, the American Legislative Exchange Council that actually writes the legislation for conservative state legislatures.

The result is that most of the productivity gains enabled by both technology and globalization (i.e., relaxed trading regulations and oversight) have gone to corporations and their investors, abetted by the reduced tax base.

This is while middle class incomes and retirement accounts have been depleted, and governments have been starved of funds to even keep up with outmoded infrastructure maintenance, while reducing educational spending, environmental enforcement that pay forward benefits for future generations.

The Great Divergence is once again a fact, but a fact that highlights the decline of western economies due to the increasing concentration of wealth. It should raise alarms in Europe as well, where austerity programs are at work impoverishing their middle class.

Harlan Green © 2013

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Affordable Housing In Decline

The Mortgage Corner

The Harvard Joint Center for Housing Studies has just come out with their rental market report, and it shows very little low rent housing available, due mainly to both increased household formation and those who have lost their homes from the busted housing bubble. Almost all of the 2.7 million abandoned and/or foreclosed homes are gone; most becoming rentals that do not meet the expanding need for rental housing.

Millions of Americans are in precisely that situation, according to a study released today by Harvard’s Joint Center for Housing Studies. The availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession, the study says.

In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing.

Graph: Harvard Center for Housing Studies

Rick Judson, chairman of the National Association of Home Builders (NAHB), issued the following statement on the rental housing report:

"The report released today by the Harvard Joint Center for Housing Studies highlights serious affordability problems for many of America's renter households, and NAHB supports many of the policy initiatives outlined in the study to meet this ongoing challenge.  Of primary importance, efforts to reform the housing finance system must include a federal backstop to maintain broad liquidity during all economic cycles and ensure that rental housing can continue to be built and preserved.”

Judson and the NAHB have supported maintaining some form of Fannie Mae and Freddie Mac to guaranteed conforming loans that currently cover more than 90 percent of mortgages originated. There have been no viable alternatives proposed to date.

"It is clear that the federal role in ensuring the availability of financing for multifamily rental housing for low- and moderate-income households is critical,” said Judson. “Other ways to reduce the costs of providing affordable housing must be pursued as well, such as strengthening the Low Income Housing Tax Credit program, removing regulatory barriers to construction, providing gap financing to help reduce construction costs, streamlining program rules and allowing agencies to align administrative procedures across programs.”

Graph: Boston Globe

So the real problem is rising housing prices, coupled with very low housing inventories that are putting pressure on affordable housing. The good news is that a lot more rental housing is being constructed with strength in the multifamily component that spiked a monthly 15.3 percent after a 20.1 percent surge in September. The multifamily component is up 22.5 percent on a year-ago basis while the single-family component is up 8.8 percent.

Harlan Green © 2013

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

Paying Sustainable Economic Growth Forward

Popular Economics Weekly

The Fed has said it wouldn’t begin to boost interest rates until sustainable economic growth was achieved. However, no one has actually defined what that means. Fed Chairman Bernanke defines it as when full employment is achieved, or the unemployment rate drops to around 6 percent. Others have said it is when Gross Domestic Product growth is back to the historical 3 percent plus rate from its 2 percent average of late.

But those metrics aren’t really definitions of sustainable growth, since they don’t take into account that portion of GDP invested in future growth. For no growth is sustainable unless investments are made in future, longer term growth, rather than held in corporate coffers or excess bank reserves. Senator Elizabeth Warren’s “paying forward” campaign speech is a good place to start in search of a truer definition of sustainable growth.

At a campaign stop in Massachusetts while running for Ted Kennedy’s Senate seat, she famously said, "You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

That is as good a definition of sustainable economic growth as we can find. For instance, future growth isn’t possible without adequate infrastructure. Yet how much of current economic activity is funneled to roads these days with the American Society of Civil Engineers saying there is some $2.2 trillion in deferred infrastructure maintenance? Or, how much is being spent on education?

A recent OECD study of education worldwide cited the U.S. as the biggest spender in elementary education, but with meager results. And for post-high school programs, the United States is far outspent in public dollars. U.S. taxpayers picked up 36 cents of every dollar spent on college and vocational training programs. Families and private sources picked up the balance. Whereas in other OECD nations, it was roughly reversed: The public picked up 68 cents of every dollar in advanced training and private sources picked up the other 32 cents.

"When people talk about other countries out-educating the United States, it needs to be remembered that those other nations are out-investing us in education as well," said Randi Weingarten, president of the American Federation of Teachers, a labor union.

But there is one measure of sustainability that almost no one talks about, and that is boosting sustainable consumer spending. We know consumer spending makes up some 70 percent of U.S. economic activity, yet current economic policies depress household incomes by putting most of the tax burden on wage and salary earners via payroll taxes. Whereas income taxes have been steadily reduced over the past 30 years, so that billionaires such as Mitt Romney and Warren Buffet pay effective tax percentages in the teens.

Rutgers economic historian James Livingston has put it best in various Op-eds and articles.

“Growth has happened precisely because net private investment has been declining since 1919 and because consumer expenditures have, meanwhile, been increasing. In theory, the Great Depression was a financial meltdown first caused, and then cured, by central bankers. In fact, the underlying cause of this disaster wasn’t a short-term credit contraction engineered by bankers. The underlying cause of the Great Depression was a fundamental shift of income shares away from wages and consumption to corporate profits, which produced a tidal wave of surplus capital that couldn’t be profitably invested in goods production -- and wasn’t invested in goods production.”

“Now look,” said Senator Warren, “you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

There will always be a debate about how to share the wealth pie, but there should be no debate about investing in the future of America, which means our youth, but also a healthy environment and yes; a well-functioning health care system.

Harlan Green © 2013

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

November’s 203,000 Payroll Jobs Not Enough

Popular Economics Weekly

The U.S. Bureau of Labor Statistics reported today unemployment declined from 7.3 percent to 7.0 percent in November, and total nonfarm payroll employment rose by 203,000. But that shouldn’t be enough good news for the Federal Reserve to begin to raise longer term interest rates, which is what will happen when they begin to ‘taper’ their monthly $85 billion in securities purchases. Too much money is still on the sidelines, rather than being invested in future growth.

In fact, if anything, the Fed will probably announce that tapering might begin in the spring, if such higher employment numbers persist. That’s because, coupled with the upward revision of Q3 GDP growth to 3.6 percent from 2.5 percent, the economy isn’t showing any inflation. Higher inflation is a sign of increased spending and investment, rather than all those excess reserves sitting idle in safe Treasury bonds, or other so-called MZM accounts (money at zero maturity), which totals $12 trillion, according to the St. Louis Fed.

Graph: Calculated Risk

Both the number of unemployed persons, at 10.9 million, and the unemployment rate, at 7.0 percent, declined in November. Among the unemployed, the number that reported as being on temporary layoff decreased by 377,000. But this largely reflects the return to work of federal employees who were furloughed in October due to the partial government shutdown.

And the civilian labor force rose by 455,000 in November, after declining by 720,000 in October. In fact, total employment as measured by the Household Survey increased by 818,000 over the month, following a decline of 735,000 in the prior month, so higher household employment just cancelled out the prior month’s drop.

Then why should the Fed wait longer to begin to taper? According to the BLS, there are 4.066 million workers who have been unemployed for more than 26 weeks and still want a job. This was up slightly from 4.063 million in October. Though generally trending down, it is still very high.  Long term unemployment remains one of the key labor problems in the US, in part because so much of the record corporate profits are not being put to work towards future growth, as I said.

One eye-opener is the continuing record corporate profits, in part because wage and salary growth has been depressed. Profits in the third quarter increased an annualized 11.5 percent, following a gain of 8.5 percent in the second quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis increased 5.8 percent versus 5.3 percent in the second quarter.

Graph: Econoday

MarketWatch columnist Rex Nutting believes that is the real growth problem. “Since June 2009, he says, “real average weekly earnings have increased 0.3 percent per year , even as productivity has increased 1.5 percent per year. Most of the income gains have gone to the highest paid workers, including the bosses. Real median weekly wages have actually declined 0.8 percent per year since 2009.”

And inflation is still a problem. That is, it’s too low, which means not enough money is being spent that would stimulate more growth, as I said. So though employment is up some 2.9 million jobs, the other two items the Fed is looking at before they decide to taper are inflation (core PCE is only up 1.1 percent year-over-year), and a budget agreement.   We are seeing some indication that an agreement can be reached, but it will do little to boost growth, though it should head off another government shutdown, which is something to cheer about.

Harlan Green © 2013

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

New-Home Sales Soaring

The Mortgage Corner

There aren’t enough new homes being built, apparently, as new U.S. homes sold at an annual rate of 444,000 in October, up 25.4 percent from 354,000 in September, the U.S. Census Bureau said Wednesday. And the inventory of new homes for sale plunged to a post-recession low of 4.9 months, which puts for-sale inventories back into 1960 levels.

Graph: Econoday

Lower interest rates are also holding, as more Federal Reserve Governors are saying that QE3 tapering of securities’ purchases shouldn’t begin until the unemployment rate actually drops below 6.5 percent, from its current 7.1 percent. And economists don’t see that happening for at least another year.

The collection of sales data for both months was delayed by the federal shutdown, prompting the government to release the information on the same day. Demand in October was strong across the country, with double-digit percent gains in all four major regions. Part of what drove sales was a decline in prices and more demand for lower-prices homes, a trend that typically emerges in the colder months.

The median price of new homes fell 5.3 percent to $245,800 in October. That's the lowest level since November 2012. The supply of new homes on the U.S. market, meanwhile, sank to 4.9 months in October at the current sales pace from 6.4 months in September. This is while new home sales are 21.6 percent higher compared to one year ago.

We mustn’t forget that the Federal Housing Finance Authority (FHFA) is also delaying any drop in conforming loan limits below $417,000 through 2014, which has to be heartening home buyers. As such a lower restriction on loan amounts would affect entry-level, lower-priced homes in particular.

Inventory levels are in fact back to levels last seen in 1997 to 2005 in this Calculated Risk graph that dates back to 1963. This is spurred the housing construction boom that boosted the housing bubble. But with all the restriction on mortgage lenders initiated by both the Federal Reserve and Dodd-Frank, Consumer Protection Finance Bureau, we don’t see the likelihood of another housing bubble. The homeownership rate has dropped to 64 percent from its high of 68 percent during the bubble. And with household incomes and debt loads that haven’t recovered from the Great Recession, there is little chance a bubble would re-occur anytime soon, if ever.

Graph: Calculated Risk

In spite of this news, existing-home prices were building steam through September based on S&P Case Shiller, indicating overall demand is still strong. The 20-city index rose an adjusted 1.0 percent in September vs monthly gains of 0.9 percent and 0.6 percent in the prior two months. Very respectable gains swept all 20 cities for the second month in a row, led this time by Atlanta at plus 1.9 percent followed by a string of cities out West where S&P says there's talk now of a housing bubble.

But we know S&P tends to be overly conservative in their projections. Most of the price gains were either in Las Vegas, or the California coastal cities of San Francisco, Los Angeles and San Diego, beneficiaries of the fast-growing Silicon Valley economy. So most of the growth in sale prices can be attributed to real economic growth, rather than the financial speculation that occurred on Wall Street leading to the Great Recession.

Harlan Green © 2013

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