Fed Chair Yellen Still Dovish, Economy Still “Sluggish”

Popular Economics Weekly

Federal Reserve Chairperson Yellen wants to keep interest rates as low as possible for at least the “next couple of FOMC meetings”, even as there are signs that economic growth is accelerating. This is in the face of the newly Republican-dominated Congress threatening to curb its powers, because their deficit hawks want to raise rates sooner, and we know what happened in Europe and Japan when this happened—their 2^nd and 3^rd recessions since 2008.

Why? Because raising rates too soon could stop many consumers from spending, because income growth is poor and consumers are only beginning to feel confident enough to spend. Whereas the deficit hawks see inflation where there is none at the moment, since they are mainly creditors that see any deficit as endangering the value of the debt they hold.

Yellen said inflation measures still show inflation too low to sustain growth, and wage pressures are still not enough to sustain higher household incomes, which is the main driver of inflation. Or, in her words, the Fed doesn’t want to raise rates “until the economy is fully healed”

However, “If economic conditions continue to improve,” said Dr. Yellen, “as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. …However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings.”

The most recent measures do show accelerating growth. For instance, the Chicago Fed National Activity Index (CFNAI), a proxy for nationwide growth, edged up to +0.13 in January from –0.07 in December. It is one of the broadest measures of economic activity, outside of the Gross Domestic Product quarterly report. Three of its four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

Graph: Calculated Risk

Too low inflation still remains a problem, you say? Yes, and is the main reason Yellen wants to keep interest rates at their lowest level. It’s now negative for the first time in the year, and even since 2009. There was another huge drop in energy prices. Overall consumer price inflation fell sharp 0.7 after declining 0.3 percent in December. Energy plunged 9.7 percent after dropping 4.7 percent in December.

Gasoline plummeted 18.7 percent, following a 9.2 percent fall in December. Food prices were unchanged, following a rise of 0.2 percent in the previous month. Core inflation excluding food and energy was just 0.2 percent after a modest 0.1 percent rise December, and is up 1.6 percent in a year.

Graph: Trading Economics

That is the main reason the Fed wants to keep rates low as long as possible. Low interest rates boost both housing prices and sales, lower debt levels, and higher valuations enable more homeowners to sell, refinance, and move, if necessary. So Yellen’s last two days of testimony should encourage those fence sitters, as well as give all consumers more confidence in their future economic well-being.

Harlan Green © 2015

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

January Existing Home Sales, Mortgage Applications Dip

The Mortgage Corner

Oh, the winter freeze! It seems to put the housing market into a deep freeze, as well. Total existing-home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 4.9 percent to a seasonally adjusted annual rate of 4.82 million in January (lowest since last April at 4.75 million) from an upwardly-revised 5.07 million in December, said the NAR. Despite January’s decline, sales are higher by 3.2 percent than a year ago.

Lawrence Yun, NAR chief economist, says the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country. “January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” he said. “Realtors® are reporting that low rates are attracting potential buyers, but the lack of new and affordable listings is leading some to delay decisions.”

Graph: Calculated Risk

Better news was that the Chicago Fed National Activity Index (CFNAI) edged up to +0.13 in January from –0.07 in December, with industrial production up. Three of the four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

Total existing-home inventory at the end of January increased 0.5 percent to 1.87 million existing homes available for sale, but is 0.5 percent lower than a year ago (1.88 million). Unsold inventory is at a 4.7-month supply at the current sales pace – up from 4.4 months in December. The median existing-home price for all housing types in January was $199,600, which is 6.2 percent above January 2014. This marks the 35^th consecutive month of year-over-year price gains.

This follows the Conference Board’s LEI, which slowed to a not-so-strong plus 0.2 percent versus a slightly downward revised plus 0.4 percent in December. Once again the yield spread is the biggest positive for the index reflecting the Fed's near zero rate policy. Consumer expectations are the 2nd largest positive in the month, though one that may reverse in the next report given last week's plunge in the consumer sentiment index. Credit indications, which continue to be very positive in this report, are the 3rd largest positive.

Both indexes show increased employment in 2015, which should mean home sales will pick up with the selling season and better weather in the spring. “Although sales cooled in January, home prices continued solid year-over-year growth,” adds Yun. “The labor market and economy are markedly improved compared to a year ago, which supports stronger buyer demand. The big test for housing will be the impact on affordability once rates rise.”

Real estate is showing more signs of life, with the Case-Shiller Home Price Index rising again. Data released for December 2014 shows a slight uptick in home prices across the country. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.6 percent annual gain in December 2014 versus 4.7 percent in November.

Graph: Calculated Risk

Nine cities reported monthly increases in prices ... Both the 10-City and 20-City Composites saw year-over-year increases in December compared to November. The 10-City Composite gained 4.3 percent year-over-year, up from 4.2 percent in November. The 20-City Composite gained 4.5 percent year-over-year, compared to a 4.3 percent increase in November.

Graph: US Census Bureau

And lastly, January new-home sales were unchanged, but prices rose. Sales of new single-family houses in January 2015 were at a seasonally adjusted annual rate of 481,000, which is not enough product to keep prices in the affordable range. This is 0.2 percent below the revised December rate of 482,000, but is 5.3 percent above the January 2014 estimate of 457,000.

“In a promising sign, new home sales have been trending at post-recession highs for the past two months,” said NAHB Chief Economist David Crowe. “As the economy strengthens and mortgage rates remain low, we can expect continued upward movement in the housing market this year.”

So still record low interest rates (i.e., 3.50 percent conforming fixed rates) are keeping homebuyer and refinancers interested, but not enthusiastic.   And we believe mortgage rates will remain low, as evidenced by Fed Chairwoman Janet Yellen’s latest congressional testimony, which hinted that said rates could remain low for much of this year.

Harlan Green © 2015

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

Enslavement of the Middle Class

Financial FAQs

It is becoming obvious that the American middle class (topic dujour among presidential candidates these days) has been enslaved by an ideology that only benefits the wealthiest among US. It is an ideology of austerity that has prevailed in the U.S. at least since the 1980s, and Paul Krugman says is putting Europe into its Second Great Depression.

It is really an economic ideology of the 18^th century first formulated by Adam Smith—of fewer government services and lower taxes that has made corporations all powerful with the greatest profits in their history, left American workers with little or no control over their livelihoods, and resulted in the greatest income inequality since the 1920s.

Such an insidious ideology has kept the poorest states poorer, caused declining investment in education (our seed corn for future entrepreneurs), is quickly degrading our public infrastructure, and even the ability to protect ourselves. President Obama’s State of the Economy report and latest speeches have made it obvious. The greatest income inequality since the 1920s is here to stay, unless there are major changes in economic policies.

That is why most Americans (at least the 90 percent) have become harried, 24/7 workers with little vacation time, poor health care options (in spite of Obamacare), too expensive educational opportunities, too few well-paying jobs, and little protection from the globalization that stronger labor laws would bring.

Those policies have been called supply-side economics, under the theory that giving more tax breaks to the wealthiest by reducing capital gains and maximum tax rates, while shrinking government investment and oversight, would induce the wealthiest to put their money into productive investments, thus creating more jobs.

But that never happened. When President Reagan cut the maximum income tax rate from 70 percent that prevailed in the 1970s to 50 percent, it and 2 recessions created the largest budget deficit of that era, which is why he instituted 11 tax hikes to bring the budget back into a semblance of balance. This was all catalogued by his budget director, David Stockmen in The Triumph of Politics.

Then we have GW Bush’s further tax cuts on both maximum income tax rates to 35 percent and capital gains to their lowest in modern history that so depleted tax revenues it created the largest budget deficits in history, and ultimately the Great Recession.

It’s no use sugar coating the truth any longer. Since the end of the Great Recession, the top 1 percent of income earners have garnered 96 percent of total income since 2009, after a brief dip. And Americans still have the greatest income inequality of the developed western world.

Why could such inequality be here to stay? In part because so much wealth has flowed to so few, and it is easy to buy influence in this country. The most obvious receivers of such largesse are the conservative members of Congress, mostly Republicans, who continue to block the economic reforms that would better the lives of those that live on Main Street.

Nobelist Paul Krugman said as much in his latest NYTimes Oped: “So what does it say about the current state of the G.O.P. that discussion of economic policy is now monopolized by people who have been wrong about everything, have learned nothing from the experience, and can’t even get their numbers straight?... Clearly, failure has only made them stronger, and now they are political kingmakers. Be very, very afraid.”

Graph: CEA Report

The White House just released their Council of Economic Advisors 2015 Report, chaired by Jason Furman. It said, “The second important factor influencing the dynamics of middle-class incomes is inequality. This, too, is a global issue. In the US, the top 1 percent has garnered a larger share of income than in any other G-7 country in each year since 1987 for which data are available, as shown in the above graph.”

It should be clear what must be done to remove the obstacles that hold back most Americans from a better life. Let us start by jettisoning the 18^th century myth which enslaves all economic classes, a myth that only holds us back in the 21st century. Indiscriminately lowering taxes while minimizing government services and oversight hasn’t improved the lives of anyone except the wealthiest among us.

Harlan Green © 2015

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Housing Starts, Builder Optimism Dips

The Mortgage Corner

Nationwide housing starts fell 2 percent to a seasonally adjusted annual rate of 1.065 million units in January, according to newly released data from the U.S. Commerce Department. This drop was mainly due to a 22.2 percent decrease in the Midwest, hit hard by winter weather.

And home builders’ sentiment also fell slightly from 57 to 55 percent, meaning a majority of those surveyed are optimistic that 2015 will be a good year for housing construction.

Graph: Calculated Risk

Single-family housing production fell 6.7 percent to a seasonally adjusted annual rate of 678,000 in January while multifamily starts rose 7.5 percent to 387,000 units. This is 2.0 percent below the revised December estimate of 1,087,000, but is 18.7 percent above the January 2014 rate of 897,000.

"After a strong single-family report in December, it is not surprising to see some pull back in January," said NAHB Chief Economist David Crowe. "With continued job creation and a growing economy, single-family production should make gains in the year ahead."

Graph: Calculated Risk

Though builder sentiment dipped, it was very good for a winter report.
“For the past eight months, confidence levels have held in the mid- to upper 50s range, which is consistent with a modest, ongoing recovery,” said NAHB Chief Economist David Crowe. “Solid job growth, affordable home prices and historically low mortgage rates should help unleash growing pent-up demand and keep the housing market moving forward in the year ahead.”

So what does this say about housing in 2015? The Fed’s FOMC minutes were just released, and it looks like they might not be ready to raise interest rates in the middle of 2015, as had been hinted by several of the Fed Governors.

“In connection with the risks associated with an early start to policy normalization, many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the Committee's objectives of maximum employment and 2 percent inflation,” said the minutes. “In addition, an earlier tightening would increase the likelihood that the Committee might be forced by adverse economic outcomes to return the federal funds rate to its effective lower bound.”

Why is the Fed becoming more dovish viz interest rates? The Producer Price Index for wholesale prices is hovering perilously close to deflation. The PPI — a good proxy for wholesale costs — fell a record 0.8 percent in January on a seasonally adjusted basis, the Labor Department said today. It was the third decline in a row and the fifth in the past six months.

This is big news, folks, and could mean mortgage rates would remain low much longer than originally projected.

Harlan Green © 2015

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

The Economic Ruination of Greece

Popular Economics Weekly

It is now beyond a reasonable doubt that Germany and its austerity cohorts want to drive Greece out of the Eurozone by insisting that it adhere to its agreement to pass most of its meager budget surplus to service its foreign debt, rather than invest it back into the Greek economy. It is insisting that Greece cut government spending enough so that it carries what is called a huge ‘primary’ budget surplus of 4.5 percent (a surplus before its bills are paid—ie, largely interest to its creditors).

The EU, led by Germany, had crafted several agreements that gave Greece large loans to service that debt, while forcing it to submit to severe austerity and wage cuts.

“The results have been catastrophic, said the Guardian in a 2013 article: “cumulative economic contraction approaching 25 percent, adult unemployment at nearly 30 percent, youth unemployment close to 65 percent, unprecedented poverty, destruction of the welfare state and humanitarian crisis in the urban centres. Greek debt, meanwhile, is currently higher than in 2010, standing at €321bn and, since the economy has collapsed, its ratio to GDP approaches an exorbitant 180 percent. This is the background to the current debate.”

But to do so would in effect drive Greece even further into its depression, since it means lower tax revenues, which means even more debt. The consequence is the layoff of more workers and further reduction of average household incomes. Paul Krugman put up a graph of the cutbacks in spending that in turn have made Greece’s debt burden worse, compared to other countries that agreed to the EU’s austerity terms.

 

Greece has already paid the piper, in other words, while Germany now has the largest budget surplus of all western countries. “Greece has done a lot more austerity than those countries cited as supposed success stories,” says Krugman, “(which is another issue — success being defined as “not total collapse, and slight recovery after years of horror” — but that’s a different story).”

Graph: Trading Economics

So Greece has little choice but to exit the euro currency, unless some last minute compromise with the EU is possible. Its unemployment rate is currently 25.8 percent, the worst in the Eurozone (slightly more than Spain’s 23.7 percent), as it has been in a deflationary spiral, further depressing its economic activity.

Graph: Trading Economics

Although Greece mostly lived up to the terms of the bailout, the promised growth never materialized. As Greek Prime Minister recently said: "We are not negotiating the bailout; it was cancelled by its own failure.” Calculated Risk tabulated the difference between the forecasted results of its austerity cutbacks and the actual result.

Greece: Annual GDP, Forecast and Actual

Year Promised      Actual

· 2009 -2.0            -4.4

· 2010 -4.0            -5.4

· 2011 -2.6             -8.9

· 2012 +1.1             -6.6

· 2013 +2.1             -3.9

The only choices are to allow Greece to run a smaller primary surplus (currently 1.5 percent), leaving more of its revenues to benefit its own citizens, or for Greece to leave the Eurozone and default on all their debt. What will it be?

Harlan Green © 2015

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

Low Inflation Everywhere Is Shrinking Growth

Popular Economics Weekly

Deflation is a rising risk for the U.S. economy based on import and export price data where contraction is at its most severe since the 2008-2009 recession, as well as for the rest of the world. U.S. import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it's much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year, reports Econoday.

Graph: Econoday

Another sign of deflationary tendencies is that U.S. consumer spending barely rose in January as households cut back on purchases of a range of goods, suggesting the economy started the first quarter on a softer note. Sluggish spending came despite cheap gasoline and a buoyant labor market, leaving economists to speculate that consumers were using the extra income to pay down debt and boost savings.

 

Graph: Thomson-Reuters

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1 percent last month. But overall retail sales slipped 0.8 percent in January, declining for a second straight month as falling gasoline prices undercut sales at service stations. This is after consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at its quickest pace since 2006 in the fourth quarter.

Graph: Trading Economics

But even falling gas prices are a sign of deflation, as it means there is lower demand for energy products everywhere in the world, as I said. In fact, consumer prices are already falling in the Eurozone, -0.2 and -0.6 percent, respectively, in the past 2 quarters, signaling an outright recession. Paul Krugman has even said the Eurozone is now in their Second Great Depression.

Graph: Calculated Risk

So why are consumers paying down debt with their extra pocket money? The preliminary University of Michigan consumer sentiment index for February was at 93.6, down from 98.1 in January. Higher gasoline prices are probably the reason for the decline in February, and that’s enough to make consumers more cautious with their spending.

Harlan Green © 2015

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

Mortgage Refinancings Surging in 2015

The Mortgage Corner

The still record-low interest rates are making a difference. Refinancings jumped 66 percent in January’s first two weeks, according to the MBA. And borrowers who refinanced during the fourth quarter of 2014 were able to reduce their interest rate, on average, by about 1.3 percentage points – a savings of about 23 percent, according to a recent Freddie Macs report. On a $200,000 loan that translates into saving of about $2,500 interest during the next 12 months.

Graph: Calculated Risk

Why? Conforming 30-yr fixed rates now are as low as 3.375 percent, and high-balance fixed rate conforming amounts can be found at 3.50 percent for 1 origination point.

"Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined over the course of 2014,” says Len Kiefer, Freddie Mac deputy chief economist. “However, because mortgage rates fell in the fourth quarter of last year, we actually saw the share of refinance originations tick up a bit despite volumes being down, a similar trend we expect to see for the first quarter of 2015 as mortgage rates have moved even lower.”

One popular program that in many cases doesn’t even require an appraisal for loan amounts up to 125 percent of value is the HARP II programs for conforming loans originated before June, 2009. Borrowers can reduce their interest rate to today’s market rates. But normal conforming qualification debt ratios and decent credit are required for HARP refinancings.

Home owners who refinanced through the government’s HARP program during the fourth quarter of 2014 saw an average reduction in their interest rate of 1.6 percentage points, according to Freddie Mac, amounting to an average savings of $3,300 in interest during the first 12 months – or about $275 in savings every month.

About 71 percent of those who refinanced their first-lien mortgage maintained about the same loan amount or lowered their principal balance by paying additional money at closing, according to the report.

But 34 percent of refinancers were able to shorten their loan terms, according to the report. This is when the conforming 15-yr fixed rate today is 2.50 percent. Overall, borrowers who refinanced in 2014 saved about $5 billion in interest over the next 12 months.

This has to spur home construction as well, since it enables the reduction of so much debt.

Graph: Calculated Risk

And sure enough, the U.S. Census Bureau of the Department of Commerce said that construction spending during October 2014 was estimated at a seasonally adjusted annual rate of $971.0 billion, 1.1 percent above the revised September estimate of $960.3 billion.

The latest NAR survey also showed more optimism for 2015 housing sales. An improving job market, low mortgage rates, and recent moves by the government to loosen up mortgage credit is fueling increased optimism among REALTORS®. In particular, real estate professionals are growing more confident about the housing market’s outlook for the next six months, according to the December 2014 REALTORS® Confidence Index, a survey of more than 4,000 Realtors.

So stay tuned, as winter wanes and interest rates stay low. Of course it will be up to the Federal Reserve as well, to maintain low interest rates for the rest of 2015.

Harlan Green © 2015

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

The Bernanke-Yellen Led US Recovery

Financial FAQs

Friday’s January unemployment report should close the books once and for all on the debate whether austerity cutbacks in government spending (and debt) such as happened in Europe, or pro-active government policies by the U.S. Federal Reserve Banks has been the prime instigator of growth during recoveries from depressions, large or small.

A total of 257,000 payroll jobs were created in December and with revisions to the past 2 months more than 1 million jobs were created just over the past 3 months. Though the unemployment rate calculated from the separate Household report declined from 5.6 to 5.7 percent, it was because an additional 700,000 new and older folks entered the workforce, surely a sign of rising job availability.

This means what can only be called the U.S. Bernanke-Yellen recovery from the Great Recession is finally reaching its growth potential, thanks to the Fed’s efforts to keep both short and long term interest rates as low as possible with the massive buying of U.S. Treasury and mortgage-backed securities, called Quantitative Easing, among other measures. The U.S. has the best growth rate in the developed world, thanks to the actions of Fed Chairmen Bernanke and Yellen.

Graph: Trading Economics

Whereas the Eurozone is declining into negative growth for the third time since 2008, in what Paul Krugman is now calling Europe’s Second Great Depression, as Greece has elected a government that is rebelling against German-inspired austerity measures.

Graph: Trading Economics

“… Germany is demanding that Greece keep trying to pay its debts in full by imposing incredibly harsh austerity,” said Krugman in his most recent recent NYTimes Oped. “The implied threat if Greece refuses is that the central bank will cut off the support it gives to Greek banks, which is what Wednesday’s move sounded like but wasn’t. And that would wreak havoc with Greece’s already terrible economy…Beyond that, chaos in Greece could fuel the sinister political forces that have been gaining influence as Europe’s Second Great Depression goes on and on.”

The European Central Bank has begun its own tepid version of QE, but excluded Greek sovereign debt from ECB purchases, which will only make Greece’s situation more dire by increasing its borrowing costs.

It wasn’t long ago that the U.S. might have suffered the same fate. Congressional conservatives had demanded that the U.S. pay down its debts rather than spend more to create jobs, opposition that shut down government briefly and led to a downgrade of U.S. sovereign debt,

But first Ben Bernanke, a student of Japan’s two decade deflationary spiral, and now Fed Chair Janet Yellen have held firm in their resolutions to stimulate growth until Main Street experiences a sustainable recovery.

This is something that Germany, instigator of the eurozone’s austerity policies, has to learn if it wants to bring Europe out of its Second Great Depression, by supporting policies that will unite Europe into a greater union, rather than cause its disintegration.

Harlan Green © 2015

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

The Future of Interest Rates

Popular Economic Weekly

The stock market plunged yesterday, but interest rates plunged as well with the latest Fed FOMC meeting and press release. Traders felt that the Fed Governors were being too optimistic about America’s economic outlook in 2015. The first estimate of Q4 GDP growth was 2.6 percent, disappointing those who saw slower growth ahead after Q3’s 5 percent GDP growth rate. So we believe the Fed will put off its mid-summer rate hike, leaving rates at record lows for the rest of 2015.

It is exactly when interest rates begin to rise that is confusing both markets and consumers. With consumer confidence now above pre-recession levels (thanks to very low gas prices) and in a spending mood, now wouldn’t be the time to announce upcoming rate hikes, and the Federal Reserve knows that.

Graph: Econoday

“The Committee continues to see the risks to the outlook for economic activity, said the press release, “and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.”

But wait a minute. There was nothing in the words that said it couldn’t be later in the year, since inflation is still falling, and wages aren’t rising for most consumers. Consumers power some 70 percent of economic activity, so a rise in their borrowing rates on autos and consumer goods could stop spending on a dime. And that’s just what the main body of its press release intimated.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely (my emphasis), if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

The housing market in particular wants to keep interest rates as low as possible to lure more buyers into the housing market. But there is still much uncertainty. For instance, the NAR’s Pending Home Sales index fell slightly in December, even though new-home sales jumped 11.6 percent.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased 3.7 percent to 100.7 in December from a slightly downwardly revised 104.6 in November, said the NAR’s press release, but is 6.1 percent above December 2013 (94.9). Despite last month’s decline (the largest since December 2013 at 5.8 percent), the index experienced its highest year-over-year gain since June 2013.

Lawrence Yun, NAR chief economist, says fewer homes available for sale and a slight acceleration in prices likely led to December’s decline in contract signings. “Total inventory fell in December for the first time in 16 months, resulting in fewer choices for buyers and a modest uptick in price growth in markets throughout the country,” he said. “With interest rates at lows not seen since early 2013, the strength in existing-sales in upcoming months will largely depend on the willingness of current homeowners to realize their equity gains from the past couple years and trade up.”

Raising rates too soon just happened in Japan. It had raised its value-added tax late last year, and Japan’s consumers stopped buying. Probably because Prime Minister Abe listened to his bankers rather than the economists, and bankers tend to worry about inflation even when there is none. Japan had endured more than 2 decades of deflation, which had reduced everyone’s incomes. It can take another decade to fix their pocketbooks, and business profits, as well.

So I believe the Fed will be reluctant to raise rates at all until the inflation rate rises from its current low, since that is a sure sign that consumers won’t pay more for things, because they can’t.

Harlan Green © 2015

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

Who Will Have Jobs This Year?

Popular Economic Weekly

Today’s ADP monthly private payroll report hints at what will happen with Friday’s ‘official’ nonfarm Labor Department unemployment report. ADP sees a slowing in job growth for January, to a lower-than-expected 213,000 for private payrolls and against ADP's upwardly revised 253,000 for December (initial estimate 241,000). Turning to government Labor Dept. data, the corresponding Econoday consensus for Friday's jobs report is 229,000 vs December's 240,000.

Graph: Econoday

Some drop in midwinter payrolls is expected, but where are the strengths and weaknesses? Companies in the U.S. service sector grew slightly faster in January, but they also cut back on the number of people they hired, according to survey of senior executives. A similar ISM gauge for manufacturing sector employment also declined in January, slipping to 54.1 percent from 56 percent.

The two ISM employment indexes are generally a good indicator of trends in the U.S. labor market. Even though both were positive in January, they point to somewhat slower job growth in the first month of 2015.

Among the goods-producing sector, there were 48,000 new construction jobs in December’s payroll report, with Health care and social assistance the second-highest job total. Construction payrolls are up 677,000 from their lows in 2010, but still 1.62 million below its 2006 high during the housing bubble.

So if interest rates remain at their record lows, real estate construction jobs may continue to expand.  Some 215,000 construction jobs were added in 2014, but total is still 1.6m below 2005 levels at height of the housing bubble. 

The apparent slowdown in hiring among service and manufacturing companies at the start of a new year could be a hint that the U.S. job creation in January will fall short of December’s 252,000 mark, as we said. The Institute for Supply Management said its nonmanufacturing index edged up to 56.7 percent in January from 56.5 percent in December. Readings over 50 percent signal that more businesses are expanding instead of contracting.

The good news is that new orders remained very healthy. The index measuring fresh demand rose to 59.5 percent and remained close to a post-recession high. On the downside, the employment gauge fell 4.1 points to 51.6 percent, marking the lowest level in 11 months. It was also the second worst reading in 20 months.

The 213,000 increase for January ADP payrolls is the lowest since September which was also 213,000. Increases in ADP's data from October to December averaged 257,000. By industries, ADP reports the largest percentage gain for January comes from construction, up 0.3 percent or 18,000 jobs (vs. 48,000 in BLS Dec. report), and the lowest from manufacturing, up 0.1 percent or 14,000 jobs, and financial activities, also up 0.1 percent or 10,000 jobs.

So continued health of the housing sector will be key to higher economic growth in 2015.

Harlan Green © 2015

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