Future Home Sales Also Soaring

The Mortgage Corner

It looks like housing sales this year could return to pre-recession levels (though not into bubble territory), as all 3 major housing stats—existing, new, and now Pending-home sales are off to a good start in 2016.

Pending home sales increased for the third consecutive month in April, in spite of all the market uncertainties, surging to the highest level in over a decade, according to the National Association of Realtors.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, hiked up 5.1 percent in March and is now 4.6 percent above April 2015. Lawrence Yun, NAR chief economist, says huge gains in the South and West propelled pending sales in April to their highest level since February 2006 (117.4).

“The ability to sign a contract on a home is slightly exceeding expectations this spring even with the affordability stresses and inventory squeezes affecting buyers in a number of markets,” he said. “The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market.”

Pending home sales in the South jumped 6.8 percent in April and is 5.1 percent higher than last April, while the index in the West climbed 11.4 percent in April, now 2.8 percent above a year ago. In the Midwest, which posted the only drop, the index declined slightly, but is still 2.0 percent above April 2015.

Although the future of mortgage rates is in question, Yun said, “Even if rates rise soon, sales have legs for further expansion this summer if housing supply increases enough to give buyers an adequate number of affordable choices during their search.”

What is driving the burst in home sales in general? It’s the increase in household formation, as millennials finally leave home or school to move into their own housing. A recent SF Fed paper predicts higher household formation in the next several years, much higher even than predictions by the Harvard Joint Center for Housing Studies of 1 to 1.2m households per year over the next decade.

“To the extent that headship rates among various age groups stabilize, household formation can be expected to more closely follow the growth in adult population…In that baseline projection, older age groups tend to have the highest growth rates. Since the older group also has traditionally higher shares of heads of households, this should mean a higher headship rate overall.”

Given current 12-month annual headship rates by age group, the Census Bureau projections imply household formations averaging on the order of 1.4 to 1.5 million per year through 2020, said the SF Fed. It compares favorably to an average of a little less than 900,000 annually over the past five years.

Graph: Econoday

This is huge, folks. If household formation is increasing this much then the real estate industry will help boost overall economic growth. Q1 2016 GDP growth was revised up slightly to 0.8 percent, and spending on residential construction increased at a 17.1 percent rate in the first quarter, the fastest pace since the fourth quarter of 2012. Residential construction added 0.56 percentage point to first-quarter GDP growth, up from the 0.49 percentage point reported last month.

Income at the disposal of households after accounting for taxes and inflation was revised up to show it jumping at a 4.0 percent rate in the first quarter instead of the previously reported 2.9 percent. Savings were revised up to $782.6 billion from $712.3 billion.

This means there should be much higher second quarter GDP growth, needless to say, as retail sales are again booming, and retail sales are again booming. Consumers came back to life in April, driving retail sales 1.3 percent higher. Autos are the key component, up a sharp 3.2 percent to reverse the prior month's decline. Excluding autos, retail sales rose 0.8 percent, still a strong number.

Harlan Green © 2016

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What Happened to Link Between Profits and Productivity?

Popular Economics Weekly

What’s the link between profits and productivity, on which economic growth is based? It has broken down of late, so that profits are no longer used to enhance productivity. And without higher productivity, we see the standard of living for most of US no longer rising.

Labor productivity has to do with the amount of output per worker, which in turn depends on the amount of capital expenditures (capex spending) on plants and equipment. The current tepid economic recovery that has averaged slightly above 2 percent GDP growth has been attributed in large part to lower labor productivity.

So why, with corporations making record profits over the past 2 years as a percentage of GDP (accompanied by today’s comparatively low tax rates and large tax loopholes) aren’t corporations investing more in productivity that would enhance their profits as well?

In fact, such record profits seem to have created a different investment environment, one that is conducive to what Nobelist Robert Stiglitz calls monopolistic behavior last seen during the Gilded Age of the early 1900s.
Monopolistic behavior means that businesses and even whole industries prefer to keep themselves in power by amassing more wealth for their shareholders and executives, rather than invest those profits to also benefit their employees and the public domain.

The result is lower investments in productivity, made mostly via investments in capital, or capex spending. And studies show increased capex spending does boost productivity, as historically higher profits have in the past boosted capex spending.

A 1964 NBER working paper by economist Robert Eisner highlighted that fact. “The historical correlations are indeed indisputable; periods of high capital expenditures have been periods of high profits and periods of low capital expenditures have been periods of low profits.”

(Therefore)“…I would suggest that capital expenditures are undertaken in the pursuit of profits, or perhaps in order to reduce the risk associated with expectations of profits…I would view the rate of investment demand as related to the expected profitability of investment, something which is quite different from past or current profits.”

So during this period of the highest corporate profits as a percentage of GDP and GDI in history, corporations have been hoarding their profits. This has to change; firstly, because so many working-age adults are still out of work some 7 years after the end of the Great Recession.

And secondly, a return to another Gilded Age, also warned by economist Thomas Piketty in his epochal Capital In the Twenty-First Century, means another era of high income inequality, and so a period with greater economic instability. This happened during the Great Recession, due in large part to a record income inequality last seen in the run up to the Great Depression.

Both private industry and governments have to invest more in R&D research, for starters. An early reading of the April service-sector PMI Flash Index showed growth in new orders, hit by weakness in investment spending, continues to slow and is among the weakest readings in the 7-year history of this series. Respondents in the sample say clients are unwilling to commit to new projects. 

And though the April Durable Goods orders just out were strong (i.e., goods that generally last more than 3 years), a negative in the report is a sizable 0.8 percent decline in core capital goods orders which ominously is the third straight decline for this reading and the fifth out of the last seven reports. Year-on-year, orders are noticeably in the negative column at minus 5.0 percent. These readings point squarely to stubborn weakness in business investment and uncertainty in the general business outlook, said Econoday.

How does this explain today’s actions of those corporations with huge profits that aren’t investing in their future growth? Actually, it can. For, if businesses find more ways to line their pockets, such as using financial engineering by speculating in markets—i.e., either by hedging commodities or stock buybacks—then they will neglect to make money the old fashioned way by creating new products and services.

A recent Reuters Special Report entitled, The Cannabilized Company, said that in the most recent reporting year, share purchases reached a record $520 billion. Throw in the most recent year’s $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than the companies’ combined net income of $847 billion.

And it confirms the cost; reduced innovation spending in new products that would boost future productivity. “…among the approximately 1,000 firms that buy back shares and report R&D spending,” said Reuters, “the proportion of net income spent on innovation has averaged less than 50 percent since 2009, increasing to 56 percent only in the most recent year as net income fell. It had been over 60 percent during the 1990s.”

Thus, maximizing shareholder value with stock buybacks has “concentrated income at the top and has led to the disappearance of middle-class jobs. The U.S. economy is now twice as rich in real terms as it was 40 years ago, but most people feel poorer,” said Reuters

A good example of this practice is tech icon IBM. CEO Sam Palmisano left in 2011, having received more than $87 million in compensation in his last three years at the company. Meanwhile, revenue declined for the past three years, and earnings have fallen for the past two. The stock is down a third from its 2013 peak, while the S&P 500 has risen 34 percent. To rein in costs, IBM has cut jobs. It now employs 55,000 fewer workers than it did in 2012.

Thus it turns out maximizing stock prices is neither maximizing shareholder value nor longer term profits—since it only benefits the few. Should this be the sad fate of American business? No one likes to give up power—not our major corporations, certainly—power that was built up over the past 40 years of consolidation and reduced regulation.
But such record income and opportunity inequality cannot continue indefinitely. This is what revolutions are made of.

Harlan Green © 2016

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New-Home Sales Also Soaring

Financial FAQs

"Sales of new single-family houses in April 2016 were at a seasonally adjusted annual rate of 619,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 16.6 percent above the revised March rate of 531,000 and is 23.8 percent above the April 2015 estimate of 500,000."

We are beginning to see a real recovery in housing inventories with more new home being built, the one element that has been holding back more robust sales, as well as first-timers from entering the housing market.

Graph: Calculated Risk

“Rising home sales combined with tight inventory will translate into increased housing production as we move onward in 2016, especially as job creation continues and mortgage rates remain low,” said NAHB Chief Economist Robert Dietz.

We are also seeing record low mortgage default rates, another sign that more homeowners are free to either move or refinance their homes.  Strong job creation and a seven-year U.S. economic recovery have helped home owners get in the best shape in years. The number of new foreclosures in the first quarter edged near the lowest level in 17 years, the New York Federal Reserve said Tuesday.

The same was true for other consumer debt. Repayments increased and just 5 percent of all outstanding household debt — student loans, credit cards, auto loans, mortgages, home equity lines of credit - was delinquent in early 2016. That’s the smallest share of delinquencies since 2007, shortly before the onset of the Great Recession.

Graph: Calculated Risk

The bottom line is that more new homes have to be built—almost doubled to 1 million per year in order to catch up with historical demand. Historically, the number of new and existing-home sales was a constant ratio of 6 to 1 existing-homes to new-home sales. That means at the current existing-home sales rate of 5.4 million homes, some 900,000 new homes need to be sold. And they have to be in the more affordable price ranges, which means closer to the current median new-home price of $321,100, or below.

Harlan Green © 2016

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Home Sales Recovering

The Mortgage Corner

There is more news the housing market is recovering—from the Great Recession, that is. But it’s still below pre-recession levels.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.7 percent to a seasonally adjusted annual rate of 5.45 million in April from an upwardly revised 5.36 million in March. After last month's gain, sales are now up 6.0 percent from April 2015, said the NAR.

Graph: Calculated Risk

Lawrence Yun, NAR chief economist, says April's sales increase signals slowly building momentum for the housing market this spring. "Primarily driven by a convincing jump in the Midwest, where home prices are most affordable, sales activity overall was at a healthy pace last month as very low mortgage rates and modest seasonal inventory gains encouraged more households to search for and close on a home," he said. Except for in the West — where supply shortages and stark price growth are hampering buyers the most — sales are meaningfully higher than a year ago in much of the country."

Also good news was the 32 percent that were first time homebuyers, up from 30 percent, but nowhere near the 40 percent during more normal economic times. Alas, pricing and low inventories are the problem. Too many builders are yet building the entry-level affordable housing that has to be below the new $232,000 median price.

And there’s just a 4.7-month supply of available inventory. That’s why the Wells Fargo Market Index is hovering just above 60 percent—i.e., 60 percent of buyers can now afford a median-price home, which shows steady improvement.

"This is the second consecutive quarter that we've seen a nationwide improvement in affordability due to favorable home prices and mortgage rates," said NAHB Chief Economist Robert Dietz. "These factors, along with rising employment, a growing economy and pent-up demand will provide a boost for home sales in the second half of 2016."

So new home construction has to fill the void in available housing inventories. Nationwide housing starts rose 6.6 percent to a seasonally adjusted annual rate of 1.17 million in April, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. Overall permit issuance was also up 3.6 percent to a seasonally adjusted annual rate of 1.12 million.

“Though housing construction data is relatively flat for the beginning of 2016, we anticipate a ramping up of housing production during the rest of the year, given a strengthening job market, low mortgage interest rates and favorable demographics,” said NAHB Chief Economist Robert Dietz.

That is sorely needed, as new-home sales in particular have been weak. This graph tracks the relative performance of existing home sales (dark line) and new home sales (light line). Existing home sales have moved from a mid 6 million rate over the span of the graph to a mid 5 million rate, but note the special weakness in new home sales, moving from over a 1 million rate in 2006 to half that now, says Econoday. Weakness in new homes means weakness for the construction sector and less strength for GDP. Watch for the April new home sales report on Tuesday's calendar, May 24.

Harlan Green © 2016

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Middle Class Finally Gets A Raise

Popular Economics Weekly

A new rule announced by the Obama administration will, effective December 1, double the overtime-pay salary threshold and set it to automatically increase every three years. It’s about time. The salary of employees has been diminishing since the 1970s, as a share of the economic pie, believe it or not. While the profits of businesses are at record highs, as a percentage of GDP.

The high point of employee earnings was 50.1 percent of Gross Domestic Income in 1970, a proxy for Gross Domestic Product, and the current low point is 42.5 percent.  Why the discrepancy? It’s complicated, but has resulted in the decline of middle class wealth—and so of the middle class itself. The Obama administration, thanks to Labor Secretary Thomas Perez, is set to correct the deficiency.

The Labor Department says about 4.2 million workers will gain overtime benefits as a result of the rule, though the labor think tank Economic Policy Institute, which has argued strongly in favor of the rule, says this is a major undercount. Up to 13.5 million employees could be affected.

Americans’ paychecks have not kept pace with their productivity in part because millions of lower-middle-class and even middle-class workers are working overtime but not getting paid for it. President Obama directed the Labor Department to modernize the rules that require employers to pay workers time-and-a-half if they work overtime. The department issued a proposed rule to raise the overtime threshold from $455 per week, or $23,660 per year, to a “standard salary level equal to the 40th percentile of earnings for full-time salaried workers,” which is $921 per week in 2013 dollars, or $933 per week adjusted to 2014 dollars.

Salaried workers whose earnings are $933 per week or more can be exempted from the right to receive overtime if they fall into one of three categories: professionals, administrators, and executives. Each of these exempt categories is defined by a set of duties showing that the exempt employee is skilled and exercises independent judgment, or is a boss with a department and employees to supervise.

Unfortunately this rule was ignored by the Bush administration when the overtime pay rule was last adjusted.

The threshold was kept at $23,660 per year, and even those workers were required to work overtime, even though they had little or no management duties.

The result has been record corporate profits, and very low productivity improvements with little incentive for businesses to raise workers’ wages or make investments that would create more jobs.Why does private business have so little incentive to put some of their record profits to productive use? Nobelist Joe Stiglitz and other economists have labeled it “Monopoly’s New Era”.

“Capitalists are rewarded for saving rather than consuming – for their abstinence, in the words of Nassau Senior, one of my predecessors in the Drummond Professorship of Political Economy at Oxford (in order to pass their wealth on to succeeding generations)…The second school of thought takes as its starting point “power,” including the ability to exercise monopoly control or, in labor markets, to assert authority over workers.”

 In other words, Big Business in particular has since the 1970s focused on maximizing profits, not to create even more wealth for their employees or communities, but to pass it on to future generations. Economist Thomas Piketty has labeled it a return to Europe’s Gilded Age when most of the wealth was inherited.

US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications, says Stiglitz. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top ten banks’ share of the deposit market, for example, increased from about 20 percent to 50 percent in just 30 years, from 1980 to 2010. Hence the need for Dodd Frank to avoid any more ‘too big to fail’ scenarios.

And the result is our middle class is shrinking, the economic class that is the most productive in our society. After more than four decades of serving as the nation’s economic majority, the American middle class is now matched in number by those in the economic tiers above and below it, reports a recent PEW Research study.

In early 2015, 120.8 million adults were in middle-income households, compared with 121.3 million in lower- and upper-income households combined, a demographic shift that could signal a tipping point, according to a new Pew Research Center analysis of government data.

Over the same period, however, the nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49 percent of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down substantially from 62 percent in 1970.

So it’s no surprise that economic growth has slowed. There are fewer households that tend to spend their earnings into the economy, which would generate the jobs and future economic growth. This is something the wealthiest do not do—they tend to save most of their wealth for other uses.

Harlan Green © 2016

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Why Too Little Inflation?

Financial FAQs

Where’s the inflation? It is barely rising, as consumers still wait for bargains, before they decide to buy. The overall Consumer Price Index in April rose just 1.1 percent, and is up 2.1 percent less food and energy prices, which have been falling this year.

Graph: Econoday

This is the major reason we saw just 0.5 percent GDP growth in Q1. It is the surest sign we are still in deflationary times, and the reason Janet Yellen’s Fed doesn’t want to raise short term rates further. We aren’t growing fast enough to put everyone to work—which includes some 8 million that are either working part time, or have stopped looking for work—which is why so many have listened to Bernie or Donald during the primaries.

Consumers sit on their pocket books when they believe prices might go lower, and job prospects aren’t so good. It is also how Japanese consumers continue to behave, as do Europeans during deflationary times, which keeps their economies from growing faster.

The U.S. isn’t as badly affected thanks to a very proactive Federal Reserve and the Obama administration $1.1T budget agreement that is pumping some infrastructure spending into public spending, as is the $305B Surface Transportation Bill that renewed the gasoline tax so that our roads and bridges can be repaired.

The new law, dubbed the Fixing America’s Surface Transportation Act, or the FAST Act, formally reauthorizes the collection of the 18.4 cents per gallon gas tax that is typically used to pay for transportation projects, and also includes $70 billion in “pay-fors” to close a $16 billion deficit in annual transportation funding that has developed as U.S. cars have become more fuel-efficient.

 Retail sales also jumped, along with consumer sentiment in April. So we should see better growth this Q2. What is causing the spike in consumer sentiment? The U. of Michigan’s consumer sentiment survey is absolutely soaring so far this month, up nearly 7 points to 95.8 for the mid-month flash, as we said last week. This is the best reading since June last year.

Retail sales surged in April a much higher-than-expected 1.3 percent for the best showing since March last year. The strength is broad based and includes auto sales which finally show some life for the first time this year, with a 3.2 percent monthly jump.

Nobelist Joseph Stiglitz has been pounding the table on what is needed for better economic growth. He says there is a deficiency in aggregate demand, a Keynesian formula that measures the overall demand in goods and service from government as well as consumer spending, and exports.

“Today’s markets are characterized by the persistence of high monopoly profits,” says Stiglitz. “The implications of this are profound. Many of the assumptions about market economies are based on acceptance of the competitive model, with marginal returns commensurate with social contributions. This view has led to hesitancy about official intervention: If markets are fundamentally efficient and fair, there is little that even the best of governments could do to improve matters.

“But if markets are based on exploitation (i.e., monopoly power), the rationale for laissez-faire disappears. Indeed, in that case, the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity.”

So when the private sector won’t spend—thanks in large part to the monopoly power of Big Business that has kept most of their record profits in the board rooms or on Wall Street, rather than investing in plants and equipment—government has to tax more of those profits in order that they be put to productive use.

So welcome to the popularity of Sanders and Trump!

Harlan Green © 2016

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Housing Affordability, Consumer Sentiment, Improving

The Mortgage Corner

Spurred by a modest reduction in mortgage interest rates and favorable home prices, nationwide housing affordability in the first quarter of 2016 posted a slight increase, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) released today.

"This is the second consecutive quarter that we've seen a nationwide improvement in affordability due to favorable home prices and mortgage rates," said NAHB Chief Economist Robert Dietz. "These factors, along with rising employment, a growing economy and pent-up demand will provide a boost for home sales in the second half of 2016."

Is this causing the spike in consumer sentiment? Consumer sentiment is absolutely soaring so far this month, in the opinion of Econoday, up nearly 7 points to 95.8 for the mid-month flash. This is the best reading since June last year.

Graph: Econoday

Expectations, which have been pulling down the headline index most of this year, jumped nearly 10 points to 87.5. The month-to-month turnaround for this reading is the best of the cycle, since 2006. Current conditions are also moving higher, to 108.6 from 106.7.

In all, 65 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $65,700. This is up from the 63.3 percent of homes sold that were affordable to median-income earners in the fourth quarter.

The national median home price fell from $226,000 in the fourth quarter to $223,000 in the first quarter. Meanwhile, conforming 30-yr fixed mortgage rates are still as low as 3.25 percent in California, and 3.375 percent for a Hi Balance conforming fixed rate with a 1 pt. origination fee.

Harlan Green © 2016

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Trump RICO Trial Date Set

Popular Economics Weekly

Trump says he will be the first candidate since 1976 not to release tax returns. Analysts said that Trump likely pushed the envelope to turn ordinary income into capital gains, and deferred the payment of tax through like-kind exchanges, said the MarketWatch report. The tax returns could also verify how much income he receives from licensing his name.

In fact, they could show much more—for instance, how much of his fortune was made from defrauding other investors. Trump’s sordid business dealings are known to very few, as I’ve said in past columns. And now Donald Trump will go to trial in a class-action lawsuit against him and his now-defunct Trump University that includes the Racketeer Influenced and Corrupt Organizations Act, or RICO charges, after the presidential election but before the inauguration, setting the stage for a president-elect to take the witness stand if he wins the White House.

One of his 4 Chapter 11 (business) bankruptcies was for Trump Casinos and Hotels. “For 10 years between 1995 and 2005, Donald Trump ran Trump Hotels & Casino Resorts — and he did it so badly and incompetently that it collapsed into Chapter 11 bankruptcy,” said Marketwatch’s Brett Arends, who has been tracking his business failures for years. “His stockholders were almost entirely wiped out, losing a staggering 89 percent of their money. The company actually lost money every single year. In total it racked up more than $600 million in net losses over that period,” something no other major casino chain did over that term.

 

Graph: MarketWatch

In total, Donald Trump pocketed $32 million in nine years of running Trump Casinos and Hotels, while his public stockholders lost more than $100 million. But much more damaging are the various class action lawsuits filed again Trump and Trump University, which was a university in name only.

Instead of receiving a quality degree, “as good as any from a university”, said Trump, students received a printed certificate and no degree after spending as much as $36,000 on a weekend course that solicited more money, and were given commonly known real estate websites, such as Zillow, and several worthless property referrals.

These are the words of several plaintiffs suing Trump that a San Diego court has elevated to gangster status. Trump is accused of not only fraud, but racketeering, as if he were running a criminal enterprise.

U.S. District Judge Gonzalo Curiel on Friday scheduled trial for Nov. 28 in the suit that alleges people who paid up to $35,000 for real estate seminars got defrauded. The likely Republican nominee planned to attend most, if not all, of the trial and would testify, Trump attorney Daniel Petrocelli said.

“This means that, fairly or unfairly, opponents will be able to say that a large group of everyman voters, many of them elderly, have accused a leading contender for the Oval Office of being a racketeer,” said Time Magazine’s Steven Brill, who has been following the progress of this lawsuit, initiated more than five years ago.

Harlan Green © 2016

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JOLTS Jobs Report Highest In Years

Popular Economics Weekly

The U.S. Bureau of Labor Statistics reported the number of job openings was little changed at 5.8 million on the last business day of March, but it is actually up 11 percent over March 2015. Methinks the BLS is being overly modest, as it shows many more available jobs than workers, a sign of future job and economic growth.

Graph: Calculated Risk

Why do we know this? Jobs openings even increased substantially in March to 5.757 million from 5.608 million in February. And Quits are up 9 percent year-over-year, which is when workers leave voluntarily, usually because they are able to find better jobs. These are voluntary separations. (see light blue columns at bottom of graph for trend for "Quits").

Note that hires (dark blue line) and total separations (red and light blue columns stacked) are pretty close each month in the Calculated Risk graph. This is a measure of labor market turnover.  When the blue line is higher than the columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

We also see much improvement in home building, another job creator, as construction jobs are up 1.2 million jobs from their lows, but 1.1 million below their 2006 bubble highs.

The U.S. Census Bureau of the Department of Commerce announced construction spending during March 2016 is 8.0 percent (±1.6%) above the March 2015 estimate of $1,052.9 billion. During the first 3 months of this year, construction spending amounted to $240.4 billion, 9.1 percent (±1.5%) above the $220.3 billion for the same period in 2015.

Lastly, state and local government employment has been the largest drag on job growth. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, 247,000 in 2011, and 29,000 in 2012, for a total of 669,000 jobs lost due to the Great Recession.

Graph: Calculated Risk

And through November 2015, reports Calculated Risk, state and local employment is up 70,000.   So, in the aggregate, state and local government layoffs are over - and the economic drag on the economy is over.  However state and local government employment is still 561,000 below the pre-recession peak.

So where will all the new jobs come from? There will be a pickup in manufacturing for one, but most jobs will occur in the non-manufacturing service sector, as I’ve said in past columns. That means Professional and Business Services (insurance, et. al.), construction, health care, and Real Estate, now the fastest growing segments.

Harlan Green © 2016

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Service Sector Economy Booming

Financial FAQs

There was a huge jump in the U.S. service sector economy, our largest sector, some 67 percent of all U.S. economic activity. This is why we keep growing while most other developed and emerging economies aren’t.

"The Institute of Supply Management’s non-manufacturing index registered 55.7 percent in April, 1.2 percentage points higher than the March reading of 54.5 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased to 58.8 percent, 1 percentage point lower than the March reading of 59.8 percent, reflecting growth for the 81st consecutive month, at a slower rate in April.”

Even more importantly, the New Orders Index registered 59.9 percent, 3.2 percentage points higher than the reading of 56.7 percent in March, said the ISM press release. The Employment Index increased 2.7 percentage points to 53 percent from the March reading of 50.3 percent and indicates growth for the second consecutive month.

Graph: Calculated Risk

The service sector is booming because it includes most consumer-based services, such as Wholesale Trade; Health Care & Social Assistance; Utilities; Finance & Insurance; Real Estate, Rental & Leasing; Construction; Agriculture, Forestry, Fishing & Hunting; Public Administration; Professional, Scientific & Technical Services; and Retail Trade. The four industries reporting contraction in April are: Other Services; Mining; Transportation & Warehousing; and Educational Services.

So they are all the businesses that cater to consumers. In fact, the index is back to the highs of pre-recession 2005-2006. Much this is due to the rising consumer demand for goods and services as we approach full employment.

Even the Prices Index increased 4.3 percentage points from the March reading of 49.1 percent to 53.4 percent, indicating prices increased in April for the first time in three months and counteracting the recent deflationary trend that comes mostly from falling commodity and energy prices. According to the NMI®, 13 non-manufacturing industries reported growth in April. The majority of the respondents’ comments reflect optimism about the business climate and the direction of the economy.

What other factors favor higher growth this year, in spite of the initial estimate of 0.5 percent GDP growth in Q1? Even the manufacturing sector is showing better growth this spring. April's 50.8 (i.e., more than 50 percent of manufacturing supply managers surveyed means growth) for the ISM manufacturing index may be moderately below expectations for 51.5 but details in the report are positive,” says Econoday. “New orders did slow by 2.5 points but the level at 55.8 still points to a very solid rate of growth.

New export orders, offering positive evidence on the effects of the lower dollar, are also positive, unchanged at 52.5 which isn't dramatically above breakeven 50 but is still very solid for this reading and the best since December 2014. Backlog orders are still rising, though just barely at 50.5, but this along with March's 51.0 are the best two months for this reading also since December 2014.

So, continued growth in both sectors of the economy—with the service sector particularly strong—is reason for optimism that we can yet achieve 3 percent GDP growth this year.

Harlan Green © 2016

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April Private Payrolls Increase 171,000

Popular Economics Weekly

 

But government payrolls lost 11,000 jobs, so total nonfarm payroll employment increased just 160,000 in April. Over the prior 12 months, employment growth had averaged 232,000 per month.

The April jobs report was well below Wall Street’s expectations. But that is partly because we are nearing full employment, and 14.5 million jobs have been added during President Obama’s term already, third best behind Presidents Clinton and Reagan, and Obama still has 7 month left in his term.

But what is really full employment when the number of persons employed part time for economic reasons (also referred to as involuntary part-time workers) was unchanged in April at 6.0 million and has shown little movement since November? These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.

And 1.7 million persons were marginally attached to the labor force, said the BLS, down by 400,000 from a year earlier. (The data are not seasonally adjusted.) These

Individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months.

The unemployment rate, meanwhile, was flat at 5 percent. More people dropped out of the labor force and the so-called participation rate fell for the first time in seven months. That could mean people find it a bit harder to get a job. In April, employment gains occurred in professional and business services, health care, and financial activities, while mining continued to lose jobs.

Graph: Marketwatch

The increase in hiring last month was the smallest since September. Job creation slowed to an average of 200,000 in the last three months from a five-year high of 282,000 a month in the fourth quarter. Still, the soft employment report could reduce the odds of the Federal Reserve raising interest rates in June, say pundits.

The disappointing April employment report, however, might be a blip. Job openings sit near a record high and a sharp rebound in auto sales in April suggest consumers are still fairly confident, said MarketWatch. Businesses are unlikely to hold the line on hiring if sales continue to rise.

There are also signs of record consumer spending, as consumer credit levels rose to the highest level in 15 years.  Outstanding consumer credit, a measure of non-real estate debt, rose by a seasonally adjusted $29.67 billion in March from the prior month, the Federal Reserve said Friday. The 10.0 percent seasonally adjusted annual growth rate was the fastest growth pace since November 2001.

            Of particular note was that revolving credit (ie, credit cards) rose 14.2 percent after remaining in the low single digits since at least 2011.  So consumers must finally be confident enough to use their plastic money.

            That’s why this shows the possibility to higher growth ahead.  In both 2014 and 2015, the economy rebounded smartly in the spring after growth sagged in the first quarter. Many economists expect a repeat this year.  In April, professional-oriented companies, health care providers and financial firms added the most new workers. White-collar businesses added 65,000 employees, health-care firms created 44,000 jobs, and banks and insurance companies padded payrolls by 20,000.

Yet retailers cut 3,000 jobs to mark the first drop since the end of 2014. The mining sector, hurt by cheap oil prices, eliminated another 8,000 jobs to bring total cuts to nearly 200,000 in the past few years.

Employment gains for March and February, meanwhile, were reduced by a combined 19,000. The government said 208,000 new jobs were created in March instead of 215,000. February’s gain was trimmed to 233,000 from 245,000.

Harlan Green © 2016

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

Fannie Mae, GSEs, Even More Important

The Mortgage Corner

With news that Fannie Mae, one of the GSEs now managed by the Federal Housing Finance Authority (and US Treasury) just showed a $1.1B profit in Q1, but must pass all of it profits to Treasury since 2012, the question of how to resolve the status of major mortgage guarantors Fannie Mae and Freddie Mac becomes even more critical.

Why? They will have no capital left after 2017, and ““Operating with essentially zero capital is not sustainable,” said Fannie CEO Tim Mayopoulos on the Thursday morning earnings call, just after his company reported a $1.14 billion profit in the first three months of the year, the 17th consecutive quarter of profitability.

Yet banks and other non-GSE lenders aren’t stepping up to the plate to replace Fannie and Freddie. And they still guarantee more the 60 percent of all conventional mortgages. Private capital is “unwilling to step in” to replace the government-sponsored enterprises as mortgage finance leaders in the secondary market, said Mayopoulos to HousingWire’s Jacob Gaffney.

This is hurting the housing market, needless to say, as the GSEs keep tightening qualification standards in an attempt to satisfy Treasury that it is shrinking its loan portfolio. The average Fannie borrower’s FICO score was 746 in the first quarter. By way of comparison, the median credit score across the entire mortgage market in 2001, before the bubble era, was 701.

And that is even high, as scores of 620 to 680 were more prevalent in past decades because it was hard for homeowners to avoid at least one mortgage late payment in a year, what with so many payments made via snail mail. In fact, both FHA and VA, the other two Government Supervised Entities, allow credit scores as low as 520.

Graph: Calculated Risk

Fannie’s serious delinquency rate also shows cleaner credit quality. It fell for the 24th quarter in a row in the beginning of the year, to 1.44 percent. According to the company’s financial statement, that number would be even lower if foreclosures didn’t take so long in many states.

And Freddie Mac reported the Single-Family serious delinquency rate decreased in March to 1.20 percent from 1.26 percent in February. Freddie's rate is down from 1.73 percent in March 2015. This is the lowest rate since August 2008.

All this is making it more difficult for younger, first-time homebuyers with generally lower incomes, savings and credit scores. The NAR’s March existing-home sales survey reported the share of first-time buyers was 30 percent in March, unchanged both from February and a year ago. First-time buyers in all of 2015 also represented an average of 30 percent.

"With rents steadily rising and average fixed rates well below 4 percent, qualified first-time buyers should be more active participants than what they are right now," said the NAR’s chief economist Lawrence Yun. "Unfortunately, the same underlying deterrents impacting their ability to buy haven't subsided so far in 2016. Affordability and the low availability of starter homes is still a major barrier for them in most markets."

So there is no reason that credit requirements should be tightening at a time when more first-time homebuyers are entering the housing market. And there is plenty of evidence that the younger generations want and need housing.

Harlan Green © 2016

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

Bernie's Economic Platform--Part II

            Bernie Sanders and Donald Trump won their Indiana primaries, and we know why.

In February air-conditioner manufacturer Carrier, a wing of United Technologies, announced that beginning next year it will move its Indianapolis production to Mexico and lay off the company’s U.S. workers. (It will also gut the factory’s suppliers and surrounding businesses.) The announcement was caught on video and went viral just as the presidential campaign was focusing on the disastrous effects of our country’s “trade” policies.

Why is this an issue now when so many jobs have already moved overseas? Because of the presidential primaries, of course, and both Bernie Sanders and Donald Trump have taken notice. 

“United Technologies reported $7.6 billion in profits for 2015,” reports The Campaign For America’s Future, a progressive blog. “This was up from $6.2 billion in 2014. The company is spending $12 billion to purchase its own stock, which manipulates an increase in the stock price. That gives an idea of just how much cash the company has at its disposal. They use plenty of it to enrich executives, with their CEO getting almost $10 million in 2014 after getting more than $20 million in 2013.”

The sad fact is this has become an everyday event for many American workers, and the reason it has taken so long for workers’ salaries to begin to rise again, reports New York Times Neil Irwin.

United Technologies’ decision is of course an outrage, any way it’s looked at.  How can a major and very profitable corporation dare to only enrich its executives and shareholders, but not benefit its employees?  We know why.  Big Business has succeeded in reducing tax rates for the highest income tax brackets, and granting major loopholes for corporations to shelter their profits (both domestically and overseas) since the late 1970s, with the deregulation of whole industries and globalization of the workforce.

“American workers are reaping fewer of the gains of a growing economy in the form of pay and benefits,” said Irwin. “Shareholders are reaping more in the form of corporate profits. That shift has been one of the most important economic stories of the past several decades, and it’s the key to understanding stagnant wages for middle-class workers and a soaring stock market in the last quarter-century.”

It is why corporate profits’ share of national income soared to a record 14.2 percent in the middle of 2014, the highest in history, and only now is beginning to decline to 12.1 percent by the end of 2015, reports Irwin, as we edge closer to full employment.

 

Graph: Econoday

            This graph shows what corporations haven’t done with their profits, here called nonresidential investments, as a percentage of GDP growth.  The largest negative component of Q1 Gross Domestic Product (up just 0.5 percent in initial estimate) was business spending as nonresidential fixed investment.  It fell 5.9 percent for a second drop in a row. Business spending had been a plus for GDP until the last two quarters.

Instead, corporations in particular have been using their record profits to enrich their execs and shareholders, as I’ve said.  This is while consumers are still spending, which should boost nonresidential investment, since consumers make up some 70 percent of economics activity these days.  Personal consumption expenditures rose at a 1.9 percent annualized rate vs rates of 2.4, 3.0, and 3.6 percent in the prior three quarters (when GDP growth was higher).

The good news is that businesses are still hiring, but mostly in the lower-paying service industries, as higher-paying manufacturing jobs continue to move overseas.  So Bernie and The Donald are right in calling out U.S. corporations.  How is it benefiting American workers?  Stay tuned.  Maybe the outcome of this presidential election will help to answer that question.

Harlan Green © 2016

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