Why Brexit?

Financial FAQs

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit’s fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries.  And it may lead to a breakup of the Eurozone.

It was a real fear—that eastern Europeans would deprive Britons of jobs by migrating from countries whose wages were lower. Great Britain’s minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

Graph: Trading Economics

So there was good reason for the Brexit vote. Great Britain’s unemployment rate only came down to 5 percent in 2016, after hovering at 8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain’s Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. He was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron’s austerity policies were instituted in the Conservative Party’s 2010 ascent to power.

“Austerity – which has affected the living standards of many working people – was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU – at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership – to take on disproportionate significance.”

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

Graph: Slate.com

“Since the global turn to austerity in 2010, said Krugman in the Guardian, “every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.”

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan—some $17 billion in loans and grants—one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven—that is, cancelled. But are there any such leaders today that might help Greece and Portugal, at the very least? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany under the Marshall Plan, in which the US gave that $17 billion – around $160 billion in today’s values – in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country’s entire economic output in 1950 and laid the foundation for Germany’s fast post-war recovery.

If we had such leaders today, could it have prevented Brexit and the possible breakup of the Eurozone—and maybe the European Union, as well?

Harlan Green © 2016

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

Holiday Cheers--Consumers Feeling Happier!

Popular Economics Weekly

It’s back to school time, and consumers are feeling the holiday spirit already. Americans in September were most optimistic about the economy since the summer of 2007, in part because of a happier view of the U.S. labor market. And coupled with rising wages, could mean a very good holiday season for businesses.

The index of consumer confidence climbed to 104.1 this month from 101.8 in August, the Conference Board said Tuesday. That’s well above the 99.3 forecast of economists and it marks the highest level since August 2007, just a few months before the onset of the Great Recession.

The Conference Board says it is about better job security, but I believe rising wages are a better reason for optimism. The present situation index, a measure of current conditions, climbed to 128.5 from 125.3. That’s also the highest level since August 2007.

“Consumers’ assessment of present-day conditions improved, primarily the result of a more positive view of the labor market,” said Lynn Franco, director of economic indicators at the board. “Looking ahead, consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects.”

But there is also new data showing middle-class household incomes growing at the fastest rate since the recession, which seemed to confirm that a recovery is finally touching the lives of ordinary, especially middle-class Americans.

This may shake up retail sales that have also been in a summer swoon, because the largest wage growth is occurring in the lowest income brackets that have to spend most, if not all, of their incomes to maintain a decent standard of living.

Graph: Marketwatch

This could largely be due to the rise in the minimum wage in some large cities, of course. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5 percent, and the number of people in poverty fell by 3.5 million, says the Census Bureau. The threshold for a family of two adults and two children to be considered living in poverty was $24,036. 

Rising consumer confidence is a good sign for continued economic growth, needless to say. But will it be enough to get us out of the 2 percent GDP growth rate of late? We will actually need much more, like more capital expenditures that have been cut back during the years when budget cuts were the priority, rather than productive investments.

Harlan Green © 2016

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

When Will (Housing) Selling Season End?

The Mortgage Corner

It’s already October and the housing market continues to boom—even after the kids are back in school, the usual end of the sales season. Sales of newly-constructed homes dropped 7.6 percent in August, though they beat forecasts. New home sales ran at a 609,000 seasonally adjusted annual rate, the Commerce Department said this morning. That was 20.6 percent higher compared to a year ago. And July’s number, previously reported as 654,000, was revised upward to 659,000, marking the highest total since late 2007.

 Graph: Calculated Risk

So despite the recent softness, housing sales are still climbing, thanks in large part to Janet Yellen’s Fed, which keeps postponing the inevitable next rate hike. The real problem causing the current slowing in sales is lack of inventory.

This graph compares the monthly supply of single-family homes, at 4.4 months in the last two reports, with resales of single-family homes, which came in at 4.70 million in August. When including condos, supply on a monthly basis is at 4.6 months with 3.3 percent fewer resales available, at 2.04 million from July's 2.11 million.

The real strength of this year's housing sector is on the new home side. Housing starts and permits did fall in August, down a sharp 5.4 percent for starts to a 1.142 million annualized rate and down 0.4 percent for permits to 1.139 million. But permit growth for single-family homes, which is a central indication for housing demand, bounced back 3.7 percent from a weak July to a 737,000 rate which, as seen in the red line of the graph, is about as good as it gets, says Econoday.

“The August reading represents a one-month blip in what has been a long-term, gradual recovery,” said NAHB Chief Economist Robert Dietz. “On a year-over-year basis, single-family starts are up 9 percent while multifamily construction continues to level off at a solid level as that sector seeks to find a balance between supply and demand.”

And prospects for ongoing strength in the new home sales report are very solid based at least on the home builders' housing market index which is up a very sharp 6 points this month to 71, a level last matched in October last year.

So the only thing that seems to hold back housing sales is the lack of supply, as we said, and that is due to builders having problems finding construction workers in a near fully-employed economy. What could be better? The surge in new condo sales is a sign that more affordable housing is coming on line, which should help the first-timers, who comprise just 31 percent of existing-home sales at present, down from the 40 percent during more normal times.

Harlan Green © 2016

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

Popular Economics Weekly

Janet Yellen’s Fed meets again this midweek to decide whether to raise short term rates. It probably won’t happen, because they can’t decide if the US economy is ‘half-full’—i.e., still growing enough to boost inflation—or ‘half empty’, which means the economy is barely growing.

A terrific New York Times conversation between two extraordinary women, Senator Elizabeth Warren and Tracee Ellis Ross, actress and daughter of Diana Ross, brought out what is at stake in this election between the Haves and Have-nots, and best describes the current political debate.

“Go listen to those guys on the floor of the Senate talking about people who are losing their homes,” said Senator Warren, “describing them like you’d talk about furniture that should be tossed out. It’s a “they” that’s so far away.”
“But it’s not just in politics, it’s everywhere,” said Ms. Ross. “This “otherness” that’s all of a sudden part of our culture. People grabbing to what’s theirs out of fear it might be taken away.”

Yet The Federal Reserve has said most recently household net worth rose to $89.06 trillion in the second quarter, a rise of $1.07 trillion, or 1.2 percent to a record level as a percentage of Gross Domestic Product. The gains were almost equally split between the $452 billion rise in equities and the $474 billion advance in the value of real estate. So even middle-class homeowners are benefiting from the current recovery.

Graph: Marketwatch

The fear mongers, such as Donald Trump, would have us believe the economic pie is fixed, a zero-sum game, in Senator Warren’s words, in which the wealthiest hoard their wealth in order to spend it on themselves, for themselves. (But) “That was not America. We were building an America that said, “If we educate all our kids, we”ll actually make more (of everything),” says Warren.

New data showing middle-class household incomes growing at the fastest rate since the recession seemed to confirm that a recovery that’s remained slow and uneven is finally touching the lives of ordinary, especially middle-class Americans. So there is more of the ‘pie’ being created, not the zero-sum that Trumpeteers would have us believe.

Graph: Marketwatch

It is also why so many seem to believe Trump’s blame-game, which wants to “blame the immigrants, blame women, blame people who have different religious beliefs than you, blame people who aren’t the same color as you,” says Warren. “Because if everyone turns on each other—then the same old system that keeps billionaires on top stays right where it is.”

In fact, this explains the almost eternal struggle between the Haves and Have-nots, as well. Capitalism, the system that Adam Smith described best in his 1776 book, The Wealth of Nations, created today’s wealth by ‘paying it forward,’ by investing part of the profits in future growth.

And that is the real game of those Haves that support Trump and all his ugliness. They want to propagate the “same-old system”, the system that must build walls to make American great again.

Harlan Green © 2016

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

Poverty Level Down, As Incomes Surge

Popular Economics Weekly

Fewer Americans lived in poverty in 2015 and median incomes charted their first increase since the Great Recession, according to data released Tuesday by the Census Department. The official poverty rate fell 1.2 percentage points between 2014 and 2015 to 13.5 percent, and the number of people in poverty fell by 3.5 million, Census said. The threshold for a family of two adults and two children to be considered living in poverty was $24,036.

Graph: Census Bureau

And new data showing middle-class household incomes growing at the fastest rate since the recession seemed to confirm that a recovery that’s remained slow and uneven is finally touching the lives of ordinary, especially middle-class Americans.

Graph: Marketwatch

In fact, this could be the income growth needed to bring US back to 3 percent GDP growth; something that hasn’t happened since 2007 before the Great Recession. Millions of Americans escaped poverty last year and incomes rose at their biggest gainever, as the 6-year long economic recovery finally hit home for households. Median middle-class wages surged 5.2 percent between 2014 and 2015, the Census Department said Tuesday, the first annual increase since 2007, just before the economy plunged into recession.

This is in large part due to almost non-existent inflation, which has not returned to even the Fed’s 2 percent target, hence the reluctance of Janet Yellen’s Federal Reserve to raise interest rates at all this year. But that may change, as rising wages also have an effect on inflation, since wages make up some two-thirds of product costs.

An even better way to increase growth is to invest more in what would grow our economy; like infrastructure, education, R&D, the environment, etc. That’s why productivity has ground to a halt, which is the main driver of future growth.

At least 43 companies plan to cut, or leave unchanged, their capital spending levels in 2016, while about 20 are increasing, according to a Reuters review of Standard & Poor's 500 companies that have given explicit early guidance.

However, Citibank seems to disagree. It’s mainly the energy sector that has cut back on new investments due to the slump in energy prices. This, however, is boosting growth in capex spending in other sectors, says Tobias Levkovich, Citigroup chief equity strategist. There's no reason to think stock buybacks, the current straw man for the lack of productive investment, are replacing capital expenditures. Rather, he said, they are complementing them.

"While misperceptions abound when it comes to companies allegedly not investing in their businesses and preferring to buy back stock instead, there is little corroborating evidence," Levkovich argued. "S&P 500 companies have had capital investment dollars ahead of the amount used for buybacks for more than four and a half years and capex has hit a record every year since 2011."

And a major reason for this is the low cost of capital is today’s low inflationary environment. So there is good reason to keep interest rate as low as possible, until we see signs of more normal GDP growth.

Harlan Green © 2016

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

Why Isn't It Easier to Qualify For A Mortgage?

The Mortgage Corner

It’s not getting any easier to obtain a mortgage. This is in spite of record low mortgage rates, as low as 3.0 percent for 30-year conforming fixed rates; as well as the appearance of so-called Alt-A, non-QM mortgages with 3 to 7 year, interest only, fixed rates that require 12 months personal bank statements to verify income.

According to a report from the Urban Institute that tracks mortgage availability among other housing issues, the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more “normal” lending period of 1999 to 2003, when less than 2 percent of the loans defaulted after 10 years.

By comparison, 12 to 13 percent of the mortgage loans made at the height of the housing bubble between 2006 and 2007 defaulted within 10 years of their origination, the Urban Institute said in August, citing Fannie Mae’s data. And that was mostly due to the Great Recession and loss of some 8 million jobs.

Graph: Calculated Risk/Black Knight

The Urban Institute noted that of Fannie Mae- and Freddie Mac-backed loans made after 2011 and through the first quarter of 2015, 69 percent of the borrowers had FICO scores better than 750. Between 1999 and 2003, only a third of people with such mortgages had a credit score that high. Less than 1 percent of loans that have been made after 2011 have defaulted, according to Fannie Mae’s data, the Urban Institute said, even for those borrowers with FICO scores under 700

Requiring higher credit scores is just one way lenders have made it more difficult to qualify. Fannie and Freddie also pile on points for scores above 680, which was a normal mid-score before the housing bubble, and in effect boosts the interest rate. For instance, just a 1 pt. cost add on for a score below 700 is the equivalent of a one-quarter percent raise in the rate.

Other problems are due to the reforms mandated by Dodd-Frank designed to protect consumers from predatory lenders, while a good idea, have made it much more difficult for lenders and slowed down the qualification time. This includes additional delays in closings for the slightest change in rates or points enacted due to the new TRID requirements (short for TILA/RESPA Integrated Disclosure) enacted last fall.

This has made lenders much more selective in granting mortgages. We are probably back to 1980s qualification standards when many fewer loans were granted—mostly by S&Ls that disappeared after the late 1980s banking scandals.

We are in a much better position today, 7 years after the Great Recession, in other words. The inventory of loans in negative equity positions dropped by 31 percent (1.5 million) in 2015, according to Black Knight. At a total of 3.2 million, or 6.5 percent of all homeowners with a mortgage, this represents significant improvement from the peak in 2010, but is still well above “normal” levels.

Graph: Black Knight

 Both the S&P Case-Shiller Home Price Index and Corelogic stats show home prices rising as much as 10 and 11 percent in Portland and Seattle, respectively, in its latest 3-month averaged, same home survey, and 5-6 percent nationally on average.  This will continue to bring back housing values and lower negative equity in homes.

So there’s no reason to continue to be as cautious as mortgage lenders are today.  There is of course the political brouhaha over whether Fannie and Freddie should become private corporations again, and so separated from US Treasury control.  With their future unclear, these entities that guarantee more than 60 percent of all mortgages make lenders doubly cautious about qualifying younger, entry-level borrowers, in particular.

Harlan Green © 2016

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

A Record In Job Openings

Financial FAQs

Not only are Nonfarm payrolls averaging some 200,000 jobs per month this year, but the Labor Department’s job openings and labor turnover survey showed 5.87 million openings, an all-time high, while hires increased to 5.23 million from 5.17 million in June. Businesses are creating jobs at a much faster rate than they can be filled, in other words.

The number of job openings are up 1 percent year-over-year. Quits are up 9 percent year-over-year. Quits are voluntary separations, which usually means workers must have found better paying jobs.

Graph: Econoday

The number of people quitting jobs voluntarily was flat at 2.98 million, but that’s still up substantially from the depths of the recession, which signals more worker confidence in the ability to find another job, as I said.

Less heartening was yesterday’s ISM’s Non-Manufacturing (i.e., service sector) survey for July, down 4 points to 51.4. This is the lowest rate of composite growth for this sample of the whole cycle since February 2010. But that may be a fluke, as new orders in past months were as high as 60 percent. It could be a catch-up month, in other words, as businesses sell off past months’ inventories.

Graph: Econoday

This should also keep the Fed from raising interest rates until at least December, since the jobs report of last week was a letdown, as well. The composite score is no fluke, says Econoday, with new orders for service sector products falling nearly 9 points to 51.4 for their lowest score since December 2013. New export orders are a particular disappointment, also down a steep 9 points and in contraction at 46.5 which is also the lowest score since December 2013. And backlog orders are also in contraction, down 1-1/2 points to 49.5.

Moody’s Investors Service, the bond rating firm, doesn’t see this lull as more than a blip, at least. The U.S.’s Aaa credit rating is safe no matter who wins the presidential election, according to Moody’s in a new report on Wednesday.

“The outcome of the forthcoming presidential election will not impact the Aaa stable credit rating of the United States, regardless whether Donald Trump or Hillary Clinton is elected,” the report says. “This is because the U.S.’s rating reflects the country’s very high degree of economic, institutional and government financial strength and its very low susceptibility to event risk,” says Moody’s, naming the four factors in its sovereign bond rating methodology.

What to make of the current weakness? It could be a summer lull, as businesses wait for the results of Brexit negotiations, the Presidential election, and maybe even China’s growth to resume.

Harlan Green © 2016

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

A Half-Full Jobs Report

Financial FAQs

Nonfarm payrolls rose a lower-than-expected 151,000 in August with revisions to July and June at a net minus 1,000, reported the Bureau of Labor Statistics. I would call this a half-full employment report in an economy that is not too hot, or too cold. The unemployment rate held at 4.9 percent with modest increases on both the employment and unemployment.

Earnings are very soft in this report, up only 0.1 percent in the month for a year-on-year plus 2.4 percent which is down a sizable 3 tenths from July and isn't pointing to any wage-hike flashpoint. And the workweek is down, at 34.3 hours with July revised 1 tenth lower to 34.4.

Graph: Marketwatch

Earnings were at the bottom end of wage growth, because bars and restaurants added 34,000 new employees to lead the way in hiring. And the number of social workers also rose by 22,000, an unusually large increase, both low-paying service sector jobs. Retail also added 15,100 jobs in a sign that consumer spending is holding up.

Consumer spending last month was lifted by a 1.6 percent surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.4 percent, but outlays on non-durable goods slipped 0.5 percent (such as food and clothing).

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 6.1 million in August. 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 the manufacturing sector is showing signs of growth in Q3, even though the ISM’s manufacturing index fell below 50 percent in August for its first contractionary sub-50 reading since February, at 49.4 a more than 3 point decline.

Graph: Econoday

Manufacturing, which accounts for about 12 percent of the economy, remains constrained by the lingering effects of a strong dollar and weak global demand, which have crimped exports of factory goods. A collapse in oil drilling activity following a plunge in oil prices has also squeezed manufacturing by undermining business spending, leading to weak demand for heavy machinery. In addition, a U.S. inventory correction has resulted in factories receiving fewer orders.

This may be temporary, however, as factory orders surged 1.9 percent in July for the best gain since October last year, after monthly declines of 1.2 and 1.8 percent in May and June. Orders for core capital goods (nondefense ex-aircraft) were especially strong in July, up 1.5 percent following June's 0.5 percent gain in readings that upgrade what has been a very soft outlook for business investment. Aircraft, which is always volatile in this report, is July's biggest plus, surging 90 percent in the month. But vehicles are a negative in the report, down 0.5 percent.

We therefore see mixed results for Q3, as businesses seem to be waiting for the various elections in November that will determine Congress, as well as the President. Business shouldn’t wait, however, as the US is in the best position to profit from uncertainty in the EU and elsewhere, regardless of who wins.

And there are still 7.8 million unemployed workers and 6.1 million part timers that would prefer to work fulltime, which means a half-full economy that still has room to grow.

Harlan Green © 2016

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