Thursday, July 20, 2017

Financial FAQs

The Bureau of Labor Statistic’s JOLTS Job Openings and Labor Turnover Survey out Tuesday showed a huge boost in hiring and shrinkage of available jobs. What to make of it with almost nonexistent inflation, and the Fed’s Janet Yellen still making noises about raising interest rates?

Job openings fell back 5.0 percent to 5.666 million in May from 6 million, and hiring shot up 8.3 percent at 5.472 million from 5 million in April. So the number of net new job openings shrank from 1 million to a mere 194,000, while more than 400,000 new jobs were created! This is big news, and sets a record for this series while the number of job openings are the second lowest of the year.

Meanwhile, Janet Yellen can’t seem to make up her mind on the direction of economic growth in her latest congressional testimony. So she won’t commit to further rate hikes at the moment, which without growing inflation would slow growth, rather than be a sign of inflation (and growth) ahead.
“As I’ve said on many occasions, the new normal with respect to what level of interest rates is neutral appears to be rather low, so we have raised the federal-funds rate target. I believe policy remains accommodative.”
In what is one of the very weakest 4-month stretch in 60 years of records, says the Census Bureau, core consumer prices could manage only a 0.1 percent increase in June. This is the third straight 0.1 percent showing for the core (ex food & energy) that was preceded by the very rare 0.1 percent decline in March. Total prices were unchanged in the month with food neutral and energy down 1.6 percent.


The JOLTS report looks like employers’ job openings are finally catching up with their hiring. Other movement in this report is a 1 tenth rise in the quits rate to 2.2 percent which hints perhaps at worker confidence and willingness to switch jobs which may be a positive for wage.

Such a strong jobs report should mean wages are about to rise. At least the Fed believes so, but it ain’t yet happening, no matter what Dr. Yellen says. Wages have been at 2.5 percent over the past 2 years; just enough to pay current bills, but not to boost retail sales, a major component consumer spending, hence GDP growth.

Retail sales fell an unexpected 0.2 percent in June. This follows a revised 0.1 percent decline in May and a revised 0.3 percent gain for April which proved to be the quarter's only respectable showing.
Econoday says it “…shows wide weakness with vehicle sales coming in with a marginal 0.1 percent increase, the same for furniture and also electronics & appliances. Declines include food & beverage stores, down a sharp 0.4 percent, and department stores down 0.7 percent following the prior month's 0.8 percent plunge.”
So where is the inflation? Economic growth is still weak because demand is weak and maybe declining. This is worrisome.

Today’s CPI retail inflation report should convince Dr. Yellen that no further Fed rate hikes are warranted. Annual inflation has increased just 1.6 percent; 1.7 percent without volatile food and energy prices. And we have June’s unemployment report with 222,000 new payroll jobs, another sign of full employment. (It is seasonally adjusted, which is why it differs from the JOLTS numbers.)

Then there is the fact that interest rates aren't rising.  The 10-year Treasury yield is still at 2.26 percent, which would normally signal an incoming recession.  Let us hope not, since there are still jobs available and we have to first see wages rising!

Harlan Green © 2017


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Housing Construction Rebounds, For How Long?

The Mortgage Corner

The Conference Board’s Index of Leading Indicators (LEI) that predicts future growth says it is being boosted by a rebound in housing starts, which means more badly needed new homes being built. Its June report posted a 0.6 percent gain. Permits had been soft through most of the spring before gaining sharply in this week's housing starts report.

But there’s concern over how long this might last, though I predict full employment and the prospect of low interest rates for the rest of this year could prolong the trend.

Starts for all homes jumped 8.3 percent in June to a 1.215 million annualized rate with permits up 7.4 percent to a 1.254 million rate. As weak as the details were in the prior report, is how strong they are in the latest. Single-family permits rose a huge 4.1 percent to an 811,000 rate with multi-family permits up 13.9 percent to 443,000. Permits are strongest in the Midwest followed by the West and South.


Actual starts for single-family homes rose 6.3 percent in June's report to 849,000 with multi-family up 13.3 percent to 366,000. The Northeast is in front followed by the Midwest. Starts in the West are up slightly and are down noticeably in the South, probably due to all the errant weather, including floods and a few tornadoes.

The LEI tracks 12 indicators of growth, including interest rates spreads and hours worked. The fact that housing permits provided the biggest boost to the LEI means that housing is probably a leading indicator of future growth as it has been in past recoveries. So why has it taken so long for housing construction and sales to catch fire? The busted housing bubble left millions of vacant homes first had to be reabsorbed into the housing market.

Then all those homeowners that lost their homes had to reestablish their credit bonafides. This is while Fannie Mae and Freddie Mac haven’t sufficiently lowered their credit and loan qualifying requirements that would add some 1 million prospective homebuyers to the list of eligibles, according to the Urban Institute.

Then there is the millennial generation saddled with all that student debt that the current administration doesn’t want to forgive or amend terms. The list goes on and on, in other words, for what needs to be done to make housing more affordable.

The NAHB, or National Association of Home Builders, also puts out a builder sentiment index that attempts to predict future activity, but which may lag housing starts data. The report cites the effects of high lumber costs on home builders in showing construction, for instance, but shows slower activity evenly divided among the 3 components in its index.

Higher future sales still lead for 73 percent of respondents with higher present sales at 70 percent of those polled. But only 48 percent report higher traffic, which is below the breakeven 50 percent for the 2nd month in a row. Regionally, the West remains the strongest for homebuilders followed by the Midwest and South and the Northeast far behind. So is optimism leading reality, if fewer buyers are lookng?

These are still terrific numbers, however, and it looks like lower interest rates are here for the rest of this year, with the conforming 30-year fixed rate holding at 3.50 percent for one origination point in California.

Why are rates still at such record lows with the Fed having already raised their overnight rate 3 times to 1.25 percent? Consumers aren’t borrowing more, which would increase loan rates.

Graph: Econoday

For instance, retail sales are still stuck below what is considered to be a robust demand for more goods and services. Annual sales are under 3 percent for the first time since August last year with the 3-month average below 4 percent. And 6 percent annual sales increases have been the norm during past recoveries.

This really means a certain middle and upper segment of income earners are doing well, but not the rest of US. The boosting of the minimum wage in the more prosperous cities and states is a start, but that is happening in only a handful of states, as I’ve said.

Much more needs to be done, in other words, to help the still record income inequality that haunts this laggard recovery from the Greatest Recession since the Great Depression.

Harlan Green © 2017

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Wednesday, July 12, 2017

Minimum Wage Raises Should Boost Spending, Employment

Financial FAQs

Minimum wages are about to rise in several cities, and eventually states. San Francisco and Los Angeles minimums are rose last weekend to $14 and $12 per hour, respectively, and ultimately to $15 per hour by 2021. But Seattle, Washington, Washington D.C., Chicago, Maryland, and New York will be raising their minimum wages, as well.

This should finally boost incomes, and maybe consumption for the rest of 2017. Central Banks are beginning to raise their rates, as well, which means they see stronger growth ahead.

But this all depends on the consumer, as businesses won’t spend and boost hiring until they see consumers spending more. Friday’s unemployment report told us we see growing demand ahead. The various QE programs and extremely low inflation have kept long term rates below 3 percent for several years because consumer incomes have been trending down lately, as I’ve said.
 
Graph: Econoday

For instance, personal income has been struggling, posting only a 3.5 percent year-on-year rate the last two months with the trend line pointing to just under 3 percent, reports Econoday. And that has kept spending in a narrow 4-5 percent range, as well.

Last week’s ISM service sector activity report could mean more hiring ahead, since the service sector employs roughly two-thirds of American workers. Its non-manufacturing survey continues to report extending strength with the index up 5 tenths in June to 57.4. New orders, at 60.5, remain unusually strong with backlog orders, at 52.0, also rising in the month. New orders for export, at 55.0, are also up solidly though to a lesser degree than domestic orders.
“The non-manufacturing sector continued to reflect strength for the month of June. The majority of respondent’s comments are positive about business conditions and the overall economy," said Anthony Nieves, Chair of the Institute for Supply Management Non-Manufacturing Business Survey Committee.
But this is anecdotal evidence only, and actual government statistics don’t reveal increased activity yet. Factory orders show manufacturing activity still rising at 5 percent, but autos and aircraft orders are down now, after surging earlier this year.


Manufacturing was once known to have high paying jobs. That's old history with pay, now at about $26.50, only 25 cents above the average. And payroll growth has also been slow with this trend also fighting to stay above zero.
“Backlogs are the bottom line and, despite all the confidence in all the private surveys, they are still under water, says Econoday. “Until unfilled orders pile up, gains for factory payrolls and wage will be limited. Despite a big jump in ISM's employment index, actual factory payrolls rose only 1,000 in Jun
So while jobs continue to be filled, wages aren’t rising in tandem, and that is another sign that there are still 6 million workers looking for jobs. Until that happens we cannot say we have reached full employment.

Harlan Green © 2017


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Tuesday, July 11, 2017

Great Employment Report

Popular Economics weekly

The U.S. created 222,000 new jobs in June as hiring accelerated in the spring, showing that companies are still finding ways to add staff despite a growing shortage of skilled workers.

The increase in new jobs was the largest in four months and second biggest increase of the year. Hiring was also stronger in May and April than previously reported, said the Bureau of Labor Statistics.

The most important take from the labor report was that a total of 361,000 new workers entered the labor force, which is why the unemployment rate ticked up slightly from 4.3 to 4.4 percent.

Also good news was that governments hired 35,000 more workers. It was a sign that state governments are financially healthy again, and beginning to spend on needed infrastructure repairs. How are they doing this?

California is one of seven states raising gas taxes (since the federal government won’t) to pay for the backlog of work that needs to be done, and at a time of record low gas prices. It will also boost economic growth. They aren’t waiting for congress and the White House to make up their minds on spending priorities, in other words.

California Gov. Jerry Brown just signed into law its increase in higher fuel taxes and vehicle fees, which gives the state an estimated $52 billion more money to help cover the state’s transportation needs for the next decade.

The money comes largely from a 12-cent increase in the base gasoline excise tax and a new transportation improvement fee based on vehicle value. Other money will come from paying off past transportation loans, Caltrans savings, and new charges on diesel fuel and zero-emission vehicles.

“The bulk of the revenue raised will go to various state and local road programs, as well as public transit, goods movement and traffic congestion,” said the Sacramento Bee announcement.


Seven states raising the gas taxes, according to The Institute on Taxation and Economic Policy (ITEP). Indiana, Montana and Tennessee lead the raises. California’s increase just kicked in July 1. Iowa and Nebraska, meanwhile, are the only states to lower their gas taxes.

April and May employment were also revised higher by 47,000 jobs, in the BLS unemployment report, “which signals that the apparent weakness in past months was just a blip due in part to late data reporting,” said Danielle Hale, managing director of housing research at the National Association of Realtors, as reported by Marketwatch.

It is, all in all, a very optimistic employment report. Government spending is the biggest plus, as that has been the most significant lack in the eight years of this recovery from the Great Recession. All those infrastructure upgrades are needed, right?

I have cited several times that of the more than 600,000 bridges in the U.S., at least 200,000 are more than 70 years old and need immediate repairs, not to speak of our electrical grid that is as old. In fact, not much has been done to our transportation network, in general. Most of our highways are more than 70 years old, as well.

This should be a no-brainer. Productivity and hence economic growth depends on these repairs and upgrades. Washington has been unable to do the needed work because it is locked in political gridlock, so it’s great news that the states want to take up the slack.

Conservatives can certainly agree on that.

Harlan Green © 2017

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Friday, June 30, 2017

Interest Rates On the Rise!

Financial FAQs

Central Banks everywhere seem to be following our Federal Reserve in selling bonds they had accumulated to keep interest rates low for so long—in fact, since the end of the Great Recession. They also seem to be crossing fingers that it won't hurt growth.

The 10-year Treasury yield rose 1.8 basis point to 2.285 percent, contributing to a 14 basis point jump over the past week. The 30-year bond, or the long bond, gained 1.7 basis point to 2.831 percent, according to Marketwatch.

Our Fed Chair Janet Yellen took the lead in calling for more Fed rate hikes this year at the last FOMC meeting; as well as beginning to sell some of the $4.5 billion in Treasury bonds it had accumulated during the various Quantitative Easing programs first initiated by former Fed Chair Ben Bernanke.

The QE programs and extremely low inflation have kept long term rates below 3 percent for several years. The Fed’s actions in tightening credit mean they see higher inflation and growth ahead. But so far it’s just words. They are hoping that talking up interest rates will have the effect of boosting growth, for some reason.

I don’t see how, since consumer spending and business investment are still at post-recession lows. First quarter GDP’s final growth estimate rose from 1.2 to 1.4 percent and it’s averaged 2 percent annually since 2009, the end of the Great Recession. That’s the reason for the various QE bond buying programs that have taken so many bonds out of the market.



So the question is, as the Fed begins to sell them back into the bond market will interest rates rise? They are taking a gamble, since consumers aren’t spending as they should, and inflation is falling, rather than rising—another sign of weak demand.

Graph: Econoday

Real disposable personal income has fallen precipitously since 2014, and the Fed’s preferred PCE inflation index is down to 1.4 percent annually. That should be a danger sign, rather than a sign of higher growth.

Maybe the Fed is looking at consumer optimism, still holding at November post-election highs. Both the University of Michigan sentiment survey and Conference Board’s confidence survey show extreme optimism about future prospects.

Why such optimism? We are nearing full employment, or perhaps there is the hope that Republicans may be able to pass an infrastructure bill that would boost state and federal work projects.

But then Congress has to begin work on legislation that both Republicans and Democrats can agree on. They shouldn’t wait on much more partisan legislation that isn’t likely to pass—like reforming health care and cutting taxes, which no one seems to be able to agree on.

Harlan Green © 2017

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Thursday, June 29, 2017

What Healthcare System Do Americans Want?

Popular Economics Weekly

This is a quiz. What country had the second-highest mortality from noncommunicable conditions — like diabetes, heart disease or violence — and the fourth highest from infectious disease? Also, from adolescence to adulthood to old age, what country has the highest chance of dying an early death?

The United States of America—where else, since the U.S. is the only developed country in the world without universal health care? A recent New York Times Business Insider article by Eduardo Porter highlighted a recent study by the Institute of Medicine and the National Research Council of 16 of the richest countries in the world that set out to assess our nation’s health.

The results are devastating, and show how far America has fallen behind in caring for its citizens. And the new Senate version of repeal and replace Obamacare strips even more benefits and money from Obamacare

This problem should have nothing to do with ideology, and whether access to affordable health care should be a privilege or a right. Too many Americans are dying of drug overdose and violence. Too many Americans suffer from depression, a major cause of drug abuse.
And too many Americans are obese, making them less productive and more prone to accidents in the workplace. “The United States ranks in the bottom fourth among the 30 industrialized nations in the Organization for Economic Cooperation and Development in terms of days lost to disability,” says Porter. “Women will lose 362 days between birth and their 60th birthday; men about 336. Mental health problems like depression will account for most.”

But all of these statistics hide the real problem—rampant income inequality. The U.S. ranks 106th of the 149 countries in income inequality as ranked by the CIA’s World Factbook; with a Gini inequality index of developing countries like Peru and Cameroon. Finland and the Scandinavian countries are at the top of equality, Germany and France are 12th and 20th, respectively. The higher the index, the greater the gap between wealthy and poorer citizens of a country’s population.

And the poorer the person, family, or community, the more prone to illness and drug use is that person, or family, or community. This is where the Senate version of repeal and replace Obamacare hurts the most—in the poorer red states that voted for President Trump.
“What’s more, the United States’ higher tolerance of poverty undoubtedly contributes to higher rates of sickness and death,” says Porter. “Americans at all socioeconomic levels are less healthy than people in some other rich countries. But the disparity is greatest among low-income groups.”
Finally contributing to our health crisis is the incredible amount of violence—both due to guns (33,000 per year killed by guns), workplace accidents, and drug abuse, that a universal health care system could treat via mental health coverages as well.

In other words, there are much higher costs because we don’t have a healthy healthcare system and we the citizens are paying those costs, rather than those that are pushing the $1.1 trillion in tax cuts that Obamacare utilizes to pay for many of those costs.

Harlan Green © 2017


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Tuesday, June 27, 2017

Housing Shortage Continues

The Mortgage Corner

It was very good news that new-home sales rose nearly 3 percent in May to a 610,000 annualized rate. The report, always volatile, included a big upward revision to April which however, at 593,000, is still the year's low. But that isn’t close to the 1 million plus new homes built annually during the housing bubble.

Existing home sales also proved better than expected, up more than 1 percent to a 5.620 million rate. Low unemployment and low mortgage rates are major positives for housing. But that only exacerbates the shortage of homes on the market.

Graph: Econoday

And that doesn’t even take into account the 1 million prospective homebuyers who could buy a home, if Fannie and Freddie would ease their qualification standards to that which prevailed throughout the last 2 decades. But because the U.S. Treasury won’t release its stranglehold on supervision of the GSE’s, for fear that taxpayers might again be at risk if another housing bubble materializes, there is little prospect of this aid coming to first-time and entry-level buyers, in particular, that must then rely on the more expensive FHA alternative.

This is while the housing shortage continues, even though prices are up a median $252,800 for resales and $345,800 for new homes, a 6 percent rise, whereas household incomes are rising just 2.4 percent annually. The FHFA house price index is another of the week's highlights, up sharply in April to a year-on-year rate of 6.8 percent.

This should boost housing construction, but housing starts are also lagging. And we are hardly in bubble territory. Bubbles occur when there is too much of something—whether housing, or credit—so that the resulting oversupply causes prices to plummet at they did during the Great Recession.


Calculated Risk shows the “Distressing Gap” that occurred with the housing crash, when oversupply of distressed housing caused new-home construction to plummet. It hasn’t yet recovered, but “in general the ratio has been trending down since the housing bust, and this ratio will probably continue to trend down over the next several years,” says Calculated Risk’s Bill McBride.

The National Association of Home Builders reported builder confidence in the market for newly-built single-family homes weakened slightly in June, down two points to a level of 67 from a downwardly revised May reading of 69 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

New-home inventories remain too low to satisfy surging demand that comes from low interest rates and full employment. Full employment is a two-edged sword, however, as it also means labor shortages and unfilled jobs. Where are those workers, when just 2 million are currently employed in construction, and there were as many as 6 million employed during the housing bubble? It could be the recession hangover, such as memories from the housing crash that has discouraged many from re-entering the workforce. Hence the 4 percent drop in labor participation rate since the end of the Great Recession.
“As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector,” said NAHB Chief Economist Robert Dietz.
Builders can’t keep up with the housing demand, in other words—especially now that the Millennials, those between the ages of 18 to 36, are coming into adulthood and outnumber all other population groups. A good percentage will want to own a home someday as their primary asset.

he younger baby boom generation dominated in 2010.  By 2016 the millennials have taken over.  “The six largest groups, by age, are in their 20s - and eight of the top ten are in their 20s,” reports Bill McBride and the U.S. Census Bureau

Harlan Green © 2017

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

Thursday, June 22, 2017

Why Home Sales Rising Fast, Construction Lagging?

The Mortgage Corner

We are once again in a housing conundrum. May Existing-home sales just surged 1.1 percent to 5.62 million units, after falling for several months. And housing starts fell for the third straight month an unexpected 5.5 percent in May to a far lower-than-expected annualized rate of 1.092 million with permits for future construction likewise very weak, down 4.9 percent to a 1.168 million rate.

So where is housing to come from with soaring prices, historically low unemployment, and interest rates? At the current sales rate, it would take 4.2 months to clear inventory, down from 4.7 months one year ago. That means a severe shortage of available housing.

The median number of days homes were on the market in May was 27, the shortest time frame since NAR began tracking data in 2011. Housing inventory has dropped for 24 straight months on a year-on-year basis, reports the National Association of Realtors.

Graph: Econoday
"Home prices keep chugging along at a pace that is not sustainable in the long run," said NAR chief economist Lawrence Yun. "Current demand levels indicate sales should be stronger, but it's clear some would-be buyers have to delay or postpone their home search because low supply is leading to worsening affordability conditions."
There is declining affordability because incomes are not keeping up with rising home prices. The median existing-home price has risen 6 percent April-to-April, says the NAR, while median household income rose just 2.4 percent over that time.

The hottest housing markets with the shortest sales’ times in May were Seattle-Tacoma-Bellevue, Wash., 20 days; San Francisco-Oakland-Hayward, Calif., 24 days; San Jose-Sunnyvale-Santa Clara, Calif., 25 days; and Salt Lake City, Utah and Ogden-Clearfield, Utah, both at 26 days, said the NAR.
"With new and existing supply failing to catch up with demand, several markets this summer will continue to see homes going under contract at this remarkably fast pace of under a month," said Yun.
Affordability is becoming an acute problem, in other words. The majority of Americans and Canadians say their nations are not doing enough to address and solve affordable housing needs, according to just published Habitat for Humanity’s Affordable Housing Survey. Escalating costs remain a top barrier preventing families from accessing decent homes with affordable mortgages, the survey says.

One major barrier to homeownership cited among survey respondents: the high costs of rent. Eighty-four percent of survey respondents said the high cost of rent was preventing them from buying, followed by 75 percent who said obtaining a mortgage was proving to be a big barrier.

We know why obtaining a mortgage is still a high barrier, even with historically low interest rates. Fannie Mae and Freddie Mac, the major guarantors of residential mortgages are still in government conservatorship, which really means the U.S. Treasury Department is in charge, though the Federal Housing Finance Authority is supposed to be the supervisor. And because Treasury maintains taxpayer monies are still ‘at risk’, it won’t relax credit standards to allow more borrowers to qualify.

The median FICO credit score is still 750 for approved loans, whereas it was closer to 680 during the last decade. It was a much lower bar since most fully-employed Americans have some kind of late charge in their past. And easing the qualification standard could bring 1 million more homebuyers into the housing market, said the Urban Institute in a recent study.

We believe such strict qualification standards are because the U.S. Treasury Department doesn’t want to part with the cash flow from raking in all of their profits—some $5 billion in Q2—so that no capital will be left to cushion any downturn.

Why? Because Treasury Secretary Mnuchin says they are working on a plan to dissolve Fannie and Freddie and come up with something better. But Treasury has been promising the same thing since 2008, and then Obama’s Treasury in 2012 when it decided to put all their profits into the general fund. That amount paid to Treasure has now climbed to more than $271 billion, vs. the $187.5 billion it cost to take over Fannie ane Freddie, making them cash cows at the expense of prospective homebuyers.

We have still not seen an outline of what a future Fannie and Freddie organization might look like. Nor has Congress been able to agree on whether they should be returned to the private sector as stockholding corporations or in a form that more resembles highly regulated VA and FHA loan programs.

So Habitat For Humanity is right in calling for more government action to increase affordability options for home owners and prospective homebuyers.

Harlan Green © 2017

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Wednesday, June 21, 2017

Consumers Not Shopping Anymore?

Popular Economics Weekly

What has happened to second quarter economic growth? Economists had been predicting 3 percent plus GDP growth for Q2, but consumers are cutting back instead. Retail sales have fallen with inflation, not a good sign for demand, while consumer sentiment is barely holding onto the optimism after President Trump’s election. Maybe it’s because nothing is getting through Congress that Trump can sign into legislation.

Graph: Econoday

Econoday reports that consumers aren’t remaining very optimistic about present or future conditions; an indication there isn’t a quarter-end bounce. June's preliminary consumer sentiment index is 94.5, down from several months at the 97 level and the least optimistic reading since the November election. The current conditions component, which offers a specific gauge on month-to-month consumer spending, shows a similar decline.

Graph: Econoday

Lack of inflation is a serious indication that demand in general is weak, as I said. Consumer spending makes up 69 percent of GDP and has been this year's big flop, but the FOMC in its June statement said "household spending has picked up in recent months". Really? Consumer spending did rise 0.4 percent in April and 0.3 percent in March but that's no better than average. And the first piece for May spending, retail sales, fell 0.3 percent which is far below average.

The housing market seems to be holding up, as long as interest rates stay at historic lows. The 10-year Treasury bond yield is still hovering at 2.15 percent, and 30-year fixed rate mortgages are still below 4 percent.

Housing had been sliding but May's very solid 1.1 percent rebound in existing home sales to a higher-than-expected 5.620 million annualized rate is hopeful and will be covered in a following column. Today's report is mostly solid throughout and includes gains for single-family homes, up 1.0 percent to a 4.980 million rate, and also condos, up 1.6 percent to a 640,000 rate.

So what’s next?  Tomorrow the Conference Board’s Index of Leading Indicators may give us more signs of future growth, and new-home sales come out on Friday. Both are leading indicators, so stay tuned.

Harlan Green © 2017

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Thursday, June 15, 2017

Why Did Fed Raise Rates Again?

Popular Economics Weekly

U.S. growth cycles have averaged about 8 years since WWII, yet the Federal Reserve just announced they were raising their overnight rate for the third time—to 1.25 percent. It also forecast that the unemployment rate could fall further, and economic growth continue for another one to two years, before the inevitable downturn.

What is the basis for their very optimistic prognosis with this growth cycle already 8 years old, and as Goldman Sachs economist Jan Hatzius says 8 years has been the average length of recoveries since WWII? We have a 4.3 percent unemployment rate, and one million fewer workers were hired (5 million in May) than the number of job openings (6 million) in the Labor Department’s latest JOLTS report, so what comes next?

Graph: Hatzius-Goldman Sachs

Fed Chair Yellen said that because of the tight labor market, price pressures are more likely to intensify. The unemployment rate fell in May to a 16-year low of 4.3 percent amid widespread reports that businesses are running out of qualified workers to hire, as I said.

In some cases, firms have sharply boosted pay to attract or retain workers, and the Fed believes that is always a red flag for incipient inflation. “Conditions are in place for inflation to move up,” Yellen said in a press conference after the Fed action.

But inflation is nowhere in sight, nor are wages on average rising more than 2.5 percent, still to low to boost economic activity. The May Consumer Price Index was basically unchanged, which may be why retail sales fell in May, but are still rising some 5 percent. Retail sales aren’t corrected for inflation, so when prices fall, it can affect retail sales.

The annual CPI core rate without volatile food and energy prices is just 1.7 percent. The Fed just can’t seem to boost inflation, no matter how hard it tries to talk it up, so it has announced it will begin to sell its $4.5 billion cache of Treasury securities that were accumulated during the various Quantitative Easing programs that have driven interest rates to historic lows. The ten-year bond yield had sunk to an unheard of 2.11 percent, which is why mortgage rates are still at historic lows.

Republicans seem to want to improve the chances of another Great Recession with their passage of the Choice Act that rolls back all the Dodd-Frank regulations that are designed to prevent another Great Recession.

The New York Times just reported on its passage in the House last Thursday, “…a sweeping deregulation of the financial sector. It passed 233-186, with no Democratic support. One Republican, Walter Jones of North Carolina, voted no. This bill rolls back or weakens most of the protections put in place since the 2008 financial crisis through President Barack Obama’s Dodd-Frank Act.”

In their attempts to please Wall Street (how quickly they changed their tune once in power), they are doing everything in their power to remove any oversight, even putting the consumers main protection, the Consumer Financial Protection Bureau, back into the hands of those regulators that allowed the Bush era excesses to happen by looking the other way.

In their purview, the Lehman Brothers failure that started the panic and consequent Great Recession was “market cleansing”. Republicans are saying someone should be punished for the excesses, rather than those excesses be prevented with regulation, and it has to stockholders and homeowners (Lehman had funded all those liar loans without adequate collateral), rather than the banks which were bailed out by the Bush administration’s TARP program, and are now bigger than ever. So what happened to Too Big To Fail?

So the Federal Reserve seems to be operating in its own bubble of unreality. It is anticipating higher growth and inflation, whereas there are no signs of either. Or, it could be anticipating another downturn, and wants to be prepared for it by clearing out its portfolio of bonds. But in selling those bonds into the open market it will surely raise long term bond rates, and mortgages.

But in pushing up interest rates, it could in fact create the slowdown it seems to believe is about to happen.

Harlan Green © 2017

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Friday, June 9, 2017

What, Too Many Job Openings?

Financial FAQs

We are now seeing real evidence of the need for more working adults, if the US economy is to continue to grow. The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS report, said April job openings are nearly 1 million ahead of hirings in a widening spread pointing to skill scarcity in the labor market.

“Job openings totaled 6.044 million in April which is well outside Econoday's high estimate for 5.765 million and up from a revised 5.785 million in the prior month. Hirings totaled 5.051 million which is well down from March's 5.304 million with the spread between the two nearly 150,000 higher at 993,000,” said Econoday.
What to do about it, since infrastructure upgrades are needed to boost economic growth? Private industry has not increased capital expenditures on anything for more than one year, choosing to either hoard their increased profits, or invest overseas. Both state and federal governments have to increase their public works spending as well, which is not yet happening because states have to run on balanced budgets.
And many chose to cut taxes like Kansas in the belief that trickle-down economics was the conservatives’ answer to adversity; which has instead prolonged the pain.
The ultra-conservative Tea Party is in control of Congress and many states, in other words, and they have focused on tax cuts, such as those incorporated in the so-called repeal and replace Obamacare House bill that was passed without updating its CBO scoring, because up to 24 million could lose health coverage, while coverage costs would skyrocket.
The Center For Budget Policies Priorities (CBPP), a progressive think tank, has been asking states to boost their infrastructure spending for years:
“But rather than identifying and making the infrastructure investments that provide the foundation for a strong economy, many states are cutting taxes and offering corporate subsidies in a misguided approach to boosting economic growth.  Tax cuts will spur little to no economic growth and take money away from schools, universities, and other public investments essential to producing the talented workforce that businesses need.”


As I’ve reported in past columns, the American Society of Civil Engineers (ASCE) in its 2017 report card on the condition of America’s infrastructure gave U.S. infrastructure a D+ or “poor” rating.  The engineers estimated the cost of bringing America’s infrastructure to a state of good repair (a grade of B) by 2020 at $4.59 trillion, of which only about 55 percent has been committed. 

Improving roads and bridges alone would require almost $850 billion more than states, localities, and the federal government have allocated.  Schools need another $270 billion beyond what’s been invested. 

CBS News reports that the Trump plan specifies only $200 billion in new federal spending even as the administration's budget includes "enormous cuts to public investment," according to the liberal Economic Policy Institute. The administration also did not specify just where the remaining $800 billion would come from and how the spending increases would jibe with the huge cuts in infrastructure spending envisioned in its proposed budget. 

The question now is not only how will these projects be financed, but where will we find the workforce?

Harlan Green © 2017

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Monday, June 5, 2017

Republicans Are About to 'Make America Last'

Popular Economics Weekly

President Trump’s withdrawal from the Paris Accord on climate change is symbolic in more ways than one. In bringing back the white nationalist call to make America great again, he could set us back decades in bringing cleaner air and reducing global warming, not to speak of what would happen to economic growth.

In fact, he wants to Make America Last in the developed nations in caring for not only our environment, but economic growth as well. The agenda of Trump and his Tea Party supporters seem to want is to knock out the main pillars that grow the economy—a better social safety net (fewer workers lose work time), restriction of immigration and the importation of new workers needed for higher growth, as well as cutting huge chunks out of the budget for education and R&D, which are needed for a more educated workforce and the development of new products, the seed corn for future productivity and prosperity.

We currently have the second highest carbon emissions per capita after China, but could become the highest emitter if Republicans succeed in rolling back 30 years of environmental protection, becoming the country with the least amount of environmental protections.

Why leave the Paris Accord, when it is a voluntary accord to reduce carbon emissions? It was to help the coal industry, where Commerce Secretary Wilbur Ross is heavily invested in coal and has already made $millions with the 50 percent bumpup in coal stocks since Trump took office.

And the Koch Brothers $millions that were spent to elect Tea Party candidates is paying off as Trump initiated an immediate review of President Obama’s Clean Power Plan, which restricts greenhouse gas emissions at coal-fired power plants, the main vehicle for reduction of U.S. emissions that was promised in the Paris Accord.

Surrounded by coal miners, the president described that plan as a “crushing attack” on workers and vowed to nix “job-killing regulations. We’re going to have safety, we’re going to have clean water, we’re going to have clean air, but so many [regulations] are unnecessary, so many are job-killing,” he said.

The withdrawal process takes a total of 4 years, beginning in 2020 after the next congressional elections. It is totally voluntary, with all but 3 countries now on board, except the US, Nicaragua, and Syria.

But it’s symbolic in another way, as well. Trump and his Republican supporters seem to want to be left out of collective agreements of any kind, and this will hurt us economically as well as isolate US from future attempts to lower carbon emissions.

America will also be last in health care if Republicans succeed in repealing Obamacare, because Repubs want to slash spending on Medicaid and social security disability coverage, needed predominately by the poorer states that supported Trump. Why? So they can use the $1.11 billion is savings to pay for the repeal of the Obamacare taxes that benefit the wealthiest.

Need we say more of why the Trump Team wants to Make America Last? So their own wealthy supporters gain even more wealth, and Trump’s supporters—most of whom reside in the poorest states—will continue to suffer from his sleight of hand.

Harlan Green © 2017

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Friday, June 2, 2017

We Have Reached Full Employment!

Financial fAQs

The U.S. added a modest 138,000 new jobs in May and hiring earlier in the spring was weaker than initially reported, adding to evidence that the tightest labor market in years is making it harder for companies to fill open jobs. So is this as good as it gets for employment and jobs?

The unemployment rate dropped to 4.3 percent because 429,000 workers dropped out of the civilian labor force, while the number of employed fell by 233,000 in the Household survey—one of two reports put out today by the Labor Department.

This was the lowest unemployment rate since 2001, while in March the private payroll (or Establishment) jobs total was revised downward to 50,000, and April was revised downward to 174,000 for a total of 66,000 fewer jobs, according to the Bureau of Labor Statistics (BLS).


But a very good total of 2.23 million jobs were created over the past 12 months, yet there are 5.7 million unfilled jobs in April, according to the BLS JOLTS report. In fact 429,000 fewer looked for work, either because they couldn’t find the job they liked, or more women are leaving the workforce to raise families according to one survey. Jobs are going begging, in other words, which is another sign of full employment.

As recently as 1990, the United States had one of the top employment rates in the world for women, says a 2014 NYTimes Upshot article, but it has now fallen behind many European countries. “After climbing for six decades, the percentage of women in the American work force peaked in 1999, at 74 percent for women between 25 and 54. It has fallen since, to 69 percent today.”
The reason? The lack of maternity leave and other social programs that would support child raising. In a New York Times/CBS News/Kaiser Family Foundation poll of nonworking adults aged 25 to 54 in the United States, conducted last month in the same Upshot article, “61 percent of women said family responsibilities were a reason they weren’t working, compared with 37 percent of men. Of women who identify as homemakers and have not looked for a job in the last year, nearly three-quarters said they would consider going back if a job offered flexible hours or allowed them to work from home.”
So where do we go from here? What will draw those back into the labor force the approximately 6 million working age adults that no longer want to work at the moment? There is plenty of job growth in Health, Leisure and Hospitality, Professional and business services, and construction, since the housing market is still perking along.

Graph: Econoday

Maybe we should forget about that magical 3 percent GDP growth goal the Trump administration says we can reach with their proposed tax and regulation cuts. The US population isn’t growing as fast as during the baby boom and labor productivity is stuck in the 1 percent range, in part because businesses aren’t investing in new plants and equipment, as we said yesterday.

Harlan Green © 2017

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Wednesday, May 31, 2017

This is A Goldilocks Economy!

Financial fAQs

Economists have debated just what ideal economic growth should be, but the Federal Reserve does it for us. The Fed defines ideal growth as when we are at full employment with moderate inflation, inflation that says an economy isn’t overheating (Goldilocks’ porridge is too hot), or the economy is below its growth potential (it’s too cold).

Could we already be at that ideal of an economy that’s not growing too fast, or wants for jobs to be filled? We are at a 4.4 percent unemployment rate, the low of this 8-year growth cycle, and there are 5.7 million unfilled jobs in April, according to the Labor Department’s JOLTS report.

Maybe we should forget about that magical 3 percent GDP growth goal the Trump administration says we can reach with their proposed tax and regulation cuts. Our population isn’t growing as fast as during the baby boom and labor productivity is stuck in the 1 percent range, in part because businesses aren’t investing in new plants and equipment.

Graph: Econoday

But why should corporations invest more with weak Q1 2017 growth at 1.2 percent? Though second Quarter GDP growth may be picking up, which always seems to happen at this time of year. Consumer confidence is holding steady at an unusually strong level, 117.9 in May for the sixth straight reading over 110 and following a revised 119.4 in April and 124.9 in March which were the two best months of the expansion, reports the Conference Board.

So it’s been consumers that have held up this 8-year growth cycle, rather than corporations, which haven’t invested their record profits in expanded production; though profits are up 12 percent this quarter, after another record 22 percent surge in fourth quarter 2016.\


And consumer spending is showing signs of more life as well in April, as the consumer benefited from strong wage gains, kept money in the bank, and was an active shopper at least compared to the first quarter. If both confidence and spending continue to increase at these rates, then a 3 percent growth rate could be achievable for Q2. But that can only be short term without either higher productivity or population growth.

The key positive in the May report is jobs-hard-to-get which is a closely watched current assessment of the labor market. This reading pf the PCE index is down a very sizable 1.2 percentage points to a very low 18.2 percent for a new expansion best, reports Econoday. But inflation is still subpar with the core PCE inflation rate (without gas and food) rising just 1.5 percent.

This is not a good sign for future growth, as we need 3 to 4 percent inflation in an economy growing faster—such as maybe 3 percent, which the Trump administration is predicting for GDP growth this year. It’s really what are called core capital goods—investments in plant and equipment—that will determine future growth, and businesses haven’t yet begun to spend that kind of money with their record profits.

We wonder if businesses are waiting for those promised tax and regulation cuts? The Trump administration can’t accomplish much with executive orders, so Congress has to find a way to compromise. The health care deadlock should tell them that they need Democrats to bring that about, since Republican moderates and extremists can’t agree among themselves.

So maybe we should be happy that we are in the eighth year of this growth cycle, even with 2 percent growth.  We have in fact achieved a goldilocks, steady growth economy .

Harlan Green © 2017

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Thursday, May 25, 2017

Has dismantling of American health care system begun?

Financial fAQs

We now know that the revised Republican repeal of Obamacare is really intended to dismantle and perhaps destroy any federally-funded health care program, which would return health care to either cash-starved states or private industry; to the high cost, broken healthcare system it was before Obamacare. And all this is to give the wealthiest among us a tax break they don’t need?

We know because the CBO and JCT estimate just out says that, in 2018, 14 million more people would be uninsured under H.R. 1628 than under current law. The increase in the number of uninsured people relative to the number projected under current law would reach 19 million in 2020 and 23 million in 2026.

We also know this because no public hearings were held on the House plan and none are planned for the still-secret Senate plan, something that Senator Diane Feinstein said has never happened before for major legislation in her 40 years in Congress.

And it is a very major bill. For instance, in 2026, an estimated 51 million people under age 65 would be uninsured, compared with 28 million who would lack insurance that year under current law, according to the CBO. Under the legislation, a few million of those people would use tax credits to purchase policies that would not cover major medical risks, but their costs would rise because no longer protected by the ACA prohibition against raising costs for those with pre-existing conditions, for example.

It therefore dismantles the possibility of affordable health care that covers pre-existing conditions for most Americans. It gives businesses and the wealthiest a juicy $664 billion reduction in taxes, which are the tax revenues needed to pay for the Obamacare state subsidies—mainly to reimburse states that cover their poorest Medicaid citizens. So, it’s to be paid for with a total of $1.111B in spending cuts for Medicaid and social security disability coverage.


It is what the white racist agenda of Tea Party Republicans and President Trump is leading us towards. It is what they mean by making American great again. Let us hope there are enough intelligent Senators to block what is being done in secrecy, in the hopes that most Americans won’t notice there is nothing great about leaving a total of 53 million in 10 years—mostly the elderly and poor—without any healthcare options except the most expensive, and a budget that wants to continue to redistribute our tax dollars to the wealthiest one percent where it will do the least good.

And in a coda, Senate Republicans face increasing pressure to rescue health insurance markets and protect coverage for millions of Americans amid growing fears that the Trump administration is going to let the markets collapse, said the LA Times.

This is because President Trump has repeatedly threatened to withhold federal aid that helps millions of low-income Americans afford their deductibles and co-pays.  The aid, which reimburses insurers for lowering out-of-pocket costs for low-income consumers, was paid by the Obama administration. But it is now the subject of a lawsuit by congressional Republicans, who argue Congress must approve the payments.

In recent days, leading hospitals, physician groups, health insurers and the U.S. Chamber of Commerce have pleaded with the Senate to step in, effectively going around the White House.

“Congress must take action now,” the groups warned in a letter to Republican and Democratic Senate leaders. “At this point, only congressional action can help consumers.”

Can it be any clearer that health care coverage for many, if not most Americans, is in danger of collapse? 


Harlan Green © 2017

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Tuesday, May 23, 2017

What Will Create Higher Growth?

Popular Economics Weekly

Amidst all the talk of Republicans promise to cut regulations and taxes to boost growth, there is one problem. Where are the workers that would boost growth? We are already close to full employment, and in fact Red states like Utah have an unemployment rate of 3.1 percent, per the New York Times  Binyamin Applebaum’s visit to the state.
“After eight years of steady growth, the main economic concern in Utah and a growing number of other states is no longer a lack of jobs, but a lack of workers,” says Applebaum. “The unemployment rate here fell to 3.1 percent in March, among the lowest figures in the nation. Nearly a third of the 388 metropolitan areas tracked by the Bureau of Labor Statistics have an unemployment rate below 4 percent, well below the level that economists consider “full employment,” the normal churn of people quitting to find new jobs. The rate in some cities, like Ames, Iowa, and Boulder, Colo., is even lower, at 2 percent.”
And this is when the Trump administration wants to build a wall and cut immigration quotas in half. There aren’t enough working-age American citizens to pick up growth, in other words. A corporate tax cut may encourage corporations to spend more on business investment. In fact, business equipment, in a positive indication for second-quarter business investment, rose a very sharp 1.2 percent, which should boost productivity from its recent very low 1.2 percent, and is the other component of GDP growth.

There’s a simple reason for the surge in business investment, as I said last week. Businesses need more automation, because they can’t find enough qualified workers to fill the 5.743 million, job openings reported in the Labor Department’s latest JOLTS report, which is far above total hirings of 5.260 million in April, a gap of 483,000.


Then there is the Trump administration budget proposal, which wants to slash healthcare and food assistance programs for the poor as they cut $3.6 trillion in government spending over 10 years, according to the White House's budget proposal for next year.

So instead of increasing revenues to pay for the Wall, tax cuts for the wealthiest, and more military spending, they are reducing revenues by cutting spending on the programs that pay for our social safety net. And studies have shown this will create an even larger hole in the federal budget.

It’s really elementary mathematics. Without the workers to produce them, and consumers with enough money to buy said products (e.g., those middle and lower income workers who lose their Medicare or Obamacare benefits), there can’t be higher growth. And the Fed has said if the federal government increases spending without the concomitant revenues to pay for that spending, they will continue to raise interest rates to avoid higher inflation.

This is the Faustian bargain that the current Congress is attempting to pass. Tax cuts for those making more than $200,000 per year ($250,00 for married couples) takes away much needed revenues that cover benefits for everyone else. For instance, repeal of the Affordable Care Act’s tax provisions would provide America’s wealthiest taxpayers with an immediate tax cut totaling $346 billion over 10 years.

That will not fly, as word gets out and more Town Halls are flooded with protesters over the proposed $800 billion in Medicaid spending cuts alone, cuts which would hurt the poorer Republican red states. So, unless lawmakers come to their senses, this could cause Republicans to lose their congressional majorities in 2018.

Harlan Green © 2017

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Wednesday, May 17, 2017

Increase Industrial Production Sign Higher Growth?

Popular Economics Weekly

Industrial production in April grew at the fastest monthly rate in more than three years on the back of broad-based gains in the manufacturing sector, reports the Federal Reserve. Industrial production grew 1 percent in April led by a 5 percent increase in motor vehicle production. It was because business investment is up sharply, as is consumer spending.

Business equipment, in a positive indication for second-quarter business investment, rose a very sharp 1.2 percent, reports Econoday, which could be a sign of a badly needed business expansion. “Production of consumer goods was even stronger, up 1.5 percent. Two negatives are hi-tech industries with a small decline and also construction supplies which posted a second straight dip that offers a reminder of this morning's disappointing housing starts report.”
There’s an obvious reason for the surge in business investment. Businesses need more automation, as they can’t find enough qualified workers to fill the 5.743 million, job openings reported in the Labor Department’s latest JOLTS report, much more plentiful than total hirings of 5.260 million in April, a gap of 483,000.

That also means an ultimate surge in badly needed Labor Productivity that has been lagging of late. From the first quarter of 2016 to the first quarter of 2017, productivity increased just 1.1 percent, reflecting increases in output and hours worked of 2.4 percent and 1.3 percent, respectively, said the BLS.

And without higher labor productivity, the US economy can’t grow more than the current 2 percent GDP growth rate. What was the rate during periods of higher growth? Until 2000, economic growth averaged more than 3 percent, while productivity averaged 2.5 percent until 2007.

 But then something happened. Average productivity plunged to 1.2 percent from 2010 onward. Why? Businesses stopped investing, for starters. This was partly due to the plunge in oil prices (from $100 to $30 per barrel last year), and consequent plunge in industrial production.

But our population also began declining, the other component to GDP growth (besides labor productivity). Until 2000, the U.S. population grew more than 1 percent, but since 2000 average population growth halved to about 0.5 percent.

Graph: CBO

The Congressional Budget Office estimates that we would need 2.8 million new workers per year to reach the 3 percent growth rate that Trump and Repubs want. Where will they come from? New immigrants, as the U.S. currently generates just 600,000 new job entrants per year, on average.

The baby boom is gone, in other words, and even the record-breaking millennial generation won’t fill the bill.  So we need more immigrants, not less, as well as higher labor productivity, if Repubs are to boost economic growth.

Harlan Green © 2017

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Monday, May 15, 2017

Builder Optimism + Affordability Higher

The Mortgage Corner

Good news is that rising wages and moderating home prices offset a rise in mortgage interest rates to give housing affordability a slight boost in the first quarter of 2017, said the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) last week.

And In a further sign that the housing market continues to strengthen, builder confidence in the market for newly-built single-family homes rose two points in May to a level of 70 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the second highest HMI reading since the downturn.


NAHB.org
"The HMI confidence measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market," said NAHB Chief Economist Robert Dietz. "Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward."

But housing construction is not yet catching up to demand, as I said in a recent column. The first quarter ended with a thud for housing starts which fell a very steep 6.8 percent to a 1.215 million annualized rate which is the weakest since November, said the NAHB. Posting similar declines were both single-family homes, at an 821,000 pace, and multi-family, at 394,000. Housing construction does show nearly double-digit year-on-year growth, though quarter-to-quarter movement is barely perceptible. 


It looks like employment is now ahead of housing, hence demand exceeds the supply of new housing, a good sign.
"Ongoing job growth continues to fuel demand for housing, while wage growth is helping to offset the effects of rising mortgage rates and keep home prices affordable," said NAHB Chief Economist Robert Dietz. "NAHB anticipates that housing will continue on a gradual, upward path throughout the year."
In all, 60.3 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 $68,000. This is up from the 59.9 percent of homes sold that were affordable to median-income earners in the fourth quarter.

The national median home price fell to $245,000 in the first quarter from $250,000 in the final quarter of 2016. Meanwhile, average mortgage rates rose nearly half a point from 3.84 percent in the fourth quarter to 4.33 percent in the first quarter.

But mortgage rates have fallen since then, which will increase affordability for first-time home buyers, in particular. The 30-year fixed conforming rate today is 3.625 percent with a 1 point origination fee in California, which means fixed mortgage rates have returned to rates last available in the 1950s.

So, once again, interest rates are not rising with expectations of higher inflation. Inflation is not even showing up in housing prices. So let us hope this continues, even if the Fed does raise short term rates a third time in June, as it has hinted it would do.

Harlan Green © 2017


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Thursday, May 11, 2017

The Declining Treasury Yield Curve—Recession Looming?

Financial FAQs

We are basically at full employment with a 4.4 percent unemployment rate, which should tell us we are nearing the end of this growth cycle.
Econoday reports, “The total number of employed Americans, and this includes both the self-employed and those on payrolls, is 153.2 million and a new record. This total has been rising steadily since falling to a cycle low in December 2009 of 138.0 million. Doing the math here means that 15.2 million jobs have been added during this expansion. The upward slope has been steady and is showing no sign of letting up. The peak in the prior cycle was 146.7 million, hit in November 2007.”



So how do we know we have reached a peak in growth? The National Bureau of Economic Research that tracks growth cycles tells us by using 4 economic indicators: including unemployment, real personal income and real GDP growth (less inflation), and industrial production. Those indicators have already surpassed their last peaks that were reached in 2007, so the question is how much higher can they go before they reach this cycle’s peak.

It is possible the economy may continue to grow with Congress and the White House politically deadlocked and unable to pass any stimulus spending, but that would mean the private sector starts spending more of their $4 trillion plus in unspent profits they have been hoarding, rather than wait for the tax cuts that Republicans have been promising. But don’t bet on that bridge to nowhere, as the saying goes.

On the NBER’s faq page, they define the beginning and end of recessions. “We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough.
The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.”

So June 2009 was identified as the end of the Great Recession (the trough in activity), which began in December 2007 (its prior peak). Calculated Risk’s Bill McBride has followed those NBER recession indicators, and as of April, 2015, they have all exceeded their past highs.

I believe the most important indicator has been personal income, which exceeded its past peak in 2012, but has fluctuated a bit since then.


Employment is also important, but has tended to lag the other indicators in predicting a recession. It didn’t peak until several months into the Great Recession, but is now 2 percent above its last peak.

All four recession indicators are now above their pre-recession peaks. The problem now is we and the NBER Business Cycle Dating Committee aren’t sure that economic activity tops out until months later when the NBER sees a sustained drop in activity, as their 2010 example showed. This past quarter’s meager 0.7 percent GDP growth is still growth, by the way.

So another indicator that might indicate a looming slowdown is the decline in slope of the so-called Treasury Yield Curve, which shows the difference between short term rates regulated by the Federal Reserve, and long term fixed Treasury yields determined by the bond markets—such as the 10 and 30-year Treasuries.

The difference between those 2 yields is basically the profit margin made by lenders that have to borrow at short term rates and lend at the longer term interest rates. It is no longer as steep as it has been, which means lenders become more restrictive, which shrinks available credit, always a sign of slower growth.

So, if the Fed continues to raise short term rates, and because of market uncertainty or low inflation long term rates don't rise from their lows, then it could mean a looming recession.  But that is a big 'if'.

Harlan Green © 2017

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Monday, May 8, 2017

TrumpCare--The Un-American Health Care Act

Popular Economics Weekly

It’s incredible. Why have House Republicans just voted for a health care bill that only does one thing in the words of MIT Professor Jonathan Gruber, co-designer of the Massachusetts single-pay healthcare program and Obamacare?

On Lawrence O’Donnell’s Last Word he states that it gives the wealthiest what could be the single largest tax cut in history—almost $1 billion for those earning $200,000 plus per year—but cuts benefits to everyone else.

And this is when 23 percent of Americans have pre-existing medical conditions. The answer in the words of Paul Krugman has to be pure greed. Tax cuts are more important than protecting Americans from loss of coverage due to pre-existing conditions and soaring premium for everyone but the youngest and healthiest among US.

It was also an attempt to make the President look good, regardless of his broken promises that Obamacare benefits wouldn’t be reduced. Trump doesn’t care who loses, in other words, so long as he doesn’t look like a ‘loser’.

But what does it do for the white blue collar male Trump supporters who have suffered most from their loss of jobs, and whose mortality rate due to drugs and suicides is double that of other developed countries that lived through the same Great Recession?

Graph: CBO

The CBO graph pictures the suffering of 45-54 year-old white working class males in our post-industrial age. The rising red line is USA males, the falling lines are white males in other developed countries with Sweden having the lowest mortality rate “for all causes”. Even US Hispanics (blue line) had a falling mortality rate.

The House wouldn’t wait for the Congressional Budget Office latest ‘scoring’ of the costs of the bill, which confirms that House Republicans weren’t even concerned about its effects on federal and state budgets, much less on how many would lose their coverage, if taken off Obamacare.

The Congressional Budget Office projections on earlier House attempts to repeal projected that the revised GOP bill would realize $150 billion in reduced federal spending through 2026, which is less than half of the $337 billion in deficit reductions that the CBO had estimated for the bill's first version, said a CNBC summary of the report.
“But the newer version, like the first, is expected to lead to 14 million fewer people having health insurance in 2018, and 24 million fewer insured Americans by 2026 than would be covered if Obamacare remained as law in its current form. And an estimated total of 52 million people nationally would lack health coverage by 2026 if the revised bill becomes law, according to the CBO's projection. However, if Obamacare remained in effect, 28 million Americans would not have insurance by that year, according to the CBO.”

It cuts almost all Obamacare benefits, including to childcare, Medicare and Medicaid; even employers’ health care plans by turning over implementation to individual states. This is basically returning healthcare to the broken system it was before Obamacare that made US the unhealthiest developed country.

There were 20 mostly moderate Republicans that didn’t vote for the bill. The defectors were primarily centrists who had trepidations about voting for the bill after the addition of an amendment to let states apply for waivers from certain Obamacare provisions that prevent insurers from charging sick people higher premiums and mandate which services insurance plans must cover, said the Washington Post.

What are the effects of 24 million losing their health insurance? The New York Times Charles Blow cites a 2009 study conducted by the Harvard Medical School and Cambridge Health Alliance: “nearly 45,000 annual deaths are associated with lack of health insurance,” and “uninsured, working-age Americans have a 40 percent higher risk of death than their privately insured counterparts.”

Republican House members seem to have no idea that President Trump is leading their re-election chances over a cliff—just so he won’t look like the loser he really is.

Harlan Green © 2017

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